$131,000 today or $700 forever

10 Replies

Let's play a game.

You have a separate property that appreciated well. You can sell it now (make $131k after taxes and fees), or you can convert it to a rental property and make. $700/mo for the rest of your life.

Also, you have 100k in other debts that cost you $800/month (of 30k in car, 70k in student). Oh, and you have a few awesome kids

What do you do?

SELL SELL SELL because we are near the top and greed kills! Start a single member (files Sch Cs and doesn't deal with K1s) LLC and pay DnB $500 to build credit quickly while boosting my personal credit and paying off all debt or converting all personal debt into business so it's off the personal reports for DTI. Take $100K and put it down on a commercial property via LLC with target income combined with personal guarantee financing. Hope that the rents stay firm during next downturn or try and force appreciation if market continues up.

This is my take on it applying some investment banking to analyze this investment decision. I will make two assumptions you will die in 30 years and you can only pick from those two investment decisions. I also will not consider tax benefits or equity appreciation. For now Pretend no debt is owed. If you plan on reinvesting the cash from selling the property if you can earn a return greater than 5.4% a year on the 131,000 then you should sell the property if you can’t earn at least 5.4% a year, you should take the 700 a month for life. Okay now if you have the debt this isn’t just comparing two investments this problem becomes optimizing a portfolio the answer is simple sell the house other wise your losing money every month for 10 years vs being debt free and making money every month. The best thing to do is neither of these options. The best thing would be to do a cash out refinance for 100,000 to get a better return on equity and to clear the debt. That way you are debt free your cash flowing and you own the house and get all the tax benefits and equity appreciation.

Originally posted by @Will NA:

Let's play a game.

You have a separate property that appreciated well. You can sell it now (make $131k after taxes and fees), or you can convert it to a rental property and make. $700/mo for the rest of your life.

Also, you have 100k in other debts that cost you $800/month (of 30k in car, 70k in student). Oh, and you have a few awesome kids

What do you do?

DISCLAIMER: I am not a financial advisor.  The is simply the opinion of one ignorant small-time real estate investor.

 If you had the desire to be a landlord, and if you could qualify for the loan, I would use the property as collateral for a loan, withdraw approximately $100K, and reinvest it into more real estate.

If you have no desire to be a landlord, and if you have a great desire to marginally increase  your spending on material things and more expensive family vacations, then you should sell, pay off your debt, and pursue the spending side of things.

If you have no desire to be a landlord, don't care to marginally increase your monthly spending, and want to invest in something other than RE, I would sell, kept the debt, and invest the $131K outside of the Real Estate market.  Maybe stocks, maybe even REITs.  My guess is that if one has no desire to exert the time/effort to be a landlord, one probably doesn't want to exert the time/effort to be an aggressive hands-on investor elsewhere.

Query: If the house is worth $131K, why is it producing only $700/month?  It seems like it ought to be producing $1200-$1400/month or at least $1000/month.

@Will Lawburg

I would choose the $131,000 over the $700/month

$700 x 12 = $8,400

$8,400 / $131,000 = 6.4% return and you still have to do work(manage the property)

I have a higher required rate of return than 6.4%

@Basit Siddiqi is correct. This isn't really a choice, it's just math

the discount rate is 6.4% so that's all you need to beat, which is easy, any excess compounds.

same as when they give you the choice of lottery winnings, lump sum or payments. the payments come out WAY higher, because they use an obscene rate, but usually the lump sum is so much that it doesn't make much real world difference. the difference however between $700 a month or $1300 (130K @ 10%) does make a real difference.

Now if you're lazy and have no ability to generate even market average returns then take forgo the life-changing upside and take the measly $700

Originally posted by @Basit Siddiqi :

@Will Lawburg

I would choose the $131,000 over the $700/month

$700 x 12 = $8,400

$8,400 / $131,000 = 6.4% return and you still have to do work(manage the property)

I have a higher required rate of return than 6.4%

 6.4% is using Revenue.  Your rate of return is after taking out operating expenses and would thus be much lower.

@Will Lawburg Since most BP investors don't use IRR templates you're not seeing that you will have at least two rehab' s over a 30 year loan cycle that are not accounted for in your CapEx monthly set-asides, What I'm saying is you don't have $700 a month for life. For my long-term Buy-and-Hold properties I factor in the rehab's to show my numbers closer to reality.

The discount rate is actually 5.4% which you get by setting the equation for net present value equal to 131,000 and then plugging in the the yearly income which is 8400 and a time for how long you’ll receive payments which I assumed to be 30 years and then solving for the discount rate. Dividing the yearly income from the cash payment does not give you the discount rate. That gives you your return on equity which is 6.4%

One other thing to note is that the discount rate is completely dependent on how long you will receive payments for assuming the month payment doesn’t change. So depending on how long you think you’ll live for will determine the discount rate

Sell the property, sell the car, pay off your student loans, buy a used car with cash for under 10K, use the remaining for a minimum DP on a income property. 

Leverage will be your best friend.

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