Trying to compare two investment scenarios

Question

I have an apartment that I have been renting, but due to some recent events, I'm considering selling. I'm trying to make a numbers based decision, so I'm going to try to compare two distinct scenarios:

1. Keep property
2. Sell and invest in index funds that track the SP 500

To make this comparison, I'll have to consider the cost of ownership and make some assumptions are projected returns. Of course, before making any final decisions, I'm likely going to consult a financial professional. However, I'd like to wrap my arms around the options to see if either option is an obvious winner. I don't know what I don't know. I'm certainly not a financial adviser by any means. I'd appreciate it if anyone can poke holes in my analysis here.

Option 1 (Keep property) Monthly expenses (mortgage + interest + insurance + upkeep + other fees): E Rental income: I Inflation rate: i Years remaining on mtg: N Present value option 1: PV1 Future Value option 1: FV1 appreciation rate: a

FV1 = appreciation of the property + income - expenses FV1 = FVa + FVi + FVe FVa = PV(1 + (a-i))^N FVi = I(1+i)^N FVe = E(1+i)^N FV1 = PV1(1 + (a-i))^N + (I - E)(1+i)^N

Option 2 (Sell property and invest in market) Projected sale price: S Current balance: B Commissions rate: c Years remaining on mtg: N capital gains tax rate: g capital gain deductions: D capital gain: G capital gain tax: T avg market return: m avg dividend return: d avg inflation: i present value option 2: PV2 future value option 2: FV2

If S greater than B: Capital Gains If S Less than B, ignore capital gains tax

G = (S - B)*(1 - c) T = (G - D)*g PV = G - T FV2 = PV2(1+(m+d-i))^N

Results If FV2 greater than FV1, sell and invest in market Else, hold property

Thoughts? How can I make this analysis better?

Answer 1

I would propose a much simpler formula. Simply ask yourself how much you enjoy being a landlord? Chances are that one you factor the risk of holding a mortgage investing in the market would be a slightly better deal. Your formula does not account for the various risks of each choice and probably cannot. How you weather adverse events depends greatly on your passion for owning real estate.

Let's say you hate being landlord and love your career, or would even seek to initiate a different line of business. You are far better off focusing on something you have a great deal of passion. Time, energy and mental processing are limited quantities. Focus on what you really enjoy doing for in exchange for money. Nothing can beat index fund asset allocation investing for earning money passively. You can set this on autopilot and just check in occasionally.

However, if you have a passion for owning and renting real estate, I would suggest keeping the property. You will learn from owning this building and it will "keep you in the game". When other ancillary lines of owning/managing/fixing aspects of property management opportunities present themselves you will be well positioned to take advantage of them.

So on a scale of 1-10 how much do you love being a landlord. If its less than 8, I would sell. You could probably get away with a 6 or so if this property did not have a mortgage, but as is I would sell if less than an 8.