Mindy: Interest rates were at all-time lows, and then they jumped, and they jumped, and they jumped, and they jumped. If you were lucky enough to lock in a sub 3 or 4% interest rate, you definitely don’t want to let it go. But that doesn’t mean that your house is always going to continue to work for you. Cue the, I’ll just turn it into a rental, mindset. Today, Scott and I are going to run through his epic spreadsheet so you can do the math to see if it’s truly a good idea to hold on to that property and that interest rate.
Mindy: Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my huge spreadsheet nerd co-host, Scott Trench.
Scott: Thanks Mindy, great to be here with you. You always excel at these types of introductions. I am looking forward to really nerding out today. This is gonna be a little bit different of an episode. I know that many of you are gonna be listening to this on a podcast. We will try to make it as helpful as possible, but this might be one that you might want to come back and rewatch on YouTube because the problem that we’re solving just has to be addressed in great detail with a large number of calculations which are done on a spreadsheet. So I’m going to be sharing a spreadsheet. This is available on BiggerPockets. You can go to biggerpockets.com, hover over analyze deals in our navigation bar, and then go to the sell versus keep link there, and you’ll be able to find the spreadsheet. And with that, let’s let’s get into it and I’ll I’ll kind of share my screen and preview what I’m trying to solve for here.
Scott: So and the way the way I’ll do that is I’ll actually start with a quick story about the last couple of years. So let’s set the scene here. We’ve got, I’ll call this person lovingly Average Joe. This is a use case I like to start with in a lot of analyses, right? This is the median American home buyer. The year is 2019 and our perfectly average, or more specifically median, American home buyer, this Average Joe, bought his first home. Joe bought this for $258,000, which yes, was actually the median home price in 2019. He uses an FHA mortgage and puts 5% down.
Scott: And what happens next is crazy, right? So over the next several years, the market explodes, and by September of 2021, Joe’s property is worth $395,000, a 53% increase in value in just 18 months. So that $12,500 down payment is now worth close to $137,000 in home equity. And it doesn’t even stop there. It gets it keeps getting better. This again, this is the median situation for a homeowner who bought in 2019. So Joe, Average Joe used a 4% interest rate mortgage when he bought his first home. Between his principal, interest, taxes, and insurance, his payment in 2019 was 1687. Again, the median home payment for a new home purchase at that point in time.
Scott: By 2021, average mortgage rates had fallen to 2.75%. So what does Joe do? He makes the average decision to cash out refinance his home. He takes a mortgage for $297,000 or roughly 25% of the new $395,000 value. And because his current mortgage, or his then mortgage is $245,000, he literally extracts $52,000 of cash, puts that into his pocket, and he lowers his payment because he’s getting rid of his PMI and he’s got 2.75% mortgage. So, at the end of this sequence of events, which if you can’t follow, I totally understand. All you have to know is Joe buys for 258 in 2019. He refinances in 2021 to a lower payment and puts $50,000 of cash in his pocket. And today, here in 2024, he’s got a property worth on average $412,000 with a whole bunch of equity, a very low payment and cash in his pocket. And this is the median situation. That extraordinary set of circumstances has created what we’re calling the lock-in effect. Millions of people are in this same position where they’ve got a low interest rate and they’ve got a home that they can’t sell right now, or don’t want to sell. And I think that this is a major problem that’s going to confront about 20 million people over the next 5 to 10 years, is now that I, because I have that low interest rate mortgage, because I bought back, you know, back in 2019, or I refinanced back in 2021, should I sell this thing or should I keep it? And that’s the analysis I want to go through today. So, any questions about that median situation before we run through the calculation?
Mindy: No, although I am going to say I have all these numbers in front of me and it was still a little bit difficult to follow, so if this is your situation and you need to really determine, should I sell it or should I keep it, go watch this on YouTube. Our YouTube channel is…
Scott: Just type in BP Money into YouTube.
Mindy: And look, blam, there it is.
