Should You Keep or Sell Your House? (Best Choice for FIRE)

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2:37Mindy Jensen:Today, we are answering one of the biggest financial dilemmas many of us face. Should you hold onto 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 five 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 slash BiggerPocketsMoney.

3:24Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my not-selling-his-real-estate co-host, Scott Trench. Thanks, Mindy. I actually am selling one of my properties. I call it the PETA property. We can talk about that another time. PIDA stands for pain in the bottom. Yeah, I do occasionally. I guess I will sell my first property shortly here. 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 question a lot of people are grappling with.

4:02So thank you so much for your transparency and for coming on today. Thank you so much, Mindy and Scott. Appreciate the time. And it's an honor to be here.

4:09Mindy Jensen:Been a longtime listener, so to be on the podcast is fantastic. 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. $20 ,000 in cash,$76 ,000 in a 401k,$5 ,000 in 529 plans with debts of, I've got a credit card of 5 ,500. I'm sure most of that is paid off every month. Assets,$320 ,000 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.

5:06Mindy Jensen: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. 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? That's at 3.75%. 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, is the stock market going to perform much better than this real estate investment I'm going to turn my house into?

5:56And 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 here. This is available on BiggerPockets. You can Google BiggerPockets sell or keep decision. And so I've input some numbers here for your home purchase that I've guessed at in a couple of cases on this. on this. You have to tell me where I'm correct or incorrect.

6:34And we will go through all of these assumptions. But underlying all of these assumptions is a more, is a kind of qualifier question 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 PETA factor, the pain in the, you can guess what, factor here. And that's a qualitative assumption that real estate investors have to have in place. So does a party you want to keep this property in the first place? And is that underlying much of the analysis we're about to do? I think if you asked me 10 years in the future, I would regret not keeping it.

7:12And 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. I think that's a really important factor in this.

8:01And there's a number of qualifier considerations that go into that. Mindy, what are some of the things that you would look for most as, you know, in addition to Sean's, you know, bias here to potentially keep it, that he should be thinking about to round out that bias?

8:15Mindy Jensen: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 cash. So how are we funding the next house? Yeah, so it would just push our timeline back, to be honest. Our two to three year timeline would probably be a five to six because we'd wait till kids are 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 we couldn't cash flow with our current income.

9:04We're going to alt tab for a few moments here and be right back after this.

9:10Mindy Jensen:Thank you for jumping back in with us. I don't know what that computer code is. 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 in 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 yep right on the money awesome the original purchase price i have 258 is that correct a little bit lower than that it was like 205 we ended up refinancing it shortly after we got it.

9:44Awesome. This will not matter in our analysis in your situation for a while because you've lived in the property for the last couple of years. So there's a number of inputs here around do capital gains taxes apply? They will not in this situation. But many people we talk to are on the coasts, for example, and they might have a 250 or 500 or much 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 to do this analysis. Is that around the time you purchased the home in June 2019? Correct. Okay, awesome. And then I have, I played around with some things here at all, but I cheated in preparation for this with a couple of things.

10:28The model here calculates a few of these. I know your balance is$175 ,000 left. So I guessed at about$197 ,000 when you refinanced the property. This is the current mortgage here around September of 2021. And I needed that so I could get your monthly P &I payment in the amortization schedule of where you are against that load. Is that about right, do you think? Yeah, ballpark. Awesome. And it's a 30-year mortgage with 3.75 % interest? Correct. That gives us our monthly P &I payment at$915. You gave me property taxes. I guessed at your insurance premium here to get this 1839 is that look all correct to you property taxes 200 and and annual insurance about 3 800 a year the insurance prop premiums are more like 25 were currently so in texas you have like an escrow account and they underpaid so right now our monthly payment is$1 ,800.

11:26But prior to the escrow adjustment, it was actually$1 ,500. Okay. So you're going to get some money back. Your payment is$1 ,839, 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$1 ,728 a month. Is that fair? Correct. Yeah. Awesome. You can see why this is so painful to do this analysis, right? How can most people do this analysis without thinking through all this stuff? It's 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.

11:55And that involves the sales expenses and then taxes if they apply. Taxes do not apply in your situation, almost certainly. They will apply if you hold the property for a few years, and that is factored into this from an investment standpoint. But they do not apply if you sell it immediately. So we have our brokerage fees. Here I've estimated 5.5 % to sell the property. Does that seem reasonable or would you want to see that bumped up a little bit? Some places each broker can charge as much as 3%. I would actually reduce that. So I still have my real estate license from when I used to do it full time.

12:30Awesome. 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. Okay. What would you reduce it to? We can do 3%. Buyer will pay, you'll, you'll pay a buyer agent about 3 % to sell this place. I've estimated closing costs in title insurance at about 1%. That might be a hair low in your area. It would be a hair high in my area here in Colorado, but maybe about this to 1.2%. Yeah, it would be a little higher. Do you think even higher than that or would you like those? Let's stick with that for now. Okay, great. So after you sell 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 costs, you'd be left with$127 ,000 of which 97 ,000 are a capital gain.

