Today, we are answering one of the biggest financial dilemmas many of us face. Should you hold on to your house or should you sell it? Our guest is wrestling with this exact dilemma right now, weighing factors like market conditions, personal finances, and future FI plans. We’ll dig into the numbers and help break down a decision that could shape his financial future for years to come. Obviously, this advice is for Sean’s specific situation, but this could be applicable to you too. In this episode, Scott shares his screen and runs numbers in a spreadsheet. So, if you’re curious to see the actual numbers, head on over to our YouTube channel, which is youtube.com/biggerpocketsmoney.
Hello, hello, hello and welcome to the Bigger Pockets Money Podcast. My name is Mindy Jensen and with me as always is my not selling his real estate co-host, Scott Trench.
Mindy:
Thanks, Mindy. I’m actually I actually am selling one of my properties. I call it the PITA property. We can talk about that another time. Um, PITA stands for pain in the, all right, never mind. Uh I yeah, I so, yeah, I I do occasionally. I guess I will sell my first property shortly here. Um, but Sean, thank you so much for your willingness to share all of your numbers for this episode of Finance Friday and of course, setting up a great discussion about whether we should sell or keep a house, which I think is a lot a question a lot of people are grappling with. So thank you so much for your transparency and for coming on today.
Scott:
Thank you so much Mindy and Scott. Appreciate the uh the time and it’s an honor to be here. Been a long time listener, so.
Mindy:
Oh, yay.
Guest:
to be on the podcast is is fantastic.
Mindy:
Sean, I am going to run through your numbers very quickly because I want to dive more into this house deal. So, we have a total net worth of $240,000, which is awesome. Uh, $20,000 in cash, 76,000 in a 401K, $5,000 in 529 plans, uh with debts of I’ve got a credit card of 5500. I’m sure most of that is paid off every month. Assets, $320,000 in the primary mortgage. I’m sorry, in the primary house with a mortgage of $175,000. Income of 138,000. Current expenses about $11,000 a month which includes taxes, investments and savings, which you did to make sure you were actually spending or accounting for all of the money that’s coming in and going out, which I love. Debts, we have a total of 193,175 of that is the mortgage with an auto loan at 8%. We’re going to talk about that. Uh, student loans of $6,000 at 3%. I don’t see any reason to pay those off early. No rental properties, no pension or life insurance. So let’s talk more about that actual house. Sean, you have 175,000 on a mortgage at what percentage rate?
Guest:
That’s at 3.75%.
Mindy:
This seemingly simple decision actually is embedded in a very difficult and detailed financial analysis that will require great precision and wild big assumptions, right? Like, like, is the stock market going to a perform much better than this real estate investment I’m going to turn my house into? And so there’s big guesses we have to make in addition to getting all of the details right in a pretty in-depth analysis here. And so if we’re going to do a big analysis like that, we’re going to need a big spreadsheet and your question has allowed me the great privilege of bringing up such a detailed spreadsheet that I’ve built several years ago. Um here, this is available on BiggerPockets, you can Google uh BiggerPockets sell or keep decision and so I’ve input some numbers here uh for your home purchase that I’ve guessed at in a couple of cases um on this, uh on this. You’ll have to tell me where I’m where I’m correct or incorrect and we we’ll go through all of all of these assumptions, but underlying all of these assumptions is a more as a kind of qualifier question of, do you kind of, does your gut kind of tell you, yeah, I want to keep this property because it’s in a good spot and it’s probably going to do pretty well and attract reasonable tenants? That’s the PITA factor, the pain in the, you can guess what, uh uh factor here. And and that’s a qualitative assumption that real estate investors have to have in place. So do you do you does does a part of you want to keep this property in the first place? Uh and is that underlying much of the analysis we’re about to do?
Scott:
I think if you asked me 10 years in the future, I would regret not keeping it and I say that because even though we didn’t necessarily go into it it being our primary with it being a rental, there is the numbers actually pencil out where we could rent it if we needed to, where some of the concern is is because we do have the desire to move in the short term, two to three years, we want to be able to do that without putting ourselves at great risk. And so if we’re not able to use the equity in order to get kind of what we want for the next stage of life, we may be too high on the fixed expenses for us to feel comfortable.
