When friends and family heard of our move from Portland to Taipei, one of the most common questions asked was, “Did you sell your house in Portland?”

Did we sell the property or rent it out? Or did we leave it there vacant?

It is all about MATH.

Before I reveal our decision, let me give you more details. You can analyse it and see if you have come to the same conclusion as ours.

The Math of Selling Our House 

In the USA, there is a capital gain tax for real estate sales. However, there is an exclusion of up to $500,000 tax-free gain, provided that we meet the criteria. Fortunately, when we sell our primary residence within the next three years after we move, we don’t have to pay taxes on the gain.

So how much can we potentially profit from the sales? 

We bought it in Sept 2018 for $555,000. The market is hot now, and we could probably get an offer up to $650,000 if the competition is fierce amongst buyers. So we could potentially get a $95,000 gross profit. 

However, the highest expense for selling a property is the agent’s commission. Sellers need to bear both sides’ agents’ commissions. That means we would typically pay 4% to the real estate agent representing us and another 2% to the broker representing buyers. Add other closing costs such as transfer tax, title insurance, escrow fees, etc. Let’s round it up to $40,000.

After deducting the closing cost, we might get a $55,000 net profit tax-free if we sell it in 2021.

What if we sell it later? Do we need to pay more taxes? 

Starting 2022, we are no longer US tax residents. It means whatever income we make there will be subjected to a flat 30% tax rate. OUCH! ???

If we don’t sell the property, we will definitely need to rent it out.

The Math of Renting Out the Property

The other option of not selling the house now is to get a long-term tenant. 

The rental market in our area is very hot. Due to pandemic and stay-home order, many knowledge workers need more space. As the husband and wife need a separate office, and most students attend school from home through distance learning programs, many families upgrade to bigger houses. 

Our housing area has the top-rated public schools in Portland. Naturally, many Nike, Columbia and Intel’s employees prefer this area, especially those with schooling kids. We checked with several property management companies to find out about the market rate. 

In short, here are the numbers:

  • Rental: $2700-$2900/month
  • Leasing and marketing fees for getting tenants: ~One month’s rent
  • Property management fees: 8% of monthly rental income
  • Mortgage interest: 2.875%
  • Mortgage outstanding loan: $440,000
  • Mortgage installment: $1850/month
  • Property tax: $6,300 / year (will increase based on property value)
  • Home insurance: $1200 / year

We would be able to secure a tenant very fast if we only ask for $2700. 

Now with the additional information — an option to rent it out — what’s your thought?

Should we sell it to receive the gain on our capital tax-free? Or, shall we rent it out and keep the property longer?

Let’s look at the cash flow if we keep the property and rent it out.

Rental Income: 

$2700/month x 12 month = $32,400

Expenses:

  • Mortgage = $1850 x 12 = $22,200
  • Property tax = $6,300
  • Home insurance = $1,200
  • Property Management fee = $2,592

Total expenses = $32,292

Let’s just round it up and treat it as break-even at this point since the total expense and total income is about the same. Now based on these numbers, we would have to make a decision – to sell or to rent it out? How do we analyse the situation?

Most people will get stuck here. Since there is not much positive cash flow from the property, why keep it? And we will need to pay more taxes if we sell at a later time. Apparently, the majority of people would have decided that it is best to sell the property, cut the ties and move on.

The analysis of the return is also not so clear cut like black and white. It has a lot of grey areas that we need to make some assumptions about. After all, we couldn’t accurately predict the future cash flow. So, here is my thought process so we can learn the methodology to make financial decision in such a situation. 

Analysis of the Opportunity Costs

To compare two different scenarios, we will need a method to compare apple to apple. For this case, I will have to figure out what I can do with the money if I sell the property. Then we compare it with the potential return of keeping the property.

Now we still have an outstanding mortgage of $440,000. If we sell the property at $650,000, we will get back $170,000 after deducting the closing costs of around $40,000. That could be the best case scenario if we could get an offer as high as $650,000. The worst case scenario is that we might not get a high bid. Then we will have to accept a more average offer around $600,000, giving us back the capital around $120,000. 

For simplicity sake, let’s agree with an average figure right in the middle ~ $145,000.

Therefore, with this capital of $145,000, I can do other investments with it, may it be stocks, or other properties in Taiwan or Malaysia. 

So the next step is to find out the potential return I can get from the rental and future capital appreciation. If I don’t sell the property, it means my capital of $145,000 will be tied there.

Before we get to estimating the return, there are some assumptions I need to make to simplify the matters. 

