If you had a shack that would sell for 300, But you had to pay fees to sell it and then you were taxed on the sale

....but after the sale you had some mystery number left over.....Say $230,000.

How would you calculate what that 230 should earn you vs. if you kept the shack and it earned $ 24,000 per year.

The reason I'm not being clear is because I don't know how to phrase the questions and I don't instinctively look at the scenario.

What I would like to do is have a base line established.

"The Shack will clear $24,000 per year after expenses, which means it should not be sold for any less than __________"

Thank you very much

Not enough information on your shack. You cost, time of ownership, amount depreciated, tax bracket, state income tax rate.

You calculate the rate of return.

In current case, you have a 230k asset yielding 24k per year. You calculate the rate of return on that.

Oh I'll take a stab at it with the caveat that you can manipulate the numbers to get whatever answer you want.

It's worth 300K and you are netting 24K so your investment is producing 8% a year. In essence you have 8 cap rate.

(Net income / current market value)

If you sold and netted 230K you'd have to clear and net 18.4K a year on your money to be producing 8% a year.

I am assuming it is owned free and clear. If there is a loan then your money is working harder (theoretically) and your return is higher (but the calculation never seems to take into account the cost of the borrowed money)

If you take the 230K net and bought two houses and financed them what would they net produce?

Could you 1031 the first property into two properties and not pay the taxes on the 300K?

If you looking to provide reinforcement that your property is worth 300K then you say it has a Cap Rate of 8 as it nets 24K. They guy buying says I want a 10 cap rate and says I'll only pay 240K for it. You say the going rate in my area for investment properties is a 7 cap rate so it is really worth 342K and I'm giving you a bargain.

But a bond/cd is fixed in the amount of money you earn. You can count on it for the term. What you clear on a rental could change (vacancies, repairs, damage) each year. There is also the aggravation factor and the fact it could actual lose its value should you ever want to sell. The more money you can get on that $230K the more risk you face in getting it (which is why you get more)

For properties that are sold to investors (like large multis), the formula I see locally is yearly gross x 10 = selling price.

So, in your case, suppose it clears $24,000/year after expenses, taxes, etc, but suppose it grosses $36,000/year. Then the selling price would be $360,000 instead of $300,000.

But if you're selling a sfh, it doesn't matter that it grosses $36,000/year or clears $24,000/year after expenses-- because it's a different buyer's pool, it hinges on what similar places are selling for. So today, it might be $300,000, and this time next year, it might be $400,000, and in five years, it might be $250,000. It fluctuates.

As to whether the $230k-in-hand is more valuable than the $24k/year, a lot of it depends on what I need to do with that $230k. If I'm wanting to invest it, real estate gives me a much better return than many other investments-- in exchange for a bit of work and effort and risk. So if I wanted to use that $230k to buy three houses that clear $12k each, that would make sense. On the other hand, if I had something where that $230k would give me $20k a year in exchange for zero work, that would also be worthwhile to consider-- it might not be exactly as profitable, but the hands-off-ness would compensate for that missing $4k.

I think the biggest question is what you will do with the money compared to keeping the property. I think using the cap rate like 7% or 8%, whatever it is a good place to start if you own it free and clear.

Thank you all very much. I'm reading the replies a few times over.

This is a free and clear house.

David, to answer your question, yes I believe that rule of thumb is what I'm looking for, but not from the stand point of selling it to someone, rather to help me know what it is worth. (It can be said that info is one and the same).

Thank you all for explaining your thoughts. I really learned from all the replies.

Oo. Another thing I'd take into account-- how much of your own money is locked up in the building? Suppose you bought it for $100k and spent $50k in renovations and you own it free and clear. That $150k is bringing you $24k/year.

If you wanted to get your original $150k back, you'd sell your house for $300k and spend $70k for the privilege. So that leaves you with $230k. You get your original $150k back, plus an extra one-time $80k bonus, because it's worth more.

But you could have kept your $150k locked up in the form of a house, and gotten $80k spread out over 4 years-- over and over and over again, imagining that rents never rose or fell, and expenses never increased or decreased.

It is an exercise to make certain I'm not asleep at the wheel.

I want to know what is the best use of the money or value. If I don't think about this, I'm like the person that rented their house out for half price and boasted that it was always rented.

I can't speak for your niche investment, but around here with my target property.....monthly rent should be about 1% of the asking price for an entry level single family home being sold to a retail buyer.

With the market inflated, that number is closer to 1.33%

So if monthly rent is $1,000 , then the house should sell for about $100,000 in a normal market and about $133,000 in today's market. Taxes and insurance typically take about 30% of the gross.