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You’re ready to trade up from the apartment you own and move into a bigger space. But which is more lucrative: renting it out for passive income, or selling it now and reinvesting the profits?

“It comes down to motivation,” says Albert Casalnova, a New York City real estate agent whose 15 years experience is rivaled only by his hawkeye for good investments, honed through decades of buying, selling, and holding. “You need to be analytical in your reasoning. What’s your precise reason for doing what you’re doing?”

Omer Reiner, Realtor®, investing consultant, and president of investment company FL Cash Home Buyers, says whether you should sell or rent out your apartment comes down to your financial goals alongside the current state of the market, which can determine whether you’ll make more money selling your apartment or keeping it as a rental.

Should you sell your apartment or rent it out? Below, Reiner and Casalnova lend their logistical expertise to a litmus test successful apartment investors use to determine whether to hold a rental or sell it now.

A city with an apartment that you can rent out.
Source: (Dean Cook / Unsplash)

Analyze the rental market in your area

In an ideal world, everyone would think ahead and research local housing trends before closing to avoid the remorse of buying into a declining micro-market.

Sadly, no one has a crystal ball, and you may not have been thinking about the future when you bought your apartment. Don’t fret. Here’s how to tell if your rental is worth its square footage in gold.

Location critically determines market rents and profitability. Buying an apartment in a college town, for example, means owning an asset in a reliable (and even pandemic-proof) market.

“If the unit’s in a good location where there’s demand for renting, you can expect healthy and steady rental income,” Reiner explains. “This makes it appealing to rent out versus selling it.”

On the other hand, Reiner points out that a great location also means you can often sell for top dollar to another investor. To find out how desirable rentals are in your area, use Apartment List’s market-specific data.

High walk score overshadows square footage as a top renter’s requirement, according to the National Association of Realtors. Walkability remains number one for renters, even through and post urban-exodus.

If your apartment is near a bustling downtown, gyms, schools, and coffee shops, it shouldn’t be too hard to fill. Even better? Permanent neighborhood fixtures like wildlife preserves or bike trails.

“The most long-term profitable amenities tend to be permanent amenities like subways and parks,” Casalnova says. “A restaurant could be on 42nd Street today and gone tomorrow, but Central Park isn’t going anywhere.”

Updated kitchens and appliances make an entire apartment feel modern and attractive to renters. According to the National Apartment Association, if you can only modernize one room, an all-white kitchen will make the strongest impression.

“They tend to be a focal point, especially in luxury apartments,” Casalnova says. “In luxury apartments, buyers tend to be more choosy and look for high-end appliances. They even know about finishes — is this travertine or is this imported calacatta?”

Whether you sell your rental or keep it, focusing your repair budget on the kitchen and bathroom will maximize your profits, according to Reiner.

Outdoor spaces are increasingly desirable for buyers and renters alike, with 49.9% of agents citing outdoor living space as a top priority in HomeLight’s Top Agent Insights Summer/Fall 2021 Report.

Whether it’s a built-in courtyard, covered patio, balcony, or a pool located in the complex, emphasize your apartment’s outdoor paradise to attract interest.

How profitable will the unit be after carrying costs?

For the most part, your carrying costs — AKA the recurring expenses you’ll pay for the duration of your time holding the apartment — are steady and easy to predict. But it’s important to do the math carefully. Under budgeting could mean a negative cash flow — the enemy of any good investment property.

According to Reiner, the major carrying costs apartment owners need to consider are the monthly mortgage payments, property and rental taxes, insurance, property management, HOA fees, vacancies, and turnover costs.

Conduct some internet research or reach out to other investors in your area to compare notes on the cost of rental insurance, property management in your area, average landlord covered utilities, etc.

After you’ve added up the expense of carrying costs, look at market rents in your area. Plug all of your numbers into a rental property calculator to estimate your apartment’s profitability. If you’d have to charge more than market rates to cover the mortgage and other fees, you’ll have trouble finding renters and likely end up losing money to high vacancies, making your rental’s viability questionable at best.

A phone used to sell an apartment.
Source: (Jonas Leupe / Unsplash)

Are you ready to be a landlord? Consider your responsibilities and involvement

If you’ve done the math and see that your gross rents minus carrying costs leaves you in the green, you’ve got some soul searching to do.

Before you plunge into the world of rental ownership, sit down, take a deep breath, ask yourself this honest question: Do you want to be a landlord? Ultimately, this may determine whether you should sell your apartment or rent it out.