Mindy:
I think that’s a really important factor in this. Um and and there’s a number of qualified qualifier considerations that go into that. Mindy, what are some of the things that you would look for most as as, you know, in in addition to Sean’s, you know, bias here to potentially keep it that he should be thinking about to to round out that bias?
Scott:
My first question is, how are you going to put money down on a new property if you’ve got all this money tied up in your equity? Because I believe you have $20,000 in expenses. I’m sorry, $20,000 in cash. So, uh how are we funding the next house?
Mindy:
Yeah. So it would just push our timeline back to be honest. Um our two to three year timeline would probably be a five to six because we would wait till kids are, you know, in between elementary and middle. Really what that would look like is more aggressive saving. Right now we’ve kept a relatively light cash position because we have the equity and outside of random house expenditures, like we don’t have very many large expenses that um we couldn’t cash flow with our current income.
Guest:
We’re going to alt tab for a few moments here uh and we’ll be right back after this.
Scott:
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Mindy:
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Scott:
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Mindy:
Thank you for jumping back in with us. I don’t know what that computer code is.
Scott:
Let’s go through the analysis and look at this based on what we believe. These are going to be assumptions here, right? Every financial model you have to guess at what thing is going to happen in the future but let’s let’s think about some things that we believe and let’s see how accurate my guesses were here about the inputs um before talking to you on this. So, we’ve got the current value at about $320,000. Is that fair for you Sean?
Mindy:
Yep. Right on the money.
Guest:
Awesome. The original purchase price, I have 258, is that correct?
Scott:
Uh, a little bit lower than that. It was like 205. We ended up refinancing it, uh, shortly after we got it.
Guest:
Awesome. This will not matter in our analysis in your situation for a while because you’ve lived in the property for the next couple of for the last couple of years. So there’s a number of inputs here around due capital gains taxes apply. They will not in this situation. Um but many people we talk to are on the coasts, for example, and they might have a 250 or 500 or much even even higher gain and so capital gain taxes will begin to apply in some of those cases here which is why I need that input, um to do this analysis. Is that around the time you purchased a home in June 2019?
Scott:
Correct.
Guest:
Okay, awesome. And then I have I I I played around with some things here, and I’ll admit I cheated uh in preparation for this with a couple of things. The model here calculates a few of these. I know your balance is 175,000 left. So I guessed at about 197 when you refinanced the property. This is the current mortgage um here around September 2021 and I needed that so I could get your monthly PITI payment and the amortization schedule of where you are against that loan. Is that about right, do you think?
Scott:
Yeah, ballpark.
Guest:
Awesome. And it’s a 30 year mortgage with 3.75% interest?
Scott:
Correct.
Guest:
That gives us our monthly PNI payment at 915 bucks. You gave me property taxes. I guessed at your insurance premium here to get this 1839. Does that look all all correct to you? Property tax is 7200 and and annual insurance about 3800 a year.
Scott:
The insurance prop uh premiums are more like 25. We’re currently, so in Texas, you have like an escrow account and they underpaid. So right now our monthly payment is 1800, but prior to the escrow adjustment, it was actually 1500.
Guest:
Okay, so you’re going to get some money back. Your payment is 1839, which is what I was backing into, but you’re going to get some money back from your escrow at some point. So your payment is really closer to 1728 a month. Is that is that fair?
Scott:
Correct. Yeah.
Guest:
Awesome. You can see why this is so painful to do this analysis, right? Like how can most people do this analysis without without thinking through all this stuff? It’s like ridiculously hard. So then we have to figure out like what would happen if you sold this property, right? So that’s what we’re trying to do here. And that involves the sale uh the sales expenses and then taxes if they apply. Taxes do not apply in your situation um almost certainly, but they they will apply if you hold the property for a few years and that is factored into this from an investment standpoint. um but they do not apply if you sell it immediately. Um so we have our brokerage fees here. I’ve estimated 5.5% to sell the property. Does that seem reasonable or should would you want to see that bumped up a little bit? Some places, each broker can charge as much as 3%.
Scott:
I would actually reduce that. So I still have my real estate license from when I used to do it full time. Awesome. And that was eight or so years ago. I’ve kept it all this time and it’s it’s what actually helped us do renovations on our current house.
Guest:
Okay, what would you reduce it to?
Scott:
We can do 3%.