Scott: Okay. So let’s pull it up here. All right. So this is not an easy thing. I I tried to simplify it. You saw how I failed miserably just now in trying trying to talk it through. The spreadsheet is no less of a beast. You have to make every single one of these assumptions or inputs in order to make a quality decision here in my view. And so I’m just going to walk through them one by one for Average Joe, the person that bought that property at a median price point in 2019 and has and refinanced it in 2021 with that low interest rate mortgage.
Scott: So today the median home price is $415,000. In 2019, the median home price was $258,000. So look, this is a beast of a spreadsheet. It is very complex. There are a large number of inputs that we have to put in here because it’s a complex analysis to determine whether you should keep or sell your home. I’ve built this around four use cases. So someone deciding whether they want to keep or sell their home needs to decide a couple of fundamental things. Are they going to self-manage as a DIY landlord? Are they going to hire out a property manager? For example, they’re moving and going to move out of state and they want to have somebody manage it for them. And then if they sold the property, would they put the money into an index fund or would they sell the money, would they sell, would they take the money and use it towards a new home mortgage, reducing their cash outflows here, right? So those are the four general options people have.
Scott: There’s an infinite number of options about what you want to do with the money if you sell a place. I didn’t build it out assuming you bought another rental property or you bought a business or whatever. So you can put in different assumptions there. This is meant to be a tool to help people with the most common use cases. So, let’s go through it. When in order to determine whether we should sell or keep a primary residence, we need to know a lot of things about that property. We need to know the current value, the original purchase price. We need to know what the mortgage balance was at origination and what it’s amortized to today, which is a calculation here. We need to have an assumption about the equity that we’ve got in that property. We need to understand the term of our mortgage, a rate, and we need the insurance and taxes, PMI or MIP if that applies to you. And that gets us to our monthly PITI payment, principal, interest, taxes, and insurance.
Mindy: Okay, Scott, I’m gonna jump back here because we just told people to gather up a lot of information. Where are they going to get an idea of the current value of their home?
Scott: So first, you know, what what what people will do is they’re going to go on Zillow and look at their Zestimate. So, uh, go do that if you must. Um, Mindy has opinions about whether that’s a good idea or not. Um, the right answer, of course, is to look at comps, really kind of follow what other properties have sold for in your local market, or better yet, talk to a local agent. You can go to biggerpockets.com/agents, for example, to talk to people who can give you an an opinion of value on there if you’re considering selling or keeping your property.
Mindy: And the rest of this information about your current mortgage should be available on a mortgage statement. The only thing that might not be is the mortgage balance, which I believe you can get from calling up your mortgage company.
Scott: Yeah, and I think you would you’d have to go, yeah, you’d obviously have to talk, go look at your mortgage statement, which you must have, um at some point, um uh be able to log into, go log into the portal and download that and you should get approximations for all of these things. Note that the uh P and I payment will be fixed, but your property taxes and insurance will grow over time, and later on in the spreadsheet we’ll have to make an an assumption about what that growth rate will be, what the inflation rate will be on those types of expenses. So, that gets us our PITI payment.
Scott: Next, we need to understand what would we get if we sold the property, right? And this is complex. We have to assume what we’re going to pay to a listing agent and the buyer agent, on the on the sale.
Mindy: If we choose to compensate the buyer’s agent. So there was this big lawsuit that I’m sure everybody has heard of, and essentially, sellers are no longer obligated to pay the buyer’s agent. However, they were never obligated to pay the buyer’s agent. So it’s a silly response to this this lawsuit is that now sellers are being told, you don’t have to pay the buyer’s agent. However, I am a real estate agent. I’ve been a real estate agent for 10 years. Real estate agency has been around, I think since the dawn of dirt, and in America when you are selling your home, if you don’t offer buyer’s agent compensation, that then falls to the buyer themselves. There’s a lot of buyers who don’t have the money for their agent commission on top of the down payment and all of the expenses that they have associated with the purchase of a house. So this is something that I am going to encourage you to talk to您的代理了解他们在本地市场看到的情况，并强烈考虑不要在这里冒险，这取决于您需要多快出售这所房子。提供买方代理佣金可以帮助它更快地售出。
Mindy: offering a buyer’s agent commission could help get it sold quicker.
