Should you Sell or Lease Your Home?
It can be tough deciding whether you should sell your home in this housing market or maybe instead you should rent your home and have a property management company oversee it. I have sold hundreds of properties that were real estate investments for my clients who planned to rent them out. So watch this video to get the broad-strokes of how you can make this very important decision.
You’ve got a rental property and you’re wondering what would be the better move…sell now or hold onto it as the market rises and falls by making it a rental property. This is the exact question I had to ask myself on my own apartment complexes and for hundreds of my rental clients with Fort Lowell Realty. So I’ll show you some key underwriting concepts and good little tidbits on major line item drawing from my own experience.
First thing you’ve got to do to figure out which option is better is to figure out where you stand for each scenario.
So you have to underwrite the property for a sale and as a rental and compare them. But how do you do that?
Well for both scenarios your very basic goal is to determine the cap rate. What the price will be at the market cap rate, which is the general area at least decently-managed properties sell for.
The cap rate you will get as a rental, along with other calculations like cash on cash, IRR, and equity rate of return…but lets just focus on cap rate.
Cap rate calculation: It’s NOI over Sales price.
So if your property makes you $100,000 a year net and the market usually sells properties at a 6 cap, then you would sell your property for around $1.6MM.
Finding cap rate is the same idea for renting out your property, except you’re mostly focusing on the NOI and then determining if that amount is worth it for you to rent out your property.
But how do you calculate NOI?
Basically it’s Income – expenses
For the most part income’s line items are: Rents, pet rents, possibly laundry, vending, etc. minus bad debt and market vacancy rates.. As a tid bit, it’s usually prudent to write in 8-10% vacancy if the average market vacancy rate is lower than 8%. But up to you.
Expenses: Acquisition costs, rehab costs, leasing costs, management fees, utilities, HOA (if applicable) maintenance, insurance, taxes…and if you’re in California…breathing too much or have plans of fleeing the state.
For the most part income is pretty straightforward if the property is stable and already has proven rental rates. Just add up the income.
But if you don’t have a renter or want to increase rents you will have to make a rental analysis to determine the rental value of your property…you’ll need this if you want to sell or rent your income property.
For Expenses you will need to add your leasing fees. If doing it yourself just add the online marketing costs, signage, and whatever sign spinner you paid to spin the sign. But if you’re getting a professional management group simply ask for the costs involved and write those costs in. Same goes for management fees.
Maintenance is always the fun one to gauge because it can vary widely. It’ll depend on
- The quality of the property and tenants
- The age of the property
- Environment it’s in…like we’re in phoenix so summers are tough on exterior paint and ACs, but we tend to get less roof leaks!
- If there’s deferred maintenance already
- When the property was last fully rehabbed
- For insurance you’ll have to select your plan
But from my experience most properties maintenance costs are between 10-18% of the properties income.
For taxes you’ll have to calculate your states rental and property taxes…or if you’re in california you basically just give them whatever’s left.
So then you take the income and subtract the expenses and that’s your NOI.
Bring back up that first NOI and sales price charts and plug the new number we found into the calculation. Then take that number and add it in here to find your sales price for a sale and for making it a rental just what you do is stare at it until you determine whether or not that number makes it worth keeping the property for years to come.
If all this sounds like a lot of work, and rather complicated to do accurately, well that’s because it is. But good news if you own or are buying slash renting in Phoenix, Casa Grande, or Tucson Arizona because we will be more than happy to calculate all of this for you so all you have to do is the soul searching. Which is the other hardest part.
That said if you’re new to investing or even a veteran I have a dedicated YouTube channel that’s designed to educate you on practical investing theories, habits, and strategies.
This one about how I bought a house and 3 duplexes with no money when I was starting out is especially useful…even if you’re a veteran of multifamily and even JVs. So I hope to see you over on my channel, feel free to click around on my website, or if you’re in Arizona to fill out our management/sales inquiries.
Please understand that this was a very simplified video on how to calculate an income property and that I’ve only gone over the basic concepts and most notable line items in the underwriting. As always you really should consult with a professional before making one of the biggest financial decisions in your life.
Associate Broker, CEO
Bob’s ranked in Arizona’s top 10 brokers for real estate sales volume and total asset value sold. He is the go-to broker for large funds, national developers, and select high net-worth individuals. His full-service model via FLR includes the acquisition, development/rehabbing, lease-up, management, daily maintenance and exit.
Bob syndicates 100+ unit apartment complexes for permanent supportive housing projects in an effort to house the homeless to a scale that makes a visible difference in the cities he operates. He collaborates with capable and established nonprofits and local municipalities in an effort to bring effective services to these vulnerable populations in order to give them a real opportunity to stand back on their own two feet.
Bob is a writer of dystopian fiction in an effort to avoid the darker possibilities of the future, gets himself beaten up in Krav Maga martial arts classes, and snowboards whenever possible.
– Buys 30+ houses/lots for Funds/Developers, monthly
– Average of 15 new Management clients, monthly
– Syndicate and reposition 1-2 100+ apartment complexes in Arizona, annually.
Robert (Bob) Collopy – am not a CPA, attorney, insurance, or financial advisor and the information in these videos shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice.
IF stocks or companies are mentioned, Robert (Bob) Collopy MAY have an ownership interest in them — DO NOT make buying or selling decisions based on Robert (Bob) Collopy’s videos.
If you need ANY professional advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. financial advisor or the appropriate professional for the subject you would like help with.
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Fort Lowell Realty and Property Management Inc.
3020 E Camelback Rd #255, Phoenix, AZ 85016