Guest:
But I will pay, you’ll you’ll pay a buyer agent about 3% to sell this place. Um I’ve estimated closing cost and title insurance at about 1%. That might be a hair low in your area. It would be a hair high in my area um here in Colorado. But maybe maybe it bumps to 1.2%.
Scott:
Yeah, it would be a little higher.
Guest:
Do you think even higher than that or would you you like those?
Scott:
Let’s stick with that for now.
Guest:
Okay, great. So, after you sell this this property for $320,000 and pay off your mortgage balance remaining balance of $175,000 and after you pay the buyer agent and other closing cost, you’ll be left with about $127,000 of which 97,000 are capital gain. Again, because this is less than $500,000 for a married couple that has lived in a property for two years, there will be no capital gains taxes or anything that do apply but if for some reason that was to change or this number was to be higher, you could simply toggle this on and it would default to putting the to computing the capital long-term capital gains taxes and I’ve defaulted this to the tax rate in Colorado. Um you can easily put in the state tax rate there. Now we got to think about what we assume for the alternative investment returns. I’ve assumed a 10% long-term nominal stock market return with a dividend yield of 1.36%. Do you agree with these assumptions or do you are you a little bit more conservative with your stock market assumption or a little bit more aggressive?
Scott:
No, we’d probably stay at the the 10%. When normally when we do our uh projections, we ignore things like social security and and all that. So like in terms of retirement and and reaching FI, like the 10% assumes we’ll have more.
Guest:
Awesome. We we had a uh, you know, a lady from California come on the show and she wanted to assume five or, you know, three three to 5% appreciation or something like that in her five to 7%, remember that Mindy? And so though everyone everyone believes different things and that that’s what they that’s what you got to that’s the point of this, right? You got to invest based on what you believe. Um for these things. So and by the way, I’ll sneak preview here. So we’ll end up with a graph of what’s going to happen with our cash flow and what’s going to happen to our net worth and we’ll I’ll explain all the quirks in this once we get to the end output here. Okay, so let’s talk about what are what we can do with the proceeds. So the first and most obvious use of the proceeds is to use it for the sale the the the down payment on the next property. That’s important because that will reduce the mortgage balance at what is likely to be a very expensive new mortgage. Not quite 7.5%, but it’ll be it’ll be something there. What what do we think mortgage rates are going to be right now? Maybe Mindy, that’s a good question for you. What do you what do you think is a good assumption?
Scott:
30-year is 6.16%.
Mindy:
6.16%. Okay. And and is this about the mortgage you’d want to get on a new house, Sean?
Scott:
Yeah, we’d be looking after the before or after the down payment?
Guest:
After the down payment. What would be the mortgage balance of the new home you’d assume?
Scott:
Yeah, it’d be around 360, I think is what we’re looking at right now.
Guest:
Okay, so this is going to be a negative number, 360. Okay, and we’re going to have a 6.16%. Um that’s going to give us monthly PNI of 2100. That would be if you didn’t sell your house and didn’t use the proceeds, you take on a $360,000 balance. But if you do use these proceeds, instead, you’re going to take on a this amount, $232,000 mortgage and that’s going to reduce your payment to 1400 from 2200, which is a what, like $800 a month difference. That’s the question, right? That’s what bugs everybody here about this decision. So that that we we now we have that one. Okay? And we’ll model out how that’s going to impact your finances uh over the next couple of years for sure. Next is going to be let’s say you keep this thing as a rental. What would this rent for?
Scott:
be 25, 2500, 25 24.
Guest:
So as close, 20 2600 bucks. Um on there. Okay, and then we’ve got our um pity payment here of 1728. This is just continuing what we’ve got, right? And I’ve got a vacancy allowance of 200 bucks here. That’s a maybe I’ll that up to 250. Um 10% vacancy is high but um that’s a you know, you’re you’ll be you’re not a landlord right now so maybe the first year or two it’s a little harder and maybe that maybe that goes down in future years. Does that seem reasonable?
Scott:
Yes. And I want to pause here just to I don’t know if this is the best time in the the podcast to do this, but one of the other considerations that we have is we know in the next five years, so short term, we’ll have roof, fence, and half the other half of the windows, which if you add that all up is around 20,000 that we anticipate within the next five years.