13:23Again, because this is less than$500 ,000 for a married couple that has lived in a property for two years, there'll be no capital gains taxes or anything that do apply. But if for some reason that was to change, this number was to be higher, you could simply toggle this on and it would default to putting the, to computing the long-term capital gains taxes. And I've defaulted this to the tax rate in Colorado. You can easily put in the state tax rate there. Now I 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%.

13:58Do 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? No, we'd probably stay at the 10%. Normally when we do our projections, we ignore things like social security and all that. So in terms of retirement and reaching five, like the 10 % assumes we'll have more. Awesome. We had a lady from California come on the show and she wanted to assume five or, or, you know, three, three to 5 % appreciation or something like that in her area, five to 7%. Remember that Mindy? And so everyone, everyone believes different things and that that's what they, that's what you gotta, that that's the point of this, right?

14:37You gotta invest based on what you believe 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, what's going to happen with our net worth. And I'll explain all the quirks on this once we get to the end output here. Okay. So let's talk about 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 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 something there.

15:10What do we think mortgage rates are going to be right now? Maybe, Mindy, that's a good question for you. What do you think is a good assumption?

15:16Mindy Jensen:30-year is 6.16%. 6.16%, okay. And is this about the mortgage you'd want to get on a new house, Sean? Yeah, we'd be looking before or after the down payment? After the down payment. What would be the mortgage balance of the new home, you'd assume? Yeah, it'd be around 360, I think is what we're looking at right now. Okay, so this is going to be a negative number, 360. Okay, and we're going to have a 6.16%. That's going to give us monthly P &I of 2 ,100. That'd be if you didn't sell your house and didn't use the proceeds, you'd take on a$360 ,000 balance. But if you do use these proceeds, instead you're going to take on this amount,$232 ,000 mortgage, and that's going to reduce your payment to$1 ,400 from$2 ,200, which is a, what, like$800 a month difference.

16:04That's the question, right? That's what bugs everybody here about this decision. So now we have that one. Okay. And we'll model out how that's going to impact your finances 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? Be$2 ,500,$2 ,500,$2 ,500,$2 ,500. So that's close, 20, 2 ,600 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 put bump 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.

16:42So 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? Yes. And I want to pause here just to, I don't know if this is the best time in 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 like five years. Okay. That's a great, this is a great time to bring that up, right? This is exactly where we're at, right?

17:21This is, this is it. So we have a, I'm saying 5 % vacancy allowance, that 10 % is way too high for, for vacancy allowance on this. 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 CapEx 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, 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 CapEx component on a monthly basis. That'll be 4 ,800 a year over the next four years.

17:54I'll be able to about 20 grand. So that's a very conservative way to model in CapEx on this property based on what you just said here. Is that right? Yep. That's it. Awesome. Do you, will you pay the utilities in this property? Probably not. No. Okay. So we'll have zero utilities. So you're going to eke out a small amount of positive cashflow 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 CapEx at this point. I could build that in the future, but it does not do that today in this particular spreadsheet. Okay. So do we agree with this, these assumptions for the rental?

18:26Yeah, definitely. I'm actually glad to see that cashflow is positive. I haven't actually done like the projecting out the CapEx. So that's great. I would wonder if that would be reasonably conservative on this for the CapEx component. And I think these are reasonable on this end here. You might also, depending on how things go, see this grow. 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 might disagree with it or might want to put 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.

19:09That may not be true in your area. New supply and multifamily construction, which is ceasing. So the next couple of years, we'll not see as many new units come on the market. And therefore, I think there could be some rent growth in a lot of markets. But those are just little nuances to think about 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, let's talk about passive. So 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.

19:44And I have property management here as a 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? Because we'd add in another, 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've plugged them at the historical average as a 3.4 % for the Case-Shiller Index for this, which I think is a reasonable base case assumption. But again, our California guests believe that these were going to be in a 7 % range for rent and home price appreciation.

20:25Maybe that'll play out. What would you want to see for these assumptions here? Yeah, I anticipate the appreciation. I'm really unsure on the rent growth and the expense growth. Home price appreciation, though, I would put closer to like four, just like slightly higher than the average.

20:43Mindy Jensen: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. 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 pill to swallow. Just the P &I. Yeah, that's just the P &I. Your known CapEx leaves you with$4 ,700 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.

21:28Mindy Jensen:So I'm concerned that your positive is going to very quickly turn to negative. 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 predicting. It'd be another$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 have 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.

22:18Mindy Jensen: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. All right. We'll be charting out Sean's financial decisions, I guess, here in a few moments. Bear with us. If you've been putting off life insurance, I get it. The old process was miserable. Phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you'd pay for. That friction is exactly why so many people who should have coverage don't. Here's what I believe. Most BP money listeners need term life, and the right move is to build a ladder.

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