BiggerPockets Money Podcast - Should You Keep or Sell Your House? Use This Tool to Find Out in Minutes

Starting point is 00:00:00 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 three or four percent 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. Q 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. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me, as always, is my huge spreadsheet nerd co-host, Scott Trench.

Starting point is 00:00:44 Thanks, Mindy, great to be here with you. You always excel at these types of introductions. I'm looking forward to really nerding out today. This is going to be a little bit different of an episode. I know that many of you are going to 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 in a

Starting point is 00:01:10 spreadsheet. So I'm going to be sharing a spreadsheet. This is available on BiggerPockets. You can go to BiggerPockets.com, hover over analyzed deals in our navigation bar, and then go to the sell versus keep link there, and you're able to find the spreadsheet. And with that, let's get into it. And I'll kind of share my screen and preview what I'm trying to solve for here. So, and 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?

Starting point is 00:01:43 This is the median American home buyer. The year is 2019 and our perfectly average or more specifically median American home buyer, and 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. 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 keeps getting better.

Starting point is 00:02:35 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. 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 a 2.75% mortgage.

Starting point is 00:03:39 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 the same position where they've got a low interest rate and they've got a home

Starting point is 00:04:23 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 five to 10 years is now that I, because I have that low interest rate mortgage, because I bought 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? 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. Just typing BP money into YouTube. And look, blam, there it is. Okay, so let's pull it up here. All right.

Starting point is 00:05:13 So this is not an easy thing. I tried to simplify it. You saw how I failed miserably just now and 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

Starting point is 00:05:40 that lower interest rate mortgage. So today, the median home price is $415,000. In 2019, the medium 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.

Starting point is 00:06:04 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 take the money and use it towards a new home mortgage, reducing their cash outflows here? Right.

Starting point is 00:06:33 So those are the four general options people have. 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. 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. 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

Starting point is 00:07:10 assumption about the equity that we've got in that property. We need to understand the term of our mortgage, the 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. Okay, Scott, I'm going to 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? So first, you know, what people will do is they're going to go on Zillow and look at this estimate. So go do that, if you must. Mindy has his opinions about whether that's a good idea or not. The right answer, of course, is to look at comps, really kind of follow what other properties have sold for in your

Starting point is 00:07:55 local market or better yet, talk to a local agent. You can go to BiggerPockets.com slash agents, for example, to talk to people who can give you an opinion of value on there if you're considering selling or keeping your property. 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. Yeah. And I think you would have to go, yeah, you'd obviously have to go look at your mortgage statement, which you must have at some point, be able to log into, go, you can log into the portal and download that, and you should get approximations for all of these things. Note that the P&I payment will be fixed, but your property

Starting point is 00:08:37 taxes and insurance will grow over time. And later on in the spreadsheet, we'll have to make 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. Next, we need to understand what would we get if we sold the property, right? And this is complex. We have to assume, we have to account for what we're going to pay to a listing agent and the buyer agent on the sales. 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.

Starting point is 00:09:20 However, they were never obligated to pay the buyer's agent. So it's a silly response to 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.

Starting point is 00:09:52 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 your agent about what they're seeing in the local market and strongly consider not going out on a limb here. Depending on, you know, how urgently you need to sell this house, offering a buyer's agent commission could help get it sold quicker. Yeah. So, you know, because this is an opinion, right, and an initial estimate here, this is, all these numbers are changeable. I have put some notes in here, including occasional snarky ones like this one, for how to think about the inputs that I have already populated the spreadsheet with on this.

Starting point is 00:10:44 So I've assumed 5.5%, but as discussed in the spreadsheet, if you're angry about me for putting that as the initial assumption, you can email your complaints to legal at NAR.com. Okay. Now, moving on to seller closing costs, we have a, I assume 1% here for, you know, kind of miscellaneous sellers closing costs, excluding title insurance. Mindy, any opinions on those or anything you want me to change here? It is so market-specific, the closing costs. And if you are not sure what your market is going to bear, go with 2%.