Scott: Yeah. So, you know, because this is an opinion, right, and an initial estimate here, this is all all these numbers are changeable. I have put some notes in here including occasional snarky ones like this one, uh, for how to think about the inputs that I have already populated the spreadsheet with uh on this. So I’ve assumed 5.5%, but as discussed in this spreadsheet, if you’re angry about me for putting that as the initial assumption, you can email your complaints to legal@nar.com. Okay. Now, moving on to seller closing costs, we have a, I I assume 1% here for, you know, kind of miscellaneous seller’s closing costs excluding title and insurance. Mindy, any any opinions on those or anything you want me to change here?
Mindy: It is so market specific, the closing costs. And if you are not sure what your market is going to bear, go with 2%, go with 3%, because it’s always better to run these numbers and say, oh, okay, I’m going to get $100,000, and then you in fact get 105, well, that’s a better scenario than you ran the numbers and say you sold the house and you’re like, wait, I was supposed to get 100, I’m only getting 80. I always want you to do these numbers very conservatively.
Scott: So yeah, so you know, I’m I’m going to stick with 1%, 1% for these two numbers and my 5.5% assumption for now in this analysis, but if you download this spreadsheet, um, uh you can change those numbers at any point uh as well. So all these are are are location specific and the best way to get good estimates is to talk to an agent, which is always linked there and always available for you on BiggerPockets if you want to refine these and get more serious about the next steps on um making a determination here.
Mindy: While we’re away for a quick break, we want to hear from you. Are you considering renting versus selling your property? Okay, we’ll be back after a few quick ads.
Mindy: Let’s jump back in.
Scott: So, those numbers get us to a net sale proceeds, right? Net sale proceeds are going to be a function of the current value of a home minus the remaining mortgage balance minus any transaction costs. Confusingly, that is different from a capital gain on the property because the capital gain is the sale price less the original purchase price of the property, right? And so we got to, you know, that that that’s different in this scenario, which it is for millions or tens of millions of Americans, because the average thing to do in 2021 was to refinance the mortgage, often with a cash out refinance. So we’ve got a bigger capital gain than net sale proceeds here in a lot of situations in this country right now. Okay. So now that we have our capital gains number and we have our net sale proceeds, we have another function here to understand what you’re actually going to put in your pocket after selling this thing.
Scott: Because we got to incorporate taxes here. For most homeowners, taxes will not apply because if you’ve lived in the property for two or more years and have a capital gain of less than $250,000 if you’re single or $500,000 if you’re married, you’re you there’s a a a capital gains exclusion on the sale of a primary residence. Mindy, what’s that law called again?
Mindy: Section 121.
Scott: Section 121, right? So I have defaulted the spreadsheet to saying capital gains taxes do not apply, but you can just toggle this to a yes if you have capital gains taxes that do apply and that will default to a 20% rate for federal and a 4.55% rate for state, which is the state capital gains tax rate here in Colorado. You will have to look up your state’s tax rate in order to run that calculation there. And then that will automatically populate with capital gains taxes for your property, your the sale of your property if they apply. And now we get our real prize, the number here, $106,503. This is what would actually hit your bank account if you sold the property under this set of assumptions. Okay. Woo. Like, is there a simpler way to get to this number? I don’t think so. I think you have to do all of these things in order to get to these numbers and that’s just the first two sections.
Mindy: Oh, wait, there’s more.
