Sell or Rent?
You have a house with $80k of equity valued at $180k. Property taxes run 2.7% on the full value of the home for rental properties. The home will need to be refinanced at 8.5% and insurance will run about $2k/year.
Based on that information, what is the best financial decision?
If you sell the house at its full value and make no concessions, you will just pay $10,800 in sales commisions, leaving you with $69,200 to invest.
Investing $69,200 at 10% for 30 years will yield $1,207,498.64.
If you keep the house, property taxes will be $4,860/year, plus $2k/year for insurance. That works out to $571.66/month in expenses before interest. A $100k mortgage at 8.5% for 30 years works out to $768.91/month. Taxes, insurance and financing will run $1340.57/month. If you want to be safe, then 75% of your cash flow should go to known expenses, and 25% toward unknown/profit. That brings rent up to $1787.42.
That would put you cashflow positive of $446.85/month. Investing that money back into the mortgage would yield 8.5%. With no mishaps, the house would be paid for in about 10 years, at which point, the entire rent could be invested at 10%. At the end of 30 years, the side investment account would be $746,366.11. The value of a $180k house in 30 years could be estimated at $548,208.00. Total value at the end of 30 years, $1,294,574.11.
There is only $87,075.47 difference between the rental and the investment. Is it worth an additional 7.21% return for the aditional risk involved? This is not compounded return, this is an additional 7.21% return over 30 years.
There are a lot of assumptions made on the rental side. Rent would go up over time, the value of the house could appreciate more than 4%/year or a lower rate could be secured. On the flip side, rental rate was assumed at 100%, tax rate didn’t increase and the initial rent rate is 1% of the home value, which is quite optimistic for the given area.
Given a better set of variables on the rental side, the rent might become a much better deal. But given the circumstances, investing looks like the safer, easier and almost as profitable route.