Starting point is 00:11:18 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. 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.

Starting point is 00:11:37 So, yeah. So, you know, 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 the spreadsheet, you can change those numbers at any point as well. So all of these 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 bigger pockets. If you want to refine these and get more serious about the next steps on making a determination here.

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Starting point is 00:15:05 Let's jump back in. 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'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

Starting point is 00:15:44 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. Because we've 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, there's a capital gains exclusion on the sale of a primary residence. Mindy, what's that law called again?

Starting point is 00:16:30 Section 121. 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 on that calculation there. And then that will automatically populate with capital gains taxes for 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, sold the property under this set of assumptions.

Starting point is 00:17:14 Okay. Whoa. 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. Oh, wait. There's more.

Starting point is 00:17:25 Oh, we have to keep going here. Now we have to say, okay, the most obvious case, the one that we talked about bigger pockets money is just put that money in the stock market, right? And the, you know, we have to make an assumption about what that's going to yield here. So I assume VLO, and I've put in a 10 or 9% rate here. 9% is kind of the true average stock market over the last 30, 40 years return, but I've bumped it up to 10%. And the reason I've done that is to illustrate that is to increase the appeal of putting

Starting point is 00:18:01 the money in the stock market relative to keeping the home. I want to make it less appealing to keep the home than putting the stock market because keeping the home is going to involve a lot of work, geographic concentration, those types of things. If you believe the stock market is going to perform better, you can bump this number up. If it's going to perform worse, you can knock it down here. Okay. So the next section here is assumption 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

Starting point is 00:18:38 And that new home mortgage is going to be at a much higher interest rate. So this was built a couple months ago 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 and as additional down payment towards the new home, you reduce your mortgage balance from 350 to 243 and therefore reduce your monthly PNI payment by about

Starting point is 00:19:14 500 bucks. That's an important consideration. We'll flow that through to the models outputs when we get down into the next section. 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 bigger pockets, which is linked in the spreadsheet. You want to use that. We know our P&I our principal interest tax is an 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 going to not have the tenant pay those. And that gives us an approximation for cash flow. Phew, next section done. Any questions here so far, Mindy?

Starting point is 00:20:01 Yes. What is good cash flow? What is good cash flow? It's all relative to to your property. In this case, let's say it is about $500 a month. That's going to be a little less than $6,000 a year. So five to five and a half, six percent cash on cash return on this, you know, 137 in equity or 106 and true net equity. That's pretty good. That's probably like a five, you know, at least four and a half to maybe bump it

Starting point is 00:20:29 up against five 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. I have 100 bucks a month for a small, nice, newer property and 300 bucks a month for a old, crappy, larger property. So, you know, it's really a tough guess here. Some people do it on percentage of rents. I've kind of taken a middle ground here and assumed a different assumption for each

Starting point is 00:20:53 maintenance and capex here. But this is about 10% of rents, for example, 8% of rents for both categories, for example, which I think a lot of landlords would agree with on here. Okay. So when I'm looking at these numbers, how do I know this is good cash flow? Remember, I am a homeowner, not an investor. Well, that's what the tool is going to do. So the tool is 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 assumptions. So what is good look like? Well, good is a 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? if I actually sell the thing. And so 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. But that's not what, you know, I think most homeowners are going to struggle with these

Starting point is 00:21:54 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 to 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 K. Schiller 3.4% 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 2.2.2% but this is, I think, reasonably conservative here, unless you're a big bear on 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. Yeah. And I'm curious to see how other people's calculations shake out. So if you do this and you want to share this with us with us, Mindy at Biggerpockets.com or Scott at Biggerpockets.com or email us both. 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. Tax season is one of the only times all year when most people

Starting point is 00:23:01 actually look at their full financial picture, including income, spending, saving, saving, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your taxed refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this

