[Calc Review]: Renting Current Property vs Selling and Buying New

Buying & Selling Real Estate
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[Calc Review]: Renting Current Property vs Selling and Buying New

Michael Sykora
San Francisco, CA · Member since 2015 · 4 posts · 1 vote

This question is rather broad and understand the answer will depend on everyone's situation.  There I'm looking for some guidance on figuring out how to calculate the numbers rather than a simple "you should do this" answer.

The Situation:

I live in California where I purchased a home (primary residence, though was 'house hacking' and renting out my in-law) in Daly City for $905K about 3.5 years ago.  Per Redfin/Zillow, the home is in the $1.25M range now.  We purchased another home where we'll be moving and I'm now trying to decide if I should keep this Daly City residence to rent out or sell it and look for another property (most likely out of state or in the San Jose area) to invest in.  I want to run the numbers to be able to make the best choice, but I'm struggling to figure out what numbers to look at.  

My thoughts on calculating if I should "Sell and Buy Something New:"

I believe I need to break this calculation into two steps 1. How much will I make on the sale? and 2. What does the investment look like for the new property.

1. How much will I make on the sale?  I'm guessing this is as simple as taking my estimated sale price, minus any expenses to make it sale ready, real estate agent fees, city fees, and any taxes to state/federal?  Then with this number I'll know how much I'll have available for the 2nd step:

2. Numbers for the new property?  I'm thinking of leveraging one of BiggerPocket's deal calculators to understand the numbers.

My thoughts on calculating if I should "Keep the Property":

Would one of the BiggerPocket Calculators help with this one?  I'm assuming I would take the estimated rent, minus all expenses (taxes, management, estimated repairs, vacancy, mortgage, etc) to understand cashflow, and leverage an appreciation estimate to guess what the property could be worth in a number of years?

Comparing the Numbers:

Once I run the above analysis I review what my cashflow and appreciation might look like to make the final decision?

Questions:

1. Any flaws you see in the process listed above?

2. Any large expenses/costs/process items that I'm completely overlooking?  When I initially thought through this I forgot about agent fees to sell the property, which is a huge cost.  Did I forget any other major costs?

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Michael T.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y

@Michael Sykora your thought process here is correct and yes the BP calculators will help you get to what you're ultimately looking for.

For the sale of the home you should typically calculate approximately 8% of the sale price going to fee's, commissions, etc.  There are definitely ways to reduce this number down to the 6% range.

Ultimately, the way I look at these type of situations is if the appreciation over the next 2-4 years will offset rent versus the cash flow you'll be getting from keeping it as a rental.

Will you lose money on a monthly basis?  If so will the appreciation over the next 2-4 years offset the loss?

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  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Michael Sykora your thought process here is correct and yes the BP calculators will help you get to what you're ultimately looking for.

    For the sale of the home you should typically calculate approximately 8% of the sale price going to fee's, commissions, etc.  There are definitely ways to reduce this number down to the 6% range.

    Ultimately, the way I look at these type of situations is if the appreciation over the next 2-4 years will offset rent versus the cash flow you'll be getting from keeping it as a rental.

    Will you lose money on a monthly basis?  If so will the appreciation over the next 2-4 years offset the loss?

    2Reply
  • Lawrence Gillen
    Real Estate Agent · San Jose, CA · Member since 2016 · 2 posts · 1 vote
    7y

    A large item to consider... (please discuss this with a tax professional - which I am not),  you will want to take into consideration the timing of your sale, if you decide to sell the Daily City property. Currently, if you meet the requirements, there is a chance that you may not have to pay any capital gains tax. If you decide to rent out the home (therefore, it is no longer your primary residence), you can eventually eliminate yourself from the capital gains tax exclusion. You will need to calculate to find out if the net income from rents will be greater than the amount of taxes you will have to pay when you sell your home. This can be extremely difficult as it requires you to make a wild guess about the future value of the home, and future rents throughout ownership, both of which are moving and unpredictable targets.

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  • Account Closed
    Real Estate Broker · San Jose, CA · Member since 2016 · 33 posts · 17 votes
    7y

    You’re on the right track with this, although I think analyzing the cash flow of the Daly City property is an appropriate first step. That can help inform your buy/hold decision on that. There may be other expenses you haven’t touched on, it’s hard to say definitively, as some are unexpected, property-specific, or part of the negotiation process. I think you’ve accounted for the major ones. Definitely make use of the calculators on here for your current property and any potential deals. I also suggest consulting a tax professional when making this decision. Best of luck to you

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