Guest:
Okay, that’s a great, this is a great time to bring that up, right? This is exactly where we’re at, right? This is this is it. So we have a 5%, 5% vacancy allowance. 10% is way too high for for vacancy allowance on this. Um, your maintenance expenses will be about 200 bucks a month, which sound reasonable, but you’re saying, hey, I’m going to have 20 grand in known Cap X over the next five years. So let’s just assume that that’s going to be let’s just put that in here to plug it and let’s say that that number is so so that’s going to be 5,000 a year, 4,000 a year here. So we’re going to need to put 400 bucks probably for the Cap X component.
Scott:
Yeah.
Guest:
On a monthly basis. It’s going to be 4800 a year over the next four years. That’ll be about 20 grand. So that’s a very conservative way to uh model in Cap X on this property based on what you just said here. Is that right?
Scott:
Yep. That’s it.
Guest:
Awesome. Do you will you pay the utilities in this property?
Scott:
Probably not, no.
Guest:
Okay, so we’ll have zero utilities. So you’re going to eek out a small amount of positive cash flow for the next couple of years and then it will bump up later. My model does not allow us to easily plug in there will be Cap X at this point. I could build that into the future but it does not do that today. um in that in that uh in this particular spreadsheet. Okay, so do we agree with this these assumptions for the rental?
Scott:
Yeah, definitely. I’m actually glad to see that it cash flows positive. I haven’t actually done like the uh projecting out the the Cap X, so that’s great.
Guest:
I would wonder if that would be reasonably conservative on this um for the CapEx component and I think these are these are reasonable um on this send here. You might also, depending on how things go, see this grow. I don’t know I I I think that the rents have been compressed for the last couple of years and I personally, this is an aggressive assumption and I think a lot of people may disagree with it or want want to put it in there, but I believe that rents are likely to grow pretty substantially in the next couple of years in many parts of the country because they’ve been depressed by a large inflow of new supply that may not be true in your area. New supply in multifamily construction which is ceasing. So the next couple of years, um will not see as many new units come on the market and therefore, I think there there could be some rent growth in a lot of markets but those are just little nuances to think about uh when we model this out. You may also have some utility expense if you’re between tenants for example, for any of those projects. Okay, um let’s talk about uh passive the passive so the this is a DIY assumption. So this assumes that you will self-manage the property and I had to make it its own case because property management is expensive and I have property management here is at 10% of rents additional cost and if you were to hire this out with property management, you would be cash flow negative in this situation, right? Um because we’d add in another we’d we’d take 10% of the rents out and that would leave you with this number. Now you also have to guess at what you think appreciation is going to look like for this place both in home price, rent growth and expense growth. I plugged them at the historical average of 3.4% for the Case-Shiller index. Um for this, which I think is a reasonable base case consumption, but again, um our California guests believed that these were going to be in the 7% range for rent and home price appreciation and maybe that maybe that that will play out. Uh what would you want to see for these assumptions here?
Scott:
Yeah, I anticipate the appreciation. I’m really unsure on the rent growth and the expense growth. Uh home price appreciation though, I would put it closer to like four uh just like slightly higher than the average.
Guest:
Okay, before we look at how this all shakes out, Scott, I have a couple of comments. Sean, if you sell, your mortgage will be about $500 more than your current mortgage. Um, so that is a lot easier to stomach. If you don’t sell, your mortgage will be $1,100 more than your current mortgage and that could be a big difference, a big uh pill to swallow.
Mindy:
Just the PNI.
Scott:
Yeah, that’s just the PNI. Your known CapEx leaves you with $47 a month and as somebody who has had rental properties before, the only CapEx that you can really count on is known, but I can guarantee you there’s going to be more than that. So I’m concerned that your positive is going to very quickly turn to negative. Um and every state is different. I know that Texas has significantly lower costs than my home state of Colorado, but you would only get the roof for that $20,000 that you’re uh predicting. It’d be another uh $4,000 for the fence, another 10 to 15 for those windows. and I like 8% vacancy because that’s a one month gap between tenants and planning for vacancy allows you to to have this uh this expectation. If you get the next tenant right away or your tenant renews, clearly then you’re making more, but I really like to run numbers conservatively just to make sure that it makes sense to rent the property. I love your 3.75% mortgage, but based on what Scott is showing here, I’m really curious to see what those numbers are going to say.