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Starting point is 00:26:07 What is this one telling us? 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. 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 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,

Starting point is 00:26:46 what is that? $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 is a real beast to look at. And I had a lot of fun constructing. But what I do, 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 and profit and I'll put it in the stock market and I'll assume that you get these returns on that investment. Makes sense? So that's going to come in there and it's not going to

Starting point is 00:27:32 be exactly the same as the outputs in the model here. It'll add that in. Okay, just to be fair, 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 cash outlay for that, that 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

Starting point is 00:28:17 your new home mortgage to pull that down, which I think is interesting. So based on this graph, Scott Trench, real estate investor, CEO of Bigger Pockets, creator of this beast of a spreadsheet, what would you do if this was your numbers? Oh, I'd keep this. So first, this is the cash flow impact. I'd keep this thing as a rental all day. Look at this. You're going to produce a ton of cash flow in year one. And it's because you have this low interest rate mortgage. You know, and high leverage against it. And 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

Starting point is 00:29:05 walk through what's going on on 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 spent, not spending an interest, I'll be able to invest that in the stock market and grow wealth. So that's going to grow the least relative amount of long-term net worth in this particular example. If I sell it and invest in passively 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

Starting point is 00:29:43 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 and you don't live in it for the last two years, the gain becomes taxable. And so you, at least for the first two years, can still realize that tax exclusion. After year three, you age out of that. You have a lot of that. You have 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, the real value of this property to you on 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,

Starting point is 00:30:37 right? Because the index fund, if you sell this, you'd pay taxes on it, right, on this front, right? But 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. Is that making sense? Mnian, I'm explaining it's brain that well. 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. 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 impacts of this decision. And now we can see that these really begin to amplify, right? The DIY landlord is going to 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 their 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. And then the cash flow impact on the pay off the mortgage and the stock market are much more muted down here on a relative basis. So you get

Starting point is 00:31:42 way more cash flow over life of this, whether you keep it as a DIY landlord or hired 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 $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, from somebody in the blog, and they're like, yeah, the average American can't manage their home. They can't fit. It's like, guys, yes, rendering 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

Starting point is 00:32:33 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 for my career during that time period in there? And so I just think run the analysis and make the decision. Now, why is this happening? It's because of leverage. This is a highly levered property still, a $277,000 mortgage on a $415,000 property with a low interest rate.

Starting point is 00:33:07 And every year, if we believe it appreciates on our. average 3.4% and the rents grow at 3.4%. Those magnify the returns. And that's why you're seeing this outcome 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're ready for part two and the more expensive property? Yes, because you said you made this as unappealing as possible towards keeping the

Starting point is 00:33:46 house. I'm wondering if these change so that it definitely makes it an easier decision to keep or sell. Well, yeah. Look, 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 stock, 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, $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 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 errors, it has stepped up basis, those types of things. But those are not factored into the spreadsheet. So the actual gap, if you're willing to be really smart and crafty from a tax strategy perspective,

Starting point is 00:34:57 is potentially much larger than this. Run your big numbers. Let's see how this works with a higher. This is all fine and dandy. But now, so this is the median income, median home price in America. bigger pockets money and bigger pockets 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 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 on this. But let's go through it. So let's take a, Mindy, what's a home you recently sold to somebody maybe like in a $7,800,000 range?

Starting point is 00:35:36 Can you build that picture in your head? Angie's under contract at $650. 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. In 2019, let's say that they've got a mortgage. They bought it. They didn't refinance it or they refinanced it at a lower mortgage price.