  • The property will need maintenance and repair. It might cost $1k-$2k a year.
  • In the meantime, we can also increase the rent every year, up to 5% as limited by Portland Housing Bureau. Every $100/month increase will fetch about $1,000 extra cash flow a year.
  • Assumption: Maintenance cost will be offset by rental increment.

Then we will look at the potential capital appreciation of the property. Portland is a relatively smaller city compared to the other big tech cities like Seattle in the north, San Francisco and generally the silicon valley in the south. In the past ten years, there is a trend of knowledge workers moving to Portland from California because they get to buy bigger houses here with the same budget. Recently, Apple and Microsoft started to hire people in Portland too, expanding their operation here because Portland has a pool of hi-tech talents. 

I am very optimistic that Portland’s property will go up in value because the similar houses in Seattle and the Silicon Valley are commanding 2-4 times higher. We have a friend who just bought a house at Cupertino as he is working for Apple there. He paid $1.5 million for a 1500 sqft townhouse (something like the double-storey terrace house in Malaysia). 

So my thought process is to figure out the rate of return when our property will fetch $1 million, say in 20 years, 15 years and 10 years. Therefore, I use a Google Spreadsheet to figure out the rate of return. You can check on the calculation here: https://KCLau.com/USHouse/ 

What you can do with the spreadsheet:

  • Make a copy for your own perusal
  • Comment on the spreadsheet if you have any questions about the calculation

If the property appreciates to $1 million in ten years time, we could get a 12.66% p.a..

If it takes 15 years to get there, the return is 9.21% p.a.

If there is no bull-run, and property prices appreciate with the rate of inflation, taking 20 years to get to $1 million, the return is still not too bad at 7.54% p.a.

By the way, the estimated return is after the 30% tax on the gain. 

Now you know my thought process, what do you think? Will you keep the property or will you sell it now?

What did we do?

After analysing the two options, it is not a very clear-cut decision whether to stick with selling the property or finding tenants. So we decided based on the circumstances we have at that time.

  1. If I cash out the money, I need to invest it somewhere. Other than properties, I prefer investing in good companies listed on the stock market. The thing is that we continue to have strong cash flow coming in month after month. So we are already buying stocks several times a month. Considering that the stock market is still at an all-time high now, I am not in a hurry to dump another hundred thousand dollars there.
  2. Do we need the money to buy another property in Taiwan? We don’t plan to do that anytime soon, at least not in the next two years. The rental yield of a decent size 3-4 bedrooms condo in Taipei is relatively low compare to our Portland house. With the same budget of US$2,500-$3,000/month rental, we can rent a condo unit. But to buy one, the mortgage instalment will be about US$5,000 a month.
  3. Is the potential return ranging from 7.5%-12.5% good enough? Anything around 10% is good enough if the risk is relatively low. In my opinion, I do think the risk is low. The high-tech companies are expanding to Portland. Additionally, Nike’s business is growing too. The Nike headquarter has added a few new highrise offices, just 10 minutes away from our home. In other words, seeing the value of the property touching $1 million is very highly probable. It is just a matter of time. Will it get there in 10 years, or take longer, like 20 years?

I think the downside is minimal. Since we are not hurrying to get rid of the property, we preferred to maintain ownership.

So we interviewed a few property management companies and picked the one with the most professional setup. Of course, they are not the most affordable in town. But since we will not be there to look after the property, we will have to rely on a property manager who can do a good job.

There are two similar properties listed for $2695 in our housing area. Our house is the best among all, with a slightly larger usable space. So I gave the green light to list it for rent at the same price, $2695. Within a week, we got more than 50 requests to view, arranged eight viewings, and every one of the prospective tenants paid the $70 to apply.

Too bad that there is no bidding process for renting a property. The law gives the first successful applicant the first right to rent without discrimination. It means we couldn’t choose whom we want to rent it to. Nonetheless, we secured a tenant in no time. They moved in right after we moved out.

In conclusion, we chose to keep the house for a while to observe the situation.

How about the extremely high 30% tax in the future?

“KC, aren’t you worried about it?”

When you have the problem of paying too much taxes, that means you are doing something right. It is an excellent problem to have. Cheers!


KCLau
KCLau

Personal finance author and trainer

    6 replies to "Portland Property: Should I Sell or Rent It Out?"

    • Sivarajah Panjalingam

      Hi KC.
      Firstly, wish you and your family good luck and blessings in your move to Taiwan. Also, thank you for a detailed analysis of the decision to make whether to sell or rent the house. I note that as a non-US tax resident, any income earned in the US is taxed at 30%. If we were to sell buy and shares in the US, will our profits be taxed 30% if we were to