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We own a two family house and both parts are being rented. We moved out years ago and now live with extended family... "temporarily." Trying to figure out the best financial route while getting into our own home again.

I'm looking to figure out if the best return is keeping this rental property or selling it now. To make it a little more complicated, if I don't sell this property I'm going to have to refi and pull out some equity to buy a first home.

Can anyone point me in the right direction of a very complete equation or calculator?

Thank you.

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    That makes sense, are you living in it and renting out part of it, or some other arrangement? – Hart CO Jul 3 '18 at 3:14
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    No it's a two family house and both parts are being rented. We moved out years ago and now live with extended family... "temporarily." Trying to figure out the best financial route while getting into our own home again. – hortstu Jul 3 '18 at 3:25
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If you're trying to decide whether to sell the property or continue selling it, I don't think ROI is the best measure. ROI would tell you what your return on your initial investment is, but since the past is past, you can eliminate "sunk" costs and investments, and just look forward to make the best decision.

A present value analysis would tell you which is the "best" investment from a pure finance point of view (not taking into consideration stress, hassle, enjoyment, etc.)

You have described two paths:

  1. Sell the house. That's easy since you can probably ignore time-value of money and your "present value" would be the expected net income (sales price less closing costs, commissions, expenses to get the property "sell-ready", etc.)
  2. Pay to fix up the property and continue renting. This one isn't too bad either since you could calculate the present value of the interest payments (which should be negative). You can use just the interest payments since you should be able to assume that the principal adds to the value of the property, which you'd recoup when you sold it. Then, calculate the present value of the rents as a perpetuity (either growing or not growing) using a simple formula. An appropriate discount rate would be whatever rate of return you would expect on whatever you would invest the proceeds of the sale in something else (10%? 15%?).

Whichever has the highest present value is the "better" financial choice.

  • Thanks for your answer. So maybe present value is a better measure of what I'm trying to figure out. Assuming that's the case I have a number of variables I should probably keep in mind, interest, principal gains, taxes, tax advantages, etc... Where do I plug these into the "simple formula" calculator? The site you linked to doesn't have much of an explanation. – hortstu Jul 3 '18 at 17:49
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considering ROI or present value analysis only touches on part of the decision matrix. Neither method deals with risk. Taking on debt to purchase a property to live in while maintaining or increasing debt on other properties that generate income increases risk (more leverage, more risk for cash flow constraints in the future).

Rather than refinance the rental properties to pull money out for a down payment, consider selling the rental properties and using the equity as your down payment. This will lower your debt obligation (risk). Rather than paying interest on debt, you will retain more of your income on an ongoing basis. The ROI on this may not be as great as the ROI on rental property, but it is a guaranteed return.

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