Mindy:
All right, we’ll be charting out Sean’s financial decisions, I guess, uh here in a few moments. Bear with us.
Scott:
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Mindy:
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Scott:
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Mindy:
And let’s jump back into these numbers.
Scott:
The great thing about this is you can tweak all these, right? So, you say one number, Mindy says another, we’ll come back and we’ll tweak it and see how it how it impacts our result here. We’re going to look at two things in this, right? One is, how is this decision going to affect the cash coming into your life, right? So you’re going to have a lot less cash coming into your life every year if you don’t sell the property and use the proceeds toward the new mortgage, right? It’s an obvious assumption, it’s an obvious conclusion, right? Because what we just said, this is like almost $1200 more a month, yeah, this is this is almost $1200 more a month uh or well over $1000 more a month than your current mortgage in terms of cash that you have to pay out for your PNI alone, right? Which is the which is the decision, right? You might have higher insurance or taxes at that point, but you’d have them no matter what in the in the in the the new decision on this. So that’s that’s a really important thing here. The other component is how what’s going to happen to your net worth, right? And these are often in conflict. This is the balance that we have to kind of think about in this analysis, right? And you’re going to have more net worth, at least in the first couple of years, if you DIY landlord the property than you are if you sell and use the proceeds towards the new home mortgage. So that’s kind of the decision here. This is a really complicated analysis. This is an everyday decision people make and it’s got really deep underlying assumptions into it. This is almost 50 lines of inputs in order to get to this output to to make the help Sean make this decision, which is a very high stakes one for a lot of people. This again spits out two things which I think are important to the average person who is who is asking this question, they’re important to Sean. One, which one’s going to make them wealthy over time and the second is how’s this going to impact my cash flow, right? Cash flow in the near term is flexibility and freedom. Net worth is obviously the long-term goal for most folks um for in building wealth. And what we’ve got here is a remarkably close, let’s start with net worth. We got a remarkably close set of of outputs here from a net worth perspective. Okay? Now what are we looking at on this chart? We have four different cases. The first blue is we sell the property and invest passively in an index fund at 10%. The second is we’re going to sell and use the proceeds towards the new home mortgage, which is a return of about 6% per year because we’re not paying that 6% on that that in that mortgage. By the way, this is not factoring in taxes um on there so this can get even more complicated than what’s in the model here. The gray line is going to be our DIY landlord and the yellow line is our passive landlord, right? Now let’s notice something funky about the chart here. In the first couple of years, the first two years, you will have more wealth if you keep the property as a rental than if you sell it. And the reason for this is because capital gains taxes do not apply to most people who have lived in this property for those two years, right? So I’ve modeled in where hey, you’re not going to be able to net those proceeds for up to the beginning of year three if, you know, the the very the the very first day of year three, uh in there, if you do not sell the property and keep it for a year or two. I think that that’s really important here because in a lot of close models like this one, right, which is what millions, tens of millions Americans are dealing with right now, the keep it for a year decision can be a pretty reasonable one, right? Uh and in in in that first little bit because you can you can just take a look at this and kind of wait and see and you still have that tax advantage, um which is the section 121, is that right Mindy, the 121 exclusion, um where you can exclude property capital gains taxes. When that goes away, all of a sudden the selling selling and using the proceeds toward a new home or selling and passively selling and passively investing in the index fund begin to jump ahead for a little bit. Then in this case, with the assumptions that we believe, selling and investing in the index fund, take off under the set of assumptions that we just said that we believe uh in the model here. We’d probably have to bump up our appreciation or rent estimates in this particular case in order to keep this property on a long-term basis. So that’s what the net worth estimate is telling us, right? The second really important consideration is going to be our cash flow, right? And this is a wild, this is a really, this is so important that I felt I had to model it separately, even though many people will claim to care about net worth, you know, if you if you do not, if you use the proceeds toward the new mortgage, you’re going to have a difference of like what, what is that? $6,000 more dollars hitting your bank account after tax every year for a number of years here, um it’s going to be a huge gap. You’re going to feel way less well off, way less flexible if you invest in the alternatives and I think that’s important because if it’s close, like this one is, that’s a heavy consideration towards prepaying the mortgage. Yeah, there’s a net worth difference, but it’s not that big after 10 years in this particular model um on on on on this basis and this may for many people trump the analysis about what the what what’s going to happen to my net worth over time. Go ahead Mindy, you you you I know you want to react here.