“If you don’t want to manage the property, need the cash now, and it’s a sellers market, selling may make more sense,” Reiner explains. “However, if you don’t need the cash now and are OK  with managing the rental for a few years, holding onto it probably makes more sense.”

Of course, landlording comes with its own unique challenges.

“You’re going to get calls in the middle of the night,” Casalnova warns. “You’re going to get tenants that don’t pay or trash the place. Sometimes, you’ll get police calls — I’ve had all of the above.”

Property managers are helpful for dealing with all of the everyday responsibilities of managing a property — marketing the apartment, screening tenants, collecting rents, scheduling repairs, responding to emergency calls, and handling evictions.

If you’re managing multiple properties or rentals nonlocal to you, forgoing a property manager typically isn’t a good option.

“Frankly, property managers make your life a lot easier,” Casalnova says. “It’s simply the cost of doing business — and it’s a good cost.”

But what if you’re only considering renting out a single unit? A typical property management company charges at least 8-12% of the apartment’s rental value as a baseline fee. Can you avoid paying this altogether if you’re renting out a single apartment?

“That’s a tougher question,” Casalnova says. “It really depends on your time and resources and, ultimately, how much patience you have.”

If you’re staying local, managing the property yourself may be an option. But it isn’t without its challenges.

If you opt not to hire a property manager, Casalnova says it’s important to know somebody with mechanical and construction skills. “Someone you can at least send in on a case by case basis for an estimate when something goes wrong.”

You might also consider keeping a landlord attorney on retainer. Landlords are beholden to federal, state, and local laws. It’s imperative that you understand these laws and follow them.

Compare your apartment’s rental profitability with its sale price

Compare your apartment’s market to its sale value and analyze which makes more sense for your individual situation.

“Thanks to the internet age we’re in, there’s plenty of public record sales information easily available,” Casalnova remarks. “All sales are documented, so go online and figure out what properties in your specific region sold for.

Find your “comps”

Casalnova says you need to select at least three “comps” — real estate world lingo for comparable properties — to reliably assess what apartments sell for in your micro-market. Select apartments that share similar square footage, number of bedrooms and bathrooms, and other amenities to yours.

“If three one bedroom apartments sold for $200K, $210K, and $220K, all two blocks from yours, and each was in decent shape, then you know that a one bedroom in your area is going to catch $220K, give or take,” Casalnova explains.

Precise data on recently sold properties and appraisals straight from the multiple listing service (MLS) will empower you to make the most accurate financial decision with a clear picture of the market. A top real estate agent has access to the MLS and accurate information on the sale price fetched by recently sold homes.

If you aren’t working with an agent at this stage of the game, run a market analysis like a pro. Look for historic sale data in your neighborhood from the National Association of Realtors or try finding recent sales on sites that pull their data from the MLS. Note that these won’t always have the most up-to-date information and therefore won’t be as accurate as a real estate agent’s data.

Remember that the market will change

The old adage — plan to stay in your home for at least five years — may add up to mean precisely nothing when it comes to how best to handle your asset.

“Markets change all the time,” Casalnova says, “It’s really hard to time a market, or figure out what the best time to sell is, which we saw clearly at the beginning of the pandemic.”

You never know where the market will be in a few years. This means that if you’re in the midst of a hot seller’s market, you could command a price if you sell now that may not be matched in two years, Casalnova explains.

On the other hand, it’s totally possible that your apartment’s value will actually increase with time and put more money directly into your pocket.

“It really depends on the market,” Reiner points out. “The old assumption was that single-family homes appreciate faster than apartments, but that’s not always the case. In some locations, apartments actually appreciate faster than single-family homes.”

While the future’s never certain, look to apartment appreciation in your area to gauge the likelihood that your apartment will be worth more with the passage of time. Limited housing in your area is one determinant of appreciation.

Even if you plan to sell your apartment in a few years, holding it as a rental for a bit longer can help you sell it to an investor for more by providing a rental history to prove its desirability as an asset.

A room in an apartment that is being rented out.
Source: (Adam Winger / Unsplash)

Consider how much equity you have on your apartment

In Q2 of 2020, 6.2% of mortgage properties were underwater, according to National Mortgage News. To be underwater, your apartment would have to have declined in value since you bought it, making it worth less now than what you paid for it. Selling would mean handing over all the proceeds, plus some personal funds, to the lender — a bad spot to be in.

