Omer Reiner<\/a>, Realtor\u00ae, 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\u2019ll make more money selling your apartment or keeping it as a rental.<\/p>\n 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.<\/p>\n In an ideal world, everyone would think ahead and research local housing trends before closing to avoid the remorse<\/a> of buying into a declining micro-market.<\/p>\n Sadly, no one has a crystal ball, and you may not have been thinking about the future when you bought your apartment. Don\u2019t fret. Here\u2019s how to tell if your rental is worth its square footage in gold.<\/p>\n Location <\/b>critically determines market rents<\/a> and profitability. Buying an apartment in a college town, for example, means owning an asset in a reliable (and even pandemic-proof<\/a>) market.<\/p>\n \u201cIf the unit\u2019s in a good location where there\u2019s demand for renting, you can expect healthy and steady rental income,\u201d Reiner explains. \u201cThis makes it appealing to rent out versus selling it.\u201d<\/p>\n 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<\/a>\u2019s market-specific data.<\/p>\n High walk score<\/b> overshadows square footage as a top renter\u2019s requirement, according to the National Association of Realtors<\/a>. Walkability remains number one for renters, even through and post urban-exodus<\/a>.<\/p>\n If your apartment is near a bustling downtown, gyms, schools, and coffee shops, it shouldn\u2019t be too hard to fill. Even better? Permanent neighborhood fixtures like wildlife preserves or bike trails.<\/p>\n \u201cThe most long-term profitable amenities tend to be permanent amenities like subways and parks,\u201d Casalnova says. \u201cA restaurant could be on 42nd Street today and gone tomorrow, but Central Park isn\u2019t going anywhere.\u201d<\/p>\n Updated kitchens and appliances make<\/b> an entire apartment feel modern and attractive to renters. According to the National Apartment Association<\/a>, if you can only modernize one room, an all-white kitchen will make the strongest impression.<\/p>\n \u201cThey tend to be a focal point, especially in luxury apartments,\u201d Casalnova says. \u201cIn luxury apartments, buyers tend to be more choosy and look for high-end appliances. They even know about finishes \u2014 is this travertine or is this imported calacatta?\u201d<\/p>\n Whether you sell your rental or keep it<\/a>, focusing your repair budget on the kitchen and bathroom will maximize your profits, according to Reiner.<\/p>\n Outdoor spaces <\/b>are increasingly desirable for buyers and renters alike, with 49.9% of agents citing outdoor living space as a top priority in HomeLight\u2019s Top Agent Insights Summer\/Fall 2021 Report<\/a>.<\/p>\n Whether it\u2019s a built-in courtyard, covered patio<\/a>, balcony, or a pool located in the complex, emphasize your apartment\u2019s outdoor paradise to attract interest.<\/p>\n For the most part, your carrying costs <\/a>\u2014 AKA the recurring expenses you\u2019ll pay for the duration of your time holding the apartment \u2014 are steady and easy to predict. But it\u2019s important to do the math carefully. Under budgeting could mean a negative cash flow \u2014 the enemy of any good investment property.<\/p>\n According to Reiner, the major carrying costs apartment owners need to consider are the monthly mortgage payments, property and rental taxes<\/a>, insurance, property management, HOA fees, vacancies, and turnover costs.<\/p>\n 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.<\/p>\n After you\u2019ve added up the expense of carrying costs, look at market rents in your area. Plug all of your numbers into a rental property calculator<\/a> to estimate your apartment\u2019s profitability. If you\u2019d have to charge more than market rates to cover the mortgage and other fees, you\u2019ll have trouble finding renters and likely end up losing money to high vacancies, making your rental\u2019s viability questionable at best.<\/p>\n If you\u2019ve done the math and see that your gross rents minus carrying costs leaves you in the green, you\u2019ve got some soul searching to do.<\/p>\n Before you plunge into the world of rental ownership<\/a>, 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.<\/a><\/p>\n \u201cIf you don\u2019t want to manage the property, need the cash now, and it\u2019s a sellers market, selling may make more sense,\u201d Reiner explains. \u201cHowever, if you don\u2019t need the cash now and are OK\u00a0 with managing the rental for a few years, holding onto it probably makes more sense.\u201d<\/p>\n Of course, landlording comes with its own unique challenges.