This was an actual question from my son seeking my advice on what he should do. He is in the Navy and has to move to Oklahoma for his next duty assignment. The Navy in Oklahoma ? He is actually being assigned to a Joint Services assignment where he will work on an Air Force Base. He owns his house at his present assignment and has determined that can rent it for a small profit of $265 per month. If he were to sell it he should realize a gain of about $65,000 when all is said and done. Should he rent it or should he just sell it? There is a ton of variables to consider but in this particular case this was my advice.
I advised him to sell the property. He knows that I am not adverse to rental property, in fact I have owned many rental properties and have made great returns from them but in this case I just had to say sell. My reasoning was based on several factors.
The first thing to consider is the shear distance between where his property is located and where he will be stationed. It is hard enough to manage rental property but just like relationships long distance rentals are a bad idea. Even with a good property manager there is still a need for your participation in the property. Property managers typically charge 10% of the rent collected which also drains your positive cash flow – for example if you rented your home for $2,500 a month the property manager takes $250 per month in fees. This is expensive ! You also need to factor in property taxes, Insurance, maintenance costs , tenants not paying rent or leaving after the lease and having an empty home that collects no rent at all. Even minor events can become expensive when you have to rely on others to do the work for you.
If he choose to sell the property then he will net about $65,000 after closing costs, Real Estate agent commissions and taxes …….. and of course there are several things he could do with that ………. use it as a down payment on a new home, pay off other debts but I advised him to invest it. Keeping in theme with that of a Dividend Income Investor one of my priories is when you earn money or come into money from what ever source the first thing you should think about is putting that money to work earning income for you.If you spend the money it cannot earn money for you. If you spend it you can never have it back. Sure, there are lots of circumstances where spending money can save you money, say paying off a high interest loan for example but when you invest that money so that it produces an income for you it does that forever! In fact if you do it correctly it will not only produce income for you for the rest of your life (and your children’s lives should you choose) it will actually grow and make sure you get constant raises in your income.
So if he takes the $65,000 and invests it in Dividend Stocks earning 9% per year ( My own portfolios exceed this yield) then it will immediately produce $5,850 in the first year which equals about $487 per month in income! He will be in Oklahoma for a total of six years. So if he lets the investment t continue to compound at the end of 6 years his account will have a value of almost $111,000 as the original $65,000 would have paid him $45,874 in Dividends (Income) over that six years.
He is now earning $10,332 per year or $861 per month in additional income ! All from not spending the $65,000 ! At this point you could withdraw $500 a month for expenses and still have your investment continue to grow and best of all you still have the cash because you did not spend it.
Rule # 1 – Never, Never spend money you do not have to !
Will he take my advice ? I doubt it as young people seem to not be able to see tomorrow for all the clutter today but I really hope he does because it will make his life easier later for doing just a little bit of planning now. Regardless of what he does though if you find yourself in a similar situation please stop and consider what I have laid out here for you.
Any thoughts or comments? We would love to hear them!