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In our last post, Should I Sell or Rent my House?, we outlined the qualitative pros and cons of selling our home, renting as a long-term rental (LTR), or renting as a short term rental (STR). In this post, we’re going to delve into the financial analysis we conducted to further confirm our initial thoughts.
Like a lot of millennials out there, we’ve always had the ambition to retire early so we could pursue hobbies or have the flexibility to travel without having to request time off. With that said, we didn’t want to make a bad financial decision, so using our favorite tool (besides paper and pen), we created a basic Excel model that we named the House Wealth Analyzer to help us analyze our options from a financial standpoint (you can view and download a copy of House Wealth Analyzer tool when you subscribe to our newsletter below).
As an added bonus, our townhouse was new when we bought it, and after a few years of living there, each of our neighbors did something different with their home (sold, LTR, and STR), so we’ll show you how close the model was to reality.
Property Analysis with The House Wealth Analyzer Tool
Disclaimer: The House Wealth Analyzer (Excel model) that we created is NOT financial advice and should only be used for directional input into the rent v. sell decision-making process.
The House Wealth Analyzer model consists of three main tabs to assist you with your analysis. The first tab is the input tab, where you set parameters based on your specific situation. Further down in this article, we will provide links to resources you can leverage to find inputs specific to your situation. Please ensure that you read this blog fully before commencing.
The second main tab is the raw output, it leverages the inputs provided to outline the total profit for each three options we laid out (i.e., sell, LTR, STR) for the next 30 years.
The last tab is a digestible graphic to showcase how your wealth (defined as the cumulative value of assets owned, including home equity and investment returns or annual cash flow generated from rental assets reinvested) can grow based on each scenario (basically a visual that supports the raw output tab).
Once again, this tool was instrumental in guiding our decision-making process (though it's not 100% perfect). Should you choose to download it, feel free to personalize and tweak the calculations to suit your preferences. However, we request that you refrain from redistributing it without our explicit permission. With the Home Wealth Analyzer now explained, let's delve into our analysis and findings!
Option 1: Sell Now
When looking at the profitability of selling our home immediately, we looked at the following parameters:
Sell Input | Our Input | Resources |
Purchase Price | $775,000 | Look up how much you paid on Zillow (scroll to the bottom of the page) |
House Appreciation Rate (Annual) | 3% | Historically speaking, homes in the U.S. generally appreciate by 2–3% per year on average (source) |
Investment Rate of Return | 7% | The S&P 500 index has returned a historic annualized average return of around 10.26% (source) |
Closing Costs | 6% | Expect to pay anywhere from 6% to 10% of the home’s sales price in closing costs at settlement (source) |
Mortgage Interest Rate | 3% | Find this on your monthly mortgage statements |
Estimated Home Value | $900,000 | Look up an estimate of your home’s value today on Zillow |
Based on our input, the model suggests that we would make a profit of $71,000 from selling the property.
With our townhome being a new construction, our three neighbors also closed on their homes at the same time so all of our inputs are basically the same (e.g., purchase price, mortgage rate, etc.). Our first set of neighbors, whom we’ll call Tom & Nicole, purchased their home to accommodate their daughter, who was studying human-centered design at the University of Washington remotely during COVID. After their daughter graduated, Nicole & Tom decided to sell the house rather than renting it out. They had all of the same inputs as us and ended up selling their home at $850,000, resulting in an immediate profit of $24,000 after factoring in house appreciation, debt repayment, and selling costs.