Scott: Oh, we have to keep going here. Now we have to say, okay, the most obvious case, the one that we talked about BiggerPockets money, is just put that money in the stock market, right? And the the you know, we have to make an assumption about what that’s going to yield here. So I assume VOO, um, and I’ve put in a 10 or 9% um rate here. I I 9% is kind of the true average stock market over the last 30, 40 years, um, return, but I’ve bumped it up to 10% and the reason I’ve done that is to illustrate that, um, is to increase the um appeal of putting the money in the stock market relative to keeping the hope. I want to make it less appealing to keep the home than putting in the stock market because keeping the home is is going to involve a lot of work, um, geographic concentration, those types of things. If you believe the stock market is going to perform better, you can bump this number up. If you believe it’s going to perform worse, you can knock it down here. Okay. So the next section here is assumption is is the first case, right? So case one is, so if case one is assuming you’re going to invest this money in the stock market, case two is you’re going to use the sale proceeds towards your next down payment. So this person is selling their home and they’re going to buy a new home, and that new home mortgage is going to be at a much higher interest rate. So this was built a couple months ago. Um here in September of 2024, rates have come down a little bit and I bet you can get up to like 5.8% on the next property here. So let’s change that one right now. That gives you a new monthly P&I payment, and if you put the $106,503 down, uh as an additional down payment towards the new home, you reduce your mortgage balance from 350 to 243, and therefore reduce your monthly P&I payment by about 500 bucks. That’s an important consideration. We’ll flow that through to the model’s outputs when we get down into the next section.
Scott: Okay. Another case, you can keep your home as a rental. In this case, we need to make an assumption for rents, gross rents. I’ve assumed $2,600 here. We’ve got a rent estimation tool at BiggerPockets, which is linked in the spreadsheet if you want to use that. We know our P&I, or principal, interest, taxes, and insurance payment from up here, so we just pop that down here. We’ve got to make assumptions for vacancy, maintenance expenses, and capex. We have an assumption here for landlord-paid utilities if you are are going to not have the tenant pay those. And that gives us an approximation for cash flow. Phew. Next section done.
Scott: Any questions here so far, Mindy?
Mindy: Yes. What is good cash flow?
Scott: What is good cash flow? Uh, it’s all relative to to um your property. In this case, let’s say this is about 500 bucks a month, that’s going to be a little less than $6,000 a year. So five to five and a half, 6% cash-on-cash return on this, you know, 137 in equity or 106 in true net equity. Um that’s pretty good. That’s probably like a five, you know, at least 4 and a half to to maybe bumping up against 5 and a half percent cash-on-cash yield in this scenario if you believe these assumptions. If you don’t like these assumptions, bump them up. Um I have 100 bucks a month for a small, nice newer property and 300 bucks a month for an old, crappy, larger property. So, you know, it’s it’s really a tough guess here. Some people do it on a percentage of rents. Um I’ve kind of taken a middle ground here and assumed a different um assumption for each maintenance and capex here. But um this is this is about 10% of rents, for example, uh 8% of rents for both categories, for example, which I think a lot of landlords would agree with on here.
Mindy: Okay, so when I’m looking at these numbers, how do I know this is good cash flow? I remember, I am a homeowner, not an investor.
Scott: Well, that’s what the tool’s going to do. So the tool’s going to show you what your cash flow is going to look like in each of these scenarios in the first year and over time as we roll through with the assumptions. So what does good look like? Well, good is relative. It’s what do I do with this $137,000 in equity in my home or $106,000 in equity that I’ll realize after taxes, um if I actually sell the thing. And so my my choices are keep it where it is as a rental property, put it in the stock market or put it towards my new home mortgage. Again, there’s other choices there. If you have a better use case than any of these, sell the property and put it towards that. Um but that’s not what, you know, I think most homeowners are going to struggle with these fundamental challenges. Do I keep my old home and rent it or do I sell it and if I sell it, do I put the proceeds toward my new home mortgage or in the stock market? So those are our kind of four cases, and then we have to assume several additional things here. We have to say, what is this thing going to appreciate at on a long-term basis? I’ve assumed the Case-Shiller 3.4% rate uh growth rate for both home prices and long-term rents. You can certainly change those. And I’ve assumed expenses will grow in line with that, although expenses may grow in line closer to the core inflation target at about 2 to 2.5%, but this is I think reasonably conservative here, uh unless you’re a big bear in inflation. Again, that’s why it’s an assumption you can change it. I’ve just populated with what I think are reasonable assumptions for Average Joe in a median situation here.
Mindy: Yeah. And I’m curious to see how other people’s uh calculations shake out. So if you do this and you want to share this with us, Mindy@biggerpockets.com or Scott@biggerpockets.com or emails are full.