Scott:
I just thought of something. Right now we are in more of a buyer’s market than a seller’s market in much of the United States. So I’m wondering if since you have these known CapEx issues coming up in the next five years, are you going to have to give a credit at closing when you sell this house?
Mindy:
More than likely. We’ve actually explored like a cash purchase, like even taking a reduced amount. Um one of the things that we’ve noticed is when the markets are shifting, sometimes the quick close cash cash purchases are higher than after fees and everything that you would get um if you went and listed directly.
Guest:
But let’s just take that out of the purchase price. That’s the simplest way to do this. So what what do we think this thing is going to sell for in a worst case scenario? What’s a more conservative estimate?
Scott:
Worst case scenario, we’d probably be looking at a $300,000 sell instead of 320.
Guest:
Okay, this is going to have an interesting output, right? When we do this. This is going to give us more weight, not not not that interesting here, um it would give us more weight a little bit more weight typically towards keeping the property. But in this case, it’s not really making a big difference where the the model really begins to talk about the the value of doing this is when there’s a very high amount of leverage at a low interest rate. So if this is at three if this was at like 3.75% and we were saying we’re only going to get like 205 from this sale, and we’re only going to net like 5,000 or maybe maybe we’ll do a little bit more here, like 220, um because of after the sale prices.
Scott:
You have 22,000.
Guest:
Yep. Only as good as the inputs here. So, you know, in this case, you only net like 33 grand on the sale. Now, all of a sudden, we’re going to have a really strong case for keeping the property over selling it.
Scott:
Yeah.
Guest:
because that that leverage is going to be that leverage and that low interest rate is going to make such a big difference that and that’s the that’s the fun part about modeling this all out is there’s so many different scenarios and we’ll probably follow this up with a couple of like, here’s a high cost of living, high leverage property and low leverage and kind of play around with those and we’ll and we’ll see a lot of a lot a lot of uh pretty staggering differences. In many cases, the decisions very obvious. Yours is so great because it’s not obvious. Yours is so great in the sense of a case study because it’s so close. Um and we and I think we knew it would be close coming in and that’s why you wanted help with the decision here.
Scott:
Yeah, one of the things that this doesn’t um take into account is if you look at the cash flow chart, right? We said there’s a $6,000 difference annually.
Guest:
And that was the case at 320, right? with the 320 sale price.
Scott:
Yeah.
Guest:
So, let’s go back to that, right?
Scott:
In terms of our lifestyle and what that looks like, the difference of that, I guess, is only roughly 500, 500 a month. But um there’s certain benefits of at that point in time, it’s we’re looking at new builds in particular for our situation. So it would be new home, new neighborhood, nicer school. Uh there’s kind of these sort of soft benefits that aren’t reflected that for $500 a month difference, like
Guest:
Sorry, there’s a point of confusion I think here then, right? This this is if you buy the new home, your mortgage PNI will go up by 21, you know, by 800 bucks. I’m sorry, by by 1200, 1300 bucks, right? It’ll go from 915 to 2196. So that’ll take out 12 to 14, 12 to $15,000 plus whatever the incremental is from the taxes and insurance. It will be more expensive no matter what and it will be worth it if that’s something you want to buy for your life. The question that we’re answering with this spreadsheet is if you take this 127 grand and pre-pay down this mortgage aggressively, you’ll have an incremental 800 what is this? 600, 700 800 bucks in PNI that you’ll be saving each month over there and there’s a little bit of an adjustment for um over the the zero mark here. That’s what that’s what we’re seeing here on this.
Scott:
Yeah, so maybe I didn’t I didn’t quite word that uh correctly then. So the the $800, I guess instead of the the 500, what I’m saying is the difference in that I don’t think outweighs the lifestyle change that would occur if we were to sell the home. I guess we’re making the assumption right that we we if we kept it as a rental, we would still get the new home as well.
Guest:
So this is saying what should we do? You’re going to get the new home, right? That that’s that’s almost that’s almost like irrelevant in part to the analysis. We’re not questioning that decision. We’re saying what do we do with the old home?
