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Breaking Down the Rent vs Sell Argument with Kyle Whissel

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All right, so the most important thing, some of you guys have never been through this before, this calculation with rent, but the number one thing is to understand there's expenses involved in rentals Far too often people say like, "Oh, well I'll just rent it out

My mortgage is $2000 and I can rent it $2000, or I can rent it for $2500, I'm going to make $500 a month" Doesn't work that way, at all That's not even close to it So, he was talking about renting it out for $4500 a month? [Woman] Correct Okay, so here's how this works

[Female Student] He bought it in a low time, so he's going to cash out on his equity So, he's got a couple of options here and we'll do a rent versus sell analysis All right, so he's going to rent it for $4500 Do you happen to know what his mortgage was, by chance? [Female Student] He bought it in 2008, so he said he bought for like $300,000 It's now worth like $700

He caught a piece of shit [Male Student 1] Does he even rent it with $4500? [Female Student] But he put a lot of money in it [Male Student 2] She got mad [Woman] And you would think the area- So, what, I don't know much about the Bay area, at all Which lists- Okay, it's fine $4500 is the rent

The important thing to note is if he moves down here, he's probably not managing the property himself He's going to hire a property manager, right? [Woman] I would assume so, yes So, when somebody hires a property manager, the typical expense figure, and you can pull up an article on Zillow, or a million articles out there, typical expense percentage on investment property On something that they're hiring a property manager, it's going to be about 40%, is what the expense number's going to be So, that number is going to be 1800, right? [Male Student 3] It's two grand (mumbles) $1800, right? [Male Student 3] Think it's two grand

[Male Student 4] 16 plus two grand [Male Student 2] I'd check my phone but it's shot [Male Student 3] $1800, you're right $1800 Okay, so just the expenses alone are going to be $1800 on that, so- [Female Student] A month? [Male Student 3] And what do you mean by expenses so that we understand? Yes, so to understand what expenses are going to include, now this is important to understand, that does include property taxes, that's insurance, that's maintenance, that's repairs, that's management

It's vacancy, very important one that people don't seem to think about Plus dot, dot, dot, dot, dot [Male Student 3] Typically they charge 80-100% of the first month's rent to place someone in your rental So, in this $4500 that he thinks he's going to get, and he probably has a mortgage of like three grand or something, so he's like, "Oh sweet, I'm going to rent this thing out and I'm going to make like $1500" He's not, because once you take that $1800, he's only left with $2700 that's actually going to make it to him

So, let's just assume in this scenario, his mortgage was three grand He's actually going to be losing money every month That he doesn't even realize it But far too often, people just look at these two numbers like, "Yeah, I'll rent this thing out I'm going to make $1500

" But he's not He's going to Let's just assume for some reason it was $2500 or even $2000

So, let's assume he had a $2000 mortgage, so, he's going to cashflow $700 a month That's not a whole lot of money Now, you said he bought this at a really good time, right? Like, do you have any idea what he paid for it and what it's worth? [Female Student] He said that he bought it for a couple hundred thousand, so I'm going to assume like $300,000 or max $400,000 Do you have any idea what it's worth? [Female Student] He said that he could pocket a couple hundred thousand This is how this guys talked

Okay, so he can pocket a couple hundred So, let's just roll with that So, the alternative is he sells this thing, $200,000 So, how much taxes is he paying on this? [Female Student] One and a quarter? No How much income tax is he paying on that $700? Depends on his tax bracket

He's in California, it's in California He's paying at least 30% on that, right? So, now his $700 take away $210, [Male Student 3] $490 Now he's left with $490, right? [Male Student 3] Yup So after taxes, he's maybe taking home $495 So let's just call that $6,000 a year after taxes that he's actually taking home on it

Or, he sells it, $200,000 How much is he paying in taxes on that? (students murmur answers) Zero, 'cause it's his primary residence So, if I'm looking at this as a seller, this number's actually less significant than this, so I usually go to this number So I would say, "You've got two options here, Mr Seller

You could sell this property right now You know exactly what it's worth, what it could sell for, you know how much you're going to net, and you know you could sell it and have to pay zero taxes on that property and put $200,000 in the bank Or, you could choose to rent the property out, put about $490 a month into your bank account Now, you're taking the risk What if your boy Trump gets impeached? What if this changes? What if that changes? What if you have a tenant who comes in, destroys your place? What if you have somebody who squats on it for six months? What if the market crashes? What if, what if, what if? So do you want to put $200,000 guaranteed tax-free money in your pocket now, or do you want to put $490 a month into the bank and roll the dice with all those different variables? Which would you rather do?"

Source: Youtube

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