Scott: We got to take one final break, but stick around for more on the numbers you need to be considering before you sell your property.
Mindy: Welcome back to the show. Let’s move down to these graphs because I know you look at these graphs all day long. I don’t look at graphs all day long. What is this one telling us?
Scott: I wanted to kind of get to two fundamental outputs with this exercise. One is how much cash comes into the person’s life based on either decision. And this is less important in this specific example, but when we go through a higher priced house, I’ll show you why this one could be a major impact here. Um but it is an important consideration, right? Like if you if you keep this place as a rental and you believe these cash flow numbers, then keeping the thing as a um as a property and DIY managing is going to make a big difference for you. That’s $7,000 in year one cash flow compared to what is that? Um uh $1,400 in cash flow from an index fund investment. Now, one caveat here is all additional cash, once we get into the model for building this out, there’s a complicated model here, you can go and dive into it for all this. This one’s a real beast to look at. Uh and I had a lot of fun constructing. Um but what I do just just behind the scenes for anyone who’s wondering is I take all of the cash flow and I invest that cash flow in the stock market at whatever this assumption was. So if you generate a couple thousand bucks in rent, then I’ll take that rental income uh and profit and I’ll put it in the stock market and I’ll assume you get these returns on that investment. Makes sense? So that’s going to come in there and that’s not going to be exactly the same as the um outputs in the model here, it’ll add that in. Um okay, just to be fair um from an opportunity cost perspective. So the stock market’s going to produce the least amount of cash flow in this particular example. The passive landlord is going to produce the second least amount of cash flow. The DIY landlord is going to get the most and that will ramp dramatically over the next few years. But in year one at least, I want to call out that selling the property and using those proceeds towards the new home mortgage will reduce that mortgage balance by enough and the the cash outlay for that, that this will you’ll actually have a bigger bank account balance at the end of year one if you just sell your property and put the proceeds towards your new home mortgage to pull that down. Which I think is interesting.
Mindy: So based on this graph, Scott Trench, real estate investor, CEO of BiggerPockets, creator of this beast of a spreadsheet, what would you do if this was your numbers?
Scott: Oh, I’d keep this. So, so first, this is the cash flow impact. I’d keep this thing as a rental all day. Look at this. You’re gonna produce a ton of cash flow in in year one and it’s because you have this low interest rate mortgage, you know, and high leverage against it and a, you know, even with this low rent-to-price ratio, that mortgage is such an asset. In this case, this is a keep decision all day. And it gets even better when we think about the net worth impact, right? So this starts out pretty close, and let’s walk let’s actually walk through what’s going on in the net worth impact and why I got this funky spike going on. Okay? So let’s start with this. If I use the proceeds towards the new home mortgage, then I will have bumped down that mortgage a little bit and I’ll be saving from a net worth perspective the amount that I’m um uh spent, not spending in interest. I’ll be able to invest that in this in the uh stock market and grow wealth. So that’s going to grow the least relative amount of um long-term net worth in this particular example. If I sell and invest passively in an index fund, then I start off with that basis and compound it and reinvest the dividends with this blue curve. In the case of keeping the home, what’s happening here is I’m computing your net worth on an after tax, realizable proceeds basis. What does that mean? Well, remember this tax component here, if you sell this property, um and you don’t live in it for the last two years, the gain becomes taxable. And so you in at least for the first two years, can still realize that advant that tax exclusion. After year three, you age out of that. Your property, you haven’t lived in that property for two out of the last five years and you no longer can get that tax exemption and so the net worth impact um uh uh the the the real value of this property to you and a net worth after tax basis declines. Now, this is a very conservative way. This is the most unfair possible way I can build this in favor of selling the property and moving the proceeds into an index fund, right? Because the index fund, if you sold this, you’d pay taxes on it, right, on on this run, right? But I’m I’m trying to make, I’m trying to make keeping the property as unappealing as possible because I know there are the soft problems that go along with it of the active management piece. Does that making sense, Mindy? Am I explaining that well?
