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Using Cost Benefit Analysis To Decide On Selling A Home Or Leasing It Out

If you are like many home owners and you are trying to decide whether to sell a home or lease it out, then you are in luck, as I have prepared a Cost Benefit Analysis model in order to help you weigh the ramifications of each decision.

Of course, the value of any cost benefit analysis model is in understanding the assumptions used to create the model, so I have prepared a real-world example in order to demonstrate what one current homeowner should consider before deciding whether to sell a home or lease it out.

Building A Real Estate Cost Benefit Analysis Model

Some of the minimum required information for a cost benefit analysis are listed below. I like to use a Microsoft Excel spreadsheet in order to tweak all of the variables that go into creating the model.

For example, the current equity (whether positive or negative) is a major factor in the final decision, as is the expected lease amount for the home. It has been my experience that homeowners over estimate each of these, opting to use "best case scenario" instead of the likely scenarios they will face once a decision is made.

My advice, take your lumps in planning so that you can be assured of making the best decision possible.

Some of the assumptions/variables required for the model include:

  • Expected Sales Price
  • Current debt and loan terms
  • Expected Lease Amount
  • Market Vacancy Rate for similar homes
  • Operating expenses (usually under-estimated by novice landlords ... 50% of rents or greater, not including mortgage P&I)
  • Housing Market Forecast based upon supply and demand for similar homes
  • Final turnover expenses required to sell at top value

When you combine all of these factors together, you can create a solid real estate cost benefit analysis model that will eliminate the guess work from your decision making.

Cost Benefit Analysis For Homeowners

Using the real world information from somebody presently trying to make the decision to sell a home or lease it out, I have compiled a full cost benefit analysis to assist in the decision. The home is currently worth as much as $375,000 and would most likely stay leased for about $2,300 per month.

Below is a piece of the table of information that will be used to create a graph for easier understanding.

Category 2012 2013 2014 2015 2016
Value $375,000 $367,500 $360,150 $352,947 $360,006
Monthly Lease $2,300 $2,300 $2,300 $2,300 $2,323
Net From Sale $71,911 $67,369 $63,486 $60,281 $70,052
Net From Leasing ($9,685) ($9,685) ($9,589) ($9,492) ($9,394)

When the full table of information is graphed, the following cost benefit analysis graph reveals some important information for the homeowner.

Real Estate Cost Benefit Analysis Joe Manausa Real Estate 1140 Capital Circle SE #12A Tallahassee, FL 32301 (850) 366-8917 www.manausa.com

In the Cost benefit analysis graph above, we are comparing two scenarios for the homeowner:

  1. Sell the home immediately and invest the proceeds at 5%
  2. Hold onto the home and evaluate a sale each year

The green area above shows that if the homeowner would sell the home immediately, roughly $71K of equity could be invested in something right away.

The solid red area represents the negative cash flow from holding onto the property. This will be a major surprise for most homeowners, as they will see the $2,300 rent and think ("well, at least that covers the mortgage").

Unfortunately, $2,300 is "before expenses, before vacancies, and before deadbeat tenants." Over the long haul, with the high cost of insurance and property taxes, this homeowner will be lucky to retain 50% of that $2,300 each month to pay towards a $2,100 per month mortgage payment (principal and interest).

Finally, the red line represents the proceeds of a sale each year, combined with the cumulative losses of rents. Again, this will surprise most homeowners, as we see the net from future sales go down before it begins going up. This occurs for several reasons:

  1. Home values are still dropping
  2. Homes with tenants are not maintained as nicely as owner occupied homes
  3. Homes with tenants are harder to sell versus vacant homes or owner occupied homes
  4. The compounding effects of negative monthly cash flows adds up quickly

When all of these components are added together, you can begin to see why it takes so long to recoup the investment for this homeowner.

Cost Benefit Analysis Results

Perhaps the biggest shock for the homeowner is that if they choose to lease the home out, they are truly committing to at least ten years. Our graph shows the homeowner won't regain the initial equity position until 2022.

The primary reason is that the market is still falling, and values will go down before they begin to go back up. Additionally, the home's condition will begin to decline immediately, as homeowners take far better care of a home than do tenants. On average, we see tenant occupied homes sell at a 10% discount to the owner-occupied market.

The second major point for the seller occurs in 2026, when the overall return finally exceeds a 5% investment. This 14 year commitment to attain a [better than 5%] return is usually another shock to the homeowner. After all, this won't be some passive investment in a tax-free municipal bond, this is an investment that requires monthly dialogue with a property manager in Tallahassee to secure the results projected in the cost benefit analysis.

Final Thoughts On The Real Estate Cost Benefit Analysis

Once you build a real estate cost benefit analysis model, you can tweak it to help you make your decisions. What if homes go up in value faster? What if rents rise faster? What happens if the housing market continues downward for longer than expected? What happens if the County raises property taxes? What happens if Congress raises capital gains tax levels?

All of these variables can change the outcome. I have performed enough of these over the years to tell you that the graph is very close to what will occur for this homeowner. If he is willing to commit to a long-enough investment, he will receive more money than he could by selling a home now. But will it be worth it?

Finally, this model does consider the tax savings each year of owning an investment property, but it DOES NOT factor in capital gains taxes at the sale of the home. Remember, the owner must live there for three out of the past five years in order to shelter a gain, and this property owner cannot even contemplate a sale for well over ten years. That means that a portion of the final sale will likely be taxed as capital gains on an investment.

The cost benefit analysis is a powerful tool that can take the emotion out of your decision to sell or lease your home, so give it a whirl and let me know what you think!


*Joe Manausa Real Estate is a brokerage company headquartered in Tallahassee, Florida. Its unique business model provides specialists to both home sellers and home buyers, and the results speak for themselves. JMRE has significantly more 5-star reviews on google than any other local competitor. Joe Manausa Real Estate is a leader in internet marketing and utilizes search engine optimization, email marketing, social media and data analytics to get their clients’ home sold faster and for more money than any other Tallahassee brokerage firm. For more information, visit www.manausa.com or call us at (850) 366-8917.

Discussion

#1 By John at 7/11/2017 3:47 AM

Most compelling. I appreciate your use of common sense and expertise to make your suggestions. I will be in touch.

#2 By Joe Manausa, MBA at 7/11/2017 3:47 AM

Thank you John. I think the biggest kicker for most people is the amount of time it really will take to just return to present financial status. Of course, if people are upside down, they also have to consider the 100% tax write-off they get in 2012 with the Tax Payer Relief Act that terminates on 12/31/2012.

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2066 Thomasville Rd
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