<\/p>\n \u201cYou\u2019re going to get calls in the middle of the night,\u201d Casalnova warns. \u201cYou\u2019re going to get tenants that don\u2019t pay or trash the place. Sometimes, you\u2019ll get police calls \u2014 I\u2019ve had all of the above.\u201d<\/p>\n Property managers are helpful for dealing with all of the everyday responsibilities of managing a property \u2014 marketing the apartment, screening tenants, collecting rents, scheduling repairs, responding to emergency calls, and handling evictions.<\/p>\n If you\u2019re managing multiple properties or rentals nonlocal to you, forgoing a property manager typically isn\u2019t a good option.<\/p>\n \u201cFrankly, property managers make your life a lot easier,\u201d Casalnova says. \u201cIt\u2019s simply the cost of doing business \u2014 and it\u2019s a good cost.\u201d<\/p>\n But what if you\u2019re only considering renting out a single unit? A typical property management company charges at least 8-12% of the apartment\u2019s rental value<\/a> as a baseline fee. Can you avoid paying this altogether if you\u2019re renting out a single apartment?<\/p>\n \u201cThat\u2019s a tougher question,\u201d Casalnova says. \u201cIt really depends on your time and resources and, ultimately, how much patience you have.\u201d<\/p>\n If you\u2019re staying local, managing the property yourself may be an option. But it isn\u2019t without its challenges.<\/p>\n If you opt not to hire a property manager, Casalnova says it\u2019s important to know somebody with mechanical and construction skills. \u201cSomeone you can at least send in on a case by case basis for an estimate when something goes wrong.\u201d<\/p>\n You might also consider keeping a landlord attorney<\/a> on retainer. Landlords are beholden to federal, state, and local laws<\/a>. It\u2019s imperative that you understand these laws and follow them.<\/p>\n Compare your apartment\u2019s market to its sale value and analyze which makes more sense for your individual situation.<\/p>\n \u201cThanks to the internet age we\u2019re in, there\u2019s plenty of public record sales information easily available,\u201d Casalnova remarks. \u201cAll sales are documented, so go online and figure out what properties in your specific region sold for.<\/p>\n Casalnova says you need to select at least <\/i>three \u201ccomps\u201d <\/a>\u2014 real estate world lingo for comparable properties <\/i>\u2014 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.<\/p>\n \u201cIf 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,\u201d Casalnova explains.<\/p>\n Precise data on recently sold properties and appraisals straight from the multiple listing service (MLS)<\/a> will empower you to make the most accurate financial decision with a clear picture of the market. A top real estate agent<\/a> has access to the MLS and accurate information on the sale price fetched by recently sold homes.<\/p>\n If you aren\u2019t 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<\/a> or try finding recent sales on sites that pull their data from the MLS. Note that these won\u2019t always have the most up-to-date information and therefore won\u2019t be as accurate as a real estate agent\u2019s data.<\/p>\n The old adage \u2014 plan to stay in your home for at least five years \u2014 may add up to mean precisely nothing when it comes to how best to handle your asset.<\/p>\n \u201cMarkets change all the time,\u201d Casalnova says, \u201cIt\u2019s 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.\u201d<\/p>\n You never know where the market will be in a few years. This means that if you\u2019re in the midst of a hot seller\u2019s market<\/a>, you could command a price if you sell now that may not be matched in two years, Casalnova explains.<\/p>\n On the other hand, it\u2019s totally possible that your apartment\u2019s value will actually increase with time and put more money directly into your pocket.<\/p>\n \u201cIt really depends on the market,\u201d Reiner points out. \u201cThe old assumption was that single-family homes appreciate faster than apartments, but that’s not always the case<\/a>. In some locations, apartments actually appreciate faster than single-family homes.\u201d<\/p>\n While the future\u2019s never certain, look to apartment appreciation in your area<\/a> 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<\/a>.<\/p>\n 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.<\/p>\n In Q2 of 2020, 6.2% of mortgage properties<\/a> 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 \u2014 a bad spot to be in.<\/p>\n Luckily, that\u2019s pretty rare. Most real estate has increased in value \u2014 up 88.57% in the last ten years<\/a>, according to GlobalPropertyGuide.