Mindy: Yes, and I know that three-year rule and I was still, until you said that, I was like, what’s with that big weird jump? Yeah, that’s great.
Scott: That’s why you’re seeing this funky bump here. Now, the next two charts on the right here are just the same graphs but pulled out 30 years to show the long-term impact of this decision. And now we can see that these really begin to amplify, right? The DIY landlord is gonna generate a lot more cash flow for the life of the loan. And then in year 27, remember our mortgage is only is already three years old on our property, the mortgage will get paid off and therefore your cash flow will bump. That’s why you’re seeing this spike at the end of the tail here for those who are curious and true spreadsheet nerds. Um and then the cash flow impact on the pay off the mortgage and the uh stock market are much more muted, um, down here in a relative basis. So you get way more cash flow over life of this whether you keep it as a DIY landlord or um higherd out to a property manager. And in this situation, you also get way more net worth over a 30-year period. I think it compounds to what, $3.4 million in this particular example versus a um uh $1.8 million. This is a $1.6 million decision over 30 years if you believe this set of assumptions on this. And I got, you know, beat up in a comment on this, you know, for for somebody in the blog and they’re like, yeah, the average American can’t manage their home and they can’t it’s like, guys, yes, managing a rental property is work. Yes, it is not like the it’s not going to be completely passive. But, you know, the average American, I think should take the time to run these numbers and say, do I believe this? And if I do, am I willing to just keep this thing and deal with some of the headaches in exchange for the opportunity to make an incremental $1.6 million over the next 30 years? How much am I going to earn from my career during that time period in there? And so I just think run the analysis and make the decision, right? Now, why is this happening? It’s because of leverage. This is a highly levered property still, 300, you know, a $277,000 mortgage on a $415,000 property with a low interest rate. And every year, if we believe it appreciates on average 3.4% and the rents grow at 3.4%, those magnify the returns and that’s why you’re seeing this outcome um really compound so much in favor of the landlord in this situation. So this is the median and I think that millions of Americans who are in a situation similar to this really should, I think the tool says, keep the property or really strongly consider it and know that they’re giving up a big opportunity cost if they sell it, if they believe, again, these long-term assumptions. Okay. That’s part one, Mindy. We ready for part two on a more expensive property?
Mindy: Yes, because you said you made this as unappealing as possible towards keeping the house. I’m wondering if these change so that it it definitely makes it an easier decision to keep or sell.
Scott: Well yeah, so one of the things here is the stock market return for, so the real estate is the real estate equity piece in this is computed as the realizable proceeds after tax if you were to sell the property. To make it more fair in favor of stocks, we’d have to say we have to do the same thing and we’d say, okay, if I took $106,000 and compounded it to, you know, three, $1.8 million over the next 30 years, then that $1.8 million if I sold that, I’d pay a 20% long-term capital gain and I’m left with $1.5 million uh in this situation. So that would bump that down if it was apples to apples on this. And I would actually say that you could reasonably do that. You could bump this down to 1.5 and bump this one up because real estate has opportunities to 1031 exchange, pass it on to your heirs at a stepped-up basis, those types of things, but those are not factored in this spreadsheet. So the actual gap, if you’re willing to be, you know, really smart and crafty from a tax strategy perspective, um is potentially much larger than this.
Mindy: Run your big numbers. Let’s see how this works with with uh higher…
Scott: This is all fine and dandy, but for now, so this is the the median in median um home price in America. BiggerPockets money and BiggerPockets general members tend to be wealthier and live in nicer, larger, more expensive homes than this medium price point. And I’ll tell you right right off the bat, once we plug in different numbers here, this is going to change and it’s going to be sell all day rather than keep the thing, um on this. But let’s go through it. So let’s take a, Mindy, what’s a home you recently sold to somebody, um maybe like in the $7-800,000 range? Can you can you build that picture in your head?
Mindy: Ang’s under contract at uh 650.