Option 2: Long-Term Rental (LTR)
When looking at long-term rental (LTR) profitability opportunities, we looked at the following parameters:
LTR Input | Our Input | Resources |
Estimated Monthly Rental Income | $3,000 | We used this Rent Estimator Tool |
LTR Operating Expenses (Annual) | $43,982 | See Below |
LTR Operating Expenses include:
Mortgage: Payment made to a lender ($31,884/annually)
Property Taxes: Annual taxes assessed by the local government based on the property's assessed value ($6,000/annually)
Insurance: Property insurance and, if required, landlord liability insurance to protect against damages and losses ($1,000/annually)
Homeowners Association (HOA) Fees: If the property is part of an HOA, these fees cover common area maintenance and amenities ($888/annually)
Maintenance and Repairs: Regular upkeep, landscaping, pest control, and repairs to address wear and tear or tenant damage ($1,025/annually)
License and Permit Fees: Costs for rental permits or licenses required by some local governments ($135/annually)
Capital Expenditures (CapEx): Larger, less frequent expenses for major repairs or replacements, like a new roof or HVAC system ($0/annually - we’re a new build)
Other LTR Expenses: listing costs, background checks, etc. ($3,050/annually)
Based on our input, the model suggests that we would have a cash flow loss of $7,730 after the first year and could expect to make $392,981 after 10 years.
Our second neighbor, let’s call her Leslie, was a single doctor that ended up getting married and wanted a larger place to grow into. Rather than sell her home, she ended up renting it out to a nurse. When we were looking at potentially doing a LTR, Leslie mentioned that she is able to rent her place out for $3,500 a month and hasn’t had any tenant turnover yet, which would yield her $42,000 in revenue annually (we do not know her annual expenses so this doesn’t account for operating expenses).
Option 3: Short-Term Rental (STR)
When looking at short-term rental (STR) profitability opportunities, we looked at the following parameters - we used Airdna and Price Labs (screenshots below) for our inputs.
AirDNA has a lot of other offerings that we’re going to discuss in future posts. If you’re looking to streamline your process and save time, investing in AirDNA’s features now might make sense. Some of AirDNA pro features include: market insights, smart pricing, regulatory data, custom map layers, plus other functionality
Link to AirDNA: www.AirDNA.co
STR Input | Our Input | Resources |
Estimated Average Nightly Rate | $245 | |
Estimated Occupancy Rate | 68% | |
STR Operating Expenses (Annual) | $41,590 | All LTR expenses excluding assumed LTR expenses ($40,932/annually) plus… Amenities & Supplies: Expenses for restocking consumable items like toiletries, paper products, replacement items, wifi, and streaming services ($910/annually) |
One-Time Start Up Costs | $15,000 | One-time costs associated with turning our property into a short term rental such as furniture and decor |
With what we input into the model, we would have a positive cash flow of $4,219 after the first year (including the initial $15,000 investment for furnishing and decor) and could expect to profit $684,244 after 10 years.
Since this situation is exactly what we did, we can tell you how close the analysis came to reality. We ended up making a positive cash flow of ~$31,000 after the first year with 82% occupancy and $255 average nightly rate.
AirDNA has a lot of other offerings that we’re going to discuss in future posts. If you’re looking to streamline your process and save time, investing in AirDNA’s features now might make sense. Some of AirDNA pro features include: market insights, smart pricing, regulatory data, custom map layers, plus other functionality.
Link to AirDNA: www.AirDNA.co
PriceLabs: Sign up with our code: 2SFt5y and receive 30 day free trial of PriceLabs Dynamic Pricing and Portfolio Analytics tools + 1 market dashboard + $10 in PriceLabs credit
Our Thoughts
Our financial analysis isn’t perfect, there are always unforeseen risks or upside, but doing this exercise helped see how each of the options might play out financially. As you can see from the above analysis, doing a short-term rental ended up being a lucrative endeavor but that is largely because of the market we are in. Framing our decision financially not only helped us understand monetary gains, but also reaffirmed our decision to go forward with a short-term rental. If you’re still not convinced, our next post will cover additional reading materials or videos you can use to support your decision.
Again, if you’re interested in using our Wealth House Analyzer tool or if you found this helpful - subscribe below and follow along as we share digestible steps to set up your rental, highlight tips & tricks that worked for us, and feature new trends & information to keep you up to date.
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