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Buy, Hold, Sell for Profit
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THE SCENARIO
Back during the crash, my friend Marie picked up a nice two-bedroom condo for $93,600. She's been collecting rent from the property for the past 6 ½ years or so, but on a lark she decided to check its current value. Marie was blown away to learn that she could probably sell the property for $315,000 today (in May of 2018). If she were to do so, she's curious as to what her return on investment would be.
The question: Marie bought the condo in January of 2012, and has averaged $200 per month in net rent over the time she's owned it. When she bought the condo, she put 20% down and borrowed the rest. She currently owes $65,500 on the mortgage. Assume that it costs Marie 10% of the sales price of the condo to sell the condo. For the purposes of this question, ignore capital gains/income taxes and depreciation recapture.
THE SOLUTION
First off, we need to figure out how long Marie has owned the condo. January 2012 to January 2018 is 6 years. January 2018 to May 2018 is 4 months. So Marie has owned the condo for 6 years and 4 months, or 72 + 4 = 76 months.
Next, we need to know how much money Marie put down when purchasing the property. Since it cost $93,600 and she put down 20%, her down payment was $18,720.
Next, we need to know how much money Marie walks away with once the sale is complete. If she sells the condo for $315,000 and it costs her 10% to sell it, that means that her proceeds from the sale (before paying off the mortgage) amount to $315,000 x 90% = $283,500. She still owes $65,500 on the mortgage, so she'll need to pay that off as well, leaving her with $283,500 - $65,500 = $218,000 cash-in-hand.
Now we're ready to do the calculation.
First things first, make sure the calculator is using 12 Payments per Year.
N: 76
I/YR: (This is what I'm trying to find)
PV: -18,720 (Marie's down payment was $18,720)
PMT: 200 (Marie made $200 in net rental income during the time she owned the condo)
FV: 218,000 (After the sale, Marie should walk away with $218,000)
If Marie sells the condo now, she'll make a 44.53% return on her original down payment.
Rental property can be nice to own, because it provides passive income, depreciation, and a variety of other benefits. Sometimes, however, it makes sense to sell a property if doing so can let you acquire an asset that will do even better for you. What do you think? Would you sell the house? Or would you hold onto it, knowing that in less than 24 years, it'll be all paid off and it will provide even better income than it does today? Let us know in the comments!