Luckily, that’s pretty rare. Most real estate has increased in value — up 88.57% in the last ten years, according to GlobalPropertyGuide.

Assuming your apartment is in the green, ask yourself this: are you satisfied with your level of equity? You likely want to walk away from the sale with a chunk of change large enough to put a sizable down payment on a new property. If what you owe eats up most of what you’d get, it may be in your interest to hold off on selling and cover the mortgage with rental income for now.

Look to the 1% rule if you own a luxury apartment

“High-end apartments usually don’t make as much sense to rent compared to median or lower-end apartments,” Reiner says. Market rents for luxury apartments with high price points may not add up to cover your carrying costs and pay down the mortgage.

It comes down to what investors refer to as the 1% rule. According to the rule, your gross monthly income from rent should be greater than or equal to 1% of the final price you paid for the apartment.

For example, if you paid $250,000 total for an apartment unit, you’d need to rent it out for $2,500 per month, according to the rule. If you paid $450,000, you’d need to rent it for $4,500 — possible in some markets, but simply unrealistic in others.

If setting your rent high enough to make your investment profitable prices your unit out of the market, then it isn’t a viable rental.

On top of the potential for market rents to constrain the viability of renting out a luxury apartment, there’s another obstacle to consider: exorbitant HOA fees.

“HOA fees tend to be very expensive in higher-end units, and the financing costs don’t justify what you can rent these units for.” If you own a luxury apartment and don’t want to sell, Reiner says your best move financially may be to turn it into a vacation rental.

Determine how you’d finance your next property one way or the other

Holding your apartment as a rental investment property will raise your monthly income, thus qualifying you for a higher mortgage amount. Most lenders want to see you keep your debt-to-income ratio below 43% of your gross monthly income, including your mortgage, credit cards, student loans, and car payments.

For example, if you make $85,000 per year, 30% of your monthly income is $2,125. If you pay $390 per month to student loans, $450 to your car payment, and $100 to credit card debt, you’ve got $1,185 to work with for a mortgage payment. That’s sufficient in some markets, but tricky in others. Consider using your apartment as rental income to qualify for a higher loan.

“Renting your apartment and accumulating the rent can be used as leverage to purchase something else at a higher price,” Casalnova explains. “Let’s say the bank loan costs you $1,000 per month, but you’re getting $1,400 in rent. You’re making $400 a month renting out the apartment.”

Applying Casalnova’s scenario to the example income above, you’d raise your yearly income to $89,800. All else being equal, you can now afford to purchase a home with a $1,300 mortgage payment.

On the other hand, selling your apartment now could mean affording a down payment on your next home. If you’re moving to a less expensive area, Casalnova says it may be in your interest to take the money and run, assuming you’re in a seller’s market.

“Look at the cost of acquisition in the market you’re moving to” Casalnova advises. “Say you sell now and net $30,000. You’ve come out ahead of the game, and it would’ve taken you six years to make that profit on an investment property with $5,000 a year in revenue.”

A coffee cup in an apartment for sale.
Source: (Jakub Dziubak / Unsplash)

The bottom line?

Now that you’ve had some time to look at the determinants expert investors use to analyze the most lucrative move for an apartment, pop quiz. Which is better: extra yearly income, or six digits in your pocket now?

The answer? It depends.

“It’ll always be on a case-by-case basis,” Casalnova says. “Ask yourself this: if you sell outright, what chunk of change will you make versus what you’d make in rent over time?”

For instance, what if you own a desirable downtown apartment that would leave you with $100,000 if you sold it, or bring in $5,000 a year after carrying costs? Building a portfolio of profitable rentals is a recipe for long-term wealth building, and holding on to your first apartment when you move is a good way to start. But a lot of money is, well, a lot of money.

“Me personally? I’m taking the hundred grand,” Casalnova quips. “It would take me 20 years to match that holding the rental. If I have the six figures dangling in front of me, I’m taking it, because I can invest elsewhere and earn more in the long run.”

If you aren’t sure which option is right for you, work with a financial planner or a top real estate agent specializing in apartments and condos who can help you make the best choice for your unique situation. If you aren’t sure where you stand, remember these key factors in deciding whether to rent your apartment or sell outright:

Considering renting out your apartment if…

Consider selling your apartment if…

Header Image Source: (CHUTTERSNAP / Unsplash)

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