Inherited House in California - Do I Sell?

[Adam Treboutat]

I inherited a house from my father in 2011. This house is located in Marin County, California (not in an extremely expensive area of Marin). I've been renting out the property ever since and using the rent to pay down the mortgage. I've been paying about $1,000 in taxes out of pocket every year.

Now that I'm 27 and have learned more about investing, I'm starting to analyze this deal from an investor framework. I believe that selling this property and reinvesting in commercial real estate syndications and Vanguard index funds would provide a better IRR.

I'm hoping that I could get some help on my calculations before I jump to any conclusions.

Here is the current information:

• Appraised value (2011) = $600,000
• Annual gross rent = $44,700
• Insurance = $900
• Maintenance (average) = $4,000
• Property tax = $6,200
• NOI = $33,600
• Cap Rate = 5.6%

Mortgage

• Mortgage Amount Remaining = $285,000
• Mortgage Rate = 2.75%
• Mortgage Term= 10

Cash Flow

• Before-Tax = $1,000 (year 1) ==> $12,100 (year 10)
• After-Tax = $-800 (year 1) ==> $7,100 (year 10)

Sale

• Current Zestimate = $900,000
• 10 Year Appreciation (3% per year) = $1,209,000
• Cap Rate at sale (assuming 3% rent increase per year) = 4.0%

Calculations

• Before-Tax IRR = 7.3%

Conclusion

Based on these calculations, a 7.3% IRR is about average. However, am I overvaluing the property appreciation? Because the CAP rate is certainly low at sale.

If this property were to sell for $1,000,000 in 10 years, that would lower the IRR to 5.4%. And if a recession drops the price back down to $600,000, then the IRR becomes 0.5%.

I hope this makes sense. Thanks for helping me through this!

I can link to the spreadsheet I am using if anyone would like to see that.