Scott:
Yeah, okay. Right? Yeah, yeah. old home, do we keep it or do we apply it to the new mortgage, right? And so incrementally, so if if you keep the old home and you keep it as a rental, a passive rental, you’re going to generate like a couple grand maybe with our base case assumptions in cash flow. If you have a property manager, you’re going to have negative cash flow. If you invest in the index fund, the $127,000 in an index fund, you’re going to generate like two or three grand in cash flow from the the dividends. And if you prepay the mortgage, you’re going to save $9,400 a year that you can spend over the the zero mark, right? um on this like that’s all going to be savings to you. It’s going to be an incremental $6,700 over what you’d have coming into your life from dividends from stocks, for example, um if you were to prepay the mortgage by that amount. Does that is that making sense?
Guest:
Yeah, yeah, yeah. I appreciate the the clarity on that.
Scott:
I can see why that’s confusing, yeah, because it’s not it’s not debating whether you should buy the new home or not. It’s debating what do we do with the old home? Because many people need to move, right? Or it’s not like not it’s not like, oh, financial decision to move. It’s no, my kids are about to go to school and I’m moving into the good school district or I’ve got a new job my parents got sick and I need to move home um back, you know, back to where I grew up um on that or whatever it is, right? Like that’s that’s the decision tens of millions of people are are grappling with and then what do I do with the old one, right? Because no most people don’t want to move right now. That’s why we have so few transaction volume. It’s because people are in your situation. You got this 3.75% mortgage, that’s a really powerful incentive to stay and this is a real killer to switch to, but life happens, life goes on. We must move, we must move go to go to the next the next place many of us here in America and this decision now becomes very difficult because the property is worth more on average to the current owner than it is to the new buyer because the mortgage is so low. And that’s that’s the fundamental problem that’s that’s that’s trapping the market right now.
Guest:
So Scott, based on all of this, what would you recommend Sean do with this property?
Mindy:
My bias, I’d still I think I think that the reason I built this this way is because if it’s close, take the proceeds and pay off the new mortgage, right? And yeah, you’ll be a little less wealthy after 10 years on that, but you’ll have all this flexibility in the meantime that I think is so powerful um for a lot of folks, so so many options that uh that that that brings in and I think that’s what I would I would probably do in this particular situation. This would be a this would be a sell it and use the proceeds to pay off the mortgage um on there or to sell it and and invest in the index funds, but I’d rank them in the sell and prepay and then invest in the index fund. What would you do, Mindy?
Scott:
Sell because of the uh cash flow, the projected cash flow, if you scroll up to the top, is $47 a month and in my very long time as the community manager for BiggerPockets, my main job was to be in the forums and I would see people comment about how they were uh cash flow negative, cash flow, like I was I projected I I I got $100 a month in cash flow and I thought this was going to be amazing and then I had this one repair that I hadn’t accounted for and it wiped out my cash flow for years. I would say sell. Even with this $47 in positive cash flow, that would be my recommendation. Sean, what do you think about what we’re saying?
Mindy:
I agree with you, Mindy, in that I think it’s going to be a lot closer than even in the analysis that we did, um, which obviously this is like way more thorough than uh what we were doing, we were doing more napkin math uh for ours. But that being so close and then the differences in cash flow, um you know, I think our risk profile in those first three years, uh because of that difference in cash flow, uh yeah, it’s you’re one big situation away from uh things sort of spiraling downward, so.
Guest:
So I think that in this case, it’s it’s it’s a pretty good lean towards sell unless you have really high hopes for your appreciation in this particular case.
Scott:
Yeah, we we didn’t even touch on this, uh, but yeah, income wise, probably in the next five years, the 130 should be in the low twos. um just for mine, um and we don’t know what what my spouse is going to do after our kids are in school more full-time. So, yeah, we uh hopefully I could be back in a couple of years and we’ll have a completely different set of questions to go over.
