Why Landlords Win

Recently a new member of Bigger Pockets posed a good question.  Why keep any properties long-term if you can make 30-40% ROI reselling a property.

I had an answer in my head, but being the number crunching type of guy I am I wanted to see what the actual numbers would look like.

Here is a spreadsheet I made to answer the question.  I made some assumptions:

• I assumed we are using all-cash
• I assumed the properties will be self managed rentals and expenses are 40%.  I think this is high, but Bigger Pocket members love the 50% rule (less 10% for management)
• I assumed 2% of the purchase price for acquisition cost
• I assumed 8% of sales price for selling costs
• I assumed after 3 years the landlord will sell the property
• I assumed that ARV would remain the same after 3 years
• State and federal tax rate on short-term capital gains is assumed at 40%
• Long-term capital gains tax is assumed at 15$

I ran three properties I decided to keep as rentals.  Property A was an average deal, Property B and C are both pretty good deals (as far as discount achieved).

If you can get to 10 free and clear rentals you would be pulling in roughly $55,000/year after taxes for managing those 10 properties and you could stop looking.  You would have to flip 3-4 properties a year (EVERY YEAR) to achieve about the same after tax profits.

I still buy-sell 15-25 houses a year because I need to generate additional investment capital.  But I think investors are making a big mistake if they completely overlook purchasing rentals when prices are at these levels. If I included the 2006 value of Property A, B, C and did another run with that being the disposition price the landlord would make even more.

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