Scott: So let’s do a $650,000 home and let’s say this home was purchased at 400, you know, let’s say it was purchased at, you know, 385. Okay. Um uh in 2019. Let’s say that they’ve got a a a a mortgage, they bought it, they they didn’t refinance it, or they refinanced it at a lower mortgage price. So we’ve got a $325,000 mortgage back from 2021. Oops, by the way, this number has to be entered as a negative number. Um I’m sorry for my bad UX here on this, but if you’re going to use this tool, enter it as a negative number. I’ve called that out here, but uh you saw I just forgot it there as well. Okay, so we’ve got this new mortgage at 346. We’ve got our low interest rate. Let’s bump these property taxes and insurance up. They’re not going to sit there on a property of this level. So let’s pop $4,000 in property taxes, and let’s call it a $3300 in insurance. Does that sound reasonable, Mindy?
Mindy: Uh, yes.
Scott: Okay, awesome. We’ve got our brokerage fees and all those types of things. Again, if you don’t like those, you can email who to email. Um, we’ve got our net sale proceeds and we’ve got our capital gain here. Uh, let’s so we we we’re still under the tax threshold in this particular example. Um we can pull those up. Okay, um, we’re we’re going to, we we let’s keep the same assumptions here for a new home mortgage, um on this. Let’s keep the same and let’s now change the assumptions for the rent situation. So, what would this place rent for, Mindy?
Mindy: This place would rent for $4,000 a month.
Scott: Ooh, this one might be a keeper actually as well. We’ll probably need to bump these up because it sounds like a nicer property. Might need a little bit more maintenance. So let’s bump those expenses um up here and now we’ve got, ooh, we’ve got a real winner on this particular property, $1200. So this one’s also going to be um a keeper here. This this is a bummer example on this. Um let’s let’s cheat here a little bit and let’s um let’s bump this prop, let’s bump this current value up to 850. Okay. So this property’s now worth 850 with those same assumptions. Okay. We have a more expensive house, 850, $500,000 mortgage on it. Um, same same old stuff here. We’ve got let’s let’s call the new mortgage is going to be 600,000 on the new property. And we’ve got our kind of same assumptions here for these. Let’s put, let’s bump these up even a little further here, 5,000 and 4,000. Now what we’ve got is a very interesting and very different picture for this person in the the wealthier cohort with a little bit more of a uh more expensive home, right? All of a sudden, the big factor here is how much is the mortgage on the new house going to be? That’s overwhelming everything else because we’re dealing with such a big number and a big pile of equity that we’re going to be able to to to extract here. So this person, if they’re using the $200 or $319,000 in after-tax proceeds to pay down their new mortgage at 5.8%, they’re going to reduce their payment from $3500 to $1600 a month. That’s a $22,000 swing in cash flow, right? Now, that may have different impacts on the net worth basis over the next 30 years, but that may be your primary consideration in this case and cannot be ignored and that’s why these two graphs in combination are so important, right?
Scott: The cash flow on this type of house is also not going to be that great because properties of this value tend not to have a great rent-to-price ratio and that’s going to impede your cash flow to a large degree, and it might go to zero or even negative if you’re to hire out management. So we’ve got a very low amount of cash flow here on the um if you keep it as a passive investment. You’ve got a very small amount of um uh cash flow if you if you put it into the index fund, and a little bit more if you DIY landlord this thing. On the net worth side, you’re just earning the interest rate here on that um by by not paying the interest on the new home mortgage. The other three are super close here and once we factor in that tax advantage out after year three, the stock market becomes a clear winner in this particular case in terms of relative net worth on this. So, for the more expensive home that’s less levered, right? you got a lot of equity in a more expensive home, you’re probably going to be better off selling the place than keeping it as a rental. And if you’re in a less expensive home with a little bit better of a price-to-rent ratio, um you know, and achieving a little bit more cash flow, it’s probably going to make a lot more sense to keep the property. And this is so case by case, you can see how each one of these inputs can blow the assumptions in the rest of the model here when we think about it. So, those are the two takeaways I wanted to basically share at the highest level, and I wanted to preview the tool. I don’t know how to make it that much simpler. So, I think it has to be done this way. But again, this is available for anyone to use at biggerpockets.com. All you got to do is go to the navigation bar, hover under analyze deals, and go to seller keep.