Guest:
Yeah, that’s the big that’s the big one to go after, I think there is is is, I think that would be a great kind of next step here is, hey, we can really do whatever we want with the house. doesn’t doesn’t really matter. Um kind of slightly leans towards maybe selling it um based on these these assumptions. Um but really what’s going to make a difference for us, it’s going to be the income front. How can I how can we set things up so that I have a great shot at that 200k income in the next couple of years and what do you want to start thinking about once the kiddos are in school, um in terms of that, um what what is what does what does a happy and good situation look like, that will be a million or two two million dollar discussion or analysis in your household compared to the decision we talked about today, which I think is surprising. I actually I actually was thinking it would be a little higher stakes when I set out for the model um today uh on your on your particular decision.
Scott:
Yeah, I appreciate it. Thank you guys so much for the for the time. It’s it’s been great. Thank you.
Guest:
Sean, thank you so much for sharing your numbers with us. We really appreciate it and we will talk to you soon and when you have a uh big change in your uh situation, please reach back out.
Mindy:
Yeah, definitely. We’ll do. Thank you, guys.
Guest:
Okay and thank you so much. We’ll talk to you soon. Bye-bye.
Mindy:
All right, that’s what we have for you today.
Guest:
Scott, I think this was a super fun episode and I think this question of should I sell or keep my house is something that truly is uh weighing on many of our listeners. So I super appreciate you taking the time to make this really, really detailed spreadsheet. Um what did you think of the episode?
Mindy:
I knew it would be close. I didn’t know it would be that close. Um in the discussion and and I think that, you know, the the power of the tool in this particular case is showing how close the decision really is and how it’s not really a decision, right? like some people separate over these things because they think they’re high stakes decisions and they are, but if you can model it out and be like, well, this job pays 120 and has a little more upside than this one at 125, who know like who knows how that like there’s decisions actually aren’t that high stakes in the end and there are actually other things I think in Sean’s financial journey that are going to be more important like his career choices, how they think about spending and the house that they purchase in the future and what type of housing arrangement they live there in the first place that are going to be more consequential than this. The but that that’s a that but don’t take that to mean that for many Americans, this isn’t an enormous choice that they’re at risk of making a a wrong decision on that could be worth that could make them better or worse off by hundreds of thousands of dollars. And so I’ll preview a couple of points. We’ll do another episode, I’m sure in the future on this in more detail. But if you are highly leveraged, if you have a very low interest rate mortgage, like 3% and you have a high amount of leverage, so let’s say your house is worth 350 and your mortgage is 325, you’re almost certainly going to be way wealthier in 20 years in a case like Sean’s today, if by keeping the property, right? Now all that depends in your cash flow and rent assumptions, but that’s generally a rule there because that property is worth so much more to you than it is to anybody else and that low interest rate and that high leverage should compound really nicely over time. On the flip side, if you’re in a very high cost living area and you have like an eight or $900,000 house um with like three or $400,000 mortgage, which is a lot of people as well in that in that type of situation. The math for selling the property and getting out of it is overwhelmingly uh is overwhelming. The challenge for those people is typically, do I then take those proceeds and invest them in the stock market or take them and apply them to my next mortgage, which is often also in a high cost living environment and that one’s really interesting because you make a lot more wealth if you invest the money in the the stock market, but some of these people that six or $700,000 can make like a five or $6,000 a month difference in their mortgage payment on the new property, which is like that’s an that’s almost like a an American household income alone will need to be earned to generate just the PNI difference on that decision. So that’s what this tool comes in really helpful as these are really high stakes decisions and sometimes there’s a tradeoff. There’s not really a right answer in it and I think that the the the two graphs will hopefully show those tradeoffs reasonably well and I like to think like if it’s close on one and a blowout on the other, you you can then it’s easy, right? Then you then you go then you go with that one and that’s what we had today, right? It was close on the net worth one and it was a blowout. way he was way better off from the cash flow perspective um from the from the uh mortgage position and that that made the decision relatively easy for me um as an outsider to kind of say like that’d be my bias.
Scott:
Yeah, you said you knew it would be close and but Scott, for many people this decision isn’t close and the best way to determine that is to run the numbers. So if you find yourself in the same position as Sean is, struggling with the should I keep my house or should I sell my house, go download Scott’s spreadsheet at biggerpockets.com/sellorkeep and sell or keep is all one word. Um and we of course will link to it in the show notes as well. All right, Scott, I had a great time talking real estate today with you but it’s time to go. Should we get out of here?
Mindy:
Let’s do it.
Scott:
That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying, farewell Gazelle.
Mindy:
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