<\/p>\n 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\u2019d get, it may be in your interest to hold off on selling and cover the mortgage with rental income for now.<\/p>\n \u201cHigh-end apartments usually don\u2019t make as much sense to rent compared to median or lower-end apartments,\u201d 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.<\/p>\n It comes down to what investors refer to as the 1% rule<\/a>. 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.<\/p>\n For example, if you paid $250,000 total for an apartment unit, you\u2019d need to rent it out for $2,500 per month, according to the rule. If you paid $450,000, you\u2019d need to rent it for $4,500 \u2014 possible in some markets<\/a>, but simply unrealistic in others.<\/p>\n If setting your rent high enough to make your investment profitable prices your unit out of the market, then it isn\u2019t a viable rental.<\/p>\n On top of the potential for market rents to constrain the viability of renting out a luxury apartment, there\u2019s another obstacle to consider: exorbitant HOA fees.<\/p>\n \u201cHOA fees tend to be very expensive in higher-end units, and the financing costs don’t justify what you can rent these units for.\u201d If you own a luxury apartment and don\u2019t want to sell, Reiner says your best move financially may be to turn it into a vacation rental<\/a>.<\/p>\n 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%<\/a> of your gross monthly income, including your mortgage, credit cards, student loans, and car payments.<\/p>\n 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\u2019ve got $1,185 to work with for a mortgage payment. That\u2019s sufficient in some markets<\/a>, but tricky in others. Consider using your apartment as rental income to qualify for a higher loan.<\/p>\n \u201cRenting your apartment and accumulating the rent can be used as leverage to purchase something else at a higher price,\u201d Casalnova explains. \u201cLet\u2019s say the bank loan costs you $1,000 per month, but you\u2019re getting $1,400 in rent. You\u2019re making $400 a month renting out the apartment.\u201d<\/p>\n Applying Casalnova\u2019s scenario to the example income above, you\u2019d 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.<\/p>\n On the other hand, selling your apartment now could mean affording a down payment<\/a> on your next home. If you\u2019re moving to a less expensive area, Casalnova says it may be in your interest to take the money and run, assuming you\u2019re in a seller\u2019s market.<\/p>\n \u201cLook at the cost of acquisition in the market you\u2019re moving to\u201d Casalnova advises. \u201cSay you sell now and net $30,000. You\u2019ve come out ahead of the game, and it would\u2019ve taken you six years to make that profit on an investment property with $5,000 a year in revenue.\u201d<\/p>\n Now that you\u2019ve 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?<\/p>\n The answer? It depends.<\/p>\n \u201cIt\u2019ll always be on a case-by-case basis,\u201d Casalnova says. \u201cAsk yourself this: if you sell outright, what chunk of change will you make versus what you\u2019d make in rent over time?\u201d<\/p>\n 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<\/a> 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.<\/p>\n \u201cMe personally? I\u2019m taking the hundred grand,\u201d Casalnova quips. \u201cIt would take me 20 years to match that holding the rental. If I have the six figures dangling in front of me, I\u2019m taking it, because I can invest elsewhere and earn more in the long run.\u201d<\/p>\n![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/should-i-sell-my-apartment-or-rent-it-out-aerial-666x381.png\")
<\/a>Analyze the rental market in your area<\/h2>\n
How profitable will the unit be after carrying costs?<\/h2>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/should-i-sell-my-apartment-or-rent-it-out-phone-666x381.png\")
<\/a>Are you ready to be a landlord? Consider your responsibilities and involvement<\/h2>\n
Compare your apartment\u2019s rental profitability with its sale price<\/h2>\n
Find your \u201ccomps\u201d<\/h3>\n
Remember that the market will change<\/h3>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/should-i-sell-my-apartment-or-rent-it-out-room-666x381.png\")
<\/a>Consider how much equity you have on your apartment<\/h2>\n
Look to the 1% rule if you own a luxury apartment<\/h3>\n
Determine how you\u2019d finance your next property one way or the other<\/h3>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/should-i-sell-my-apartment-or-rent-it-out-coffee-666x381.png\")
<\/a>The bottom line?<\/h2>\n