Starting point is 00:36:01 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. I'm sorry for my bad Ux here on this. But if you're going to use this tool, enter as a negative number, I've called that out here, but you saw I just forgot it there as well. Okay. So we've got this new mortgage at $3.46. We've got our low interest rate. Let's bump these property taxes and insurance up. They're not going to sit there at a property of this level. So let's call it $4,000 in property taxes. And let's call it $3,300 insurance. Does that sound reasonable, Mindy? Okay, awesome. We've got our brokerage fees and all those types of things. Again, if you don't like those, you know who to email. We've got our net sale proceeds and we've got our capital gain here. Let's, so we're still under the tax threshold in this particular example. We can pull those up. Okay. Let's keep the same assumptions here for a new home mortgage on this. Let's keep the same and let's now change the assumptions for the rent situation.

Starting point is 00:37:06 So what would this place rent for, Mindy? This place would rent for $4,000 a month. 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 up here. And now we've got a real winner on this particular property, $1,200. So this one's also going to be a keeper here.

Starting point is 00:37:28 This is a bummer example on this. 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 is 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.

Starting point is 00:37:52 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 wealthier cohort with a little bit more of a 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 extract here. So this person, if they're using the 200 or the 300, or the

Starting point is 00:38:34 $319,000 in after-tax proceeds to pay down their new mortgage at 5.8%, they're going to reduce their payment from $3,500 to $1,600 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 and combination are so important, right? 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

Starting point is 00:39:23 if you keep it as a passive investment. You've got a very small amount of 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, 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, if you have 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

Starting point is 00:40:13 a little bit better of a price to rent ratio, you know, and are 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 and 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. 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 analyzed deals and go to sell or keep. So this is available for anyone to use, as long as you're a bigger pockets pro member, of course,

Starting point is 00:40:50 at biggerpockets.com, you hover under the navigation bar, go under analyze, analyze deals, and then click on Sellverse Keep, and you're going to be able 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 costs can be huge depending on what you think is going to happen over the next 20, 30 years. Scott, I agree. I'm glad that we had these giant swings so you could see that sometimes

Starting point is 00:41:30 it is going to say sell is the best choice. And sometimes it's going to say keep is the best choice. 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 and rent it 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? No, because I think that this could be a very emotional decision as well. And not everybody is going to be able to look at this and say, oh, it's going to cash flow all day long. I should keep it. I don't want to be a landlord really. Okay. I just want to

Starting point is 00:42:17 push back on that particular thing there because I got that into comment here as well. Respectful, respectful disagreement. Mindy, I don't want to be a landlord. I run bigger pockets. I don't want to be a landlord. Being a landlord is work.

Starting point is 00:42:27 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 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 her own homes that are

Starting point is 00:43:07 priced at the median price point in this country if they keep the home and become a landlord. And again, they need to run those numbers. And then you make the decision, okay, I don't want to be a landlord. How much would someone have to pay me to be a landlord? That's a better question, right? And if that answer is, you know, a hundred thousand dollars 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 piece that, you know, millions people need to consider here. That's an entire career of wealth accumulation in one decision. 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

Starting point is 00:43:54 talking to you. Yeah. Sorry. I get animated about this because I got beat up on it. 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.

Starting point is 00:44:08 Well, thank you for allowing me to have an impassioned speech here. I hope that folks appreciate the spreadsheet. You know, I went through it, had a bunch of, 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 Bigger Pockets that can help you out, like taxes and agents and our rent estimation tool, property manager finder,

Starting point is 00:44:31 if you want assumptions for rent and those types of expenses. So go check it out. And thanks for watching today. We've also got a special coupon code for this and all the other tools that are included in the Bigger Pockets Pro membership, which includes all of the features you would need to DIY. manage your property. And any BiggerPockets money listener who's listening today can go and get the BiggerPockets Pro membership with a seven-day free trial included for anybody. But they can also

Starting point is 00:44:59 get 20% off by using the code BP Money at checkout. So thank you for listening. And we appreciate you and hope you try it out. Use it. Give us feedback. Yes. Email Scott at 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. get out of here. Thank you, Mindy. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying we must depart, Zebra Heart.

BiggerPockets Money Podcast - Should You Keep or Sell Your House? Use This Tool to Find Out in Minutes

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