Scott: So this is available for anyone to use as long as you’re a BiggerPockets Pro member, of course, at uh biggerpockets.com. You can go cover under the over the navigation bar, go under analyze, analyze deals, and then click on sell versus keep and you’re going to find this and use the tool and make your own assumptions about the property. Also happy to answer questions if you want to DM me on BiggerPockets or post questions to the BiggerPockets forums about the outputs of the spreadsheet here. But I think this is a critical analysis that tens of millions of Americans are going to need to make and the answer is going to vary by person and the opportunity cost can be huge depending on what you think’s going to happen over the next 20, 30 years.
Mindy: Scott, I agree. I’m glad that we had these giant swings so you could see that sometimes it is going to say sell is the best choice. Um and sometimes it’s going to say keep is the best choice. Uh I think this is very, very interesting. I am definitely going to be running these numbers for potential real estate clients because they are going to want to know. I’ve had a lot of real estate listings right now saying, should we keep it invested out or should we just sell it? And, you know, the number one question that I think you should ask yourself is, do you want to be a landlord? Do you want to deal with these issues?
Scott: No, because I think I think this could be a very emotional decision as well. And not everybody is going to be able to look at this and say, um, oh, it’s that’s going to cash flow all day long. I should keep it. I don’t want to be a landlord really. Okay, I I just want to push back on that particular thing there because I got that in some comments here as well. Respectful, respectful disagreement. Mindy, I don’t want to be a landlord. I run BiggerPockets. I don’t want to be a landlord. Being a landlord is work. It involves managing tenants. What I want, however, more than not wanting to do the landlording duties is $1.6 million per property over 30 years. So that’s the thing that I think people need to ask themselves is, look, nobody wants if you could get the work of not being a landlord, of of being a landlord without doing the work, then of course you would take that. But that’s not the choice. The choice is there’s an opportunity cost. There is massive incremental cash flow and massive incremental net worth that could be had by maybe 20 million Americans who bought who have own homes that are priced at the median price point in this country, if they keep the home and become a landlord. You know, depending on and again, depending on, they need to run those numbers and then you make the decision, okay, I don’t want to be a landlord. How much would you someone have to pay me to be a landlord? That’s a better question, right? And if that answer is, you know, uh $100,000 a year, then this is not enough. But if that answer is $5,000 or $10,000 a year, this is way more than enough. And that I think is the the the piece that, you know, millions of people need to need to consider here. That’s an entire career of wealth accumulation in one decision.
Mindy: Okay, Scott, I asked the question so people who are driving down the road don’t have to or can’t because they’re not sitting here talking to you.
Scott: Yeah, sorry. I get animated about this because I got I got beat up on a comment on this.
Mindy: I think that’s a great answer because there are a lot of people who are siding with me. I don’t want to be a landlord. I just want to sell, or it’s not enough money. I love your impassioned speech.
Scott: Well, thank you for allowing me to have an impassioned speech here. I hope that folks appreciate the spreadsheet. You know, I uh went through it, had a bunch of uh, uh, I went through a bunch of different cases. Really appreciate any feedback that you find here. And of course, if you need any help with the assumptions, I’ve got these notes and or links to resources on BiggerPockets that can help you out like taxes and agents and our rent estimation tool, property manager finder if you want assumptions for rent and um those types of expenses. So go check it out and uh thanks for watching today. We’ve also got a uh special coupon code um for this and all the other tools that are included in the BiggerPockets Pro membership, which includes all of the features you would need to DIY manage your property. Um and any bigger pockets money listener who’s listening today can go and um get the the BiggerPockets Pro membership with a 7-day free trial included for anybody. But they can also get 20% off by using the code BPmoney at checkout. So thank you for listening and we appreciate you and hope you try it out, use it, and give us feedback.
Mindy: Yes, email Scott@biggerpockets.com if you have found anything you would like to comment on his spreadsheet. He created this from scratch from his big beautiful brain. All right, Scott.
Scott: Let’s get out of here. Thank you, Mindy.
Mindy: That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen, saying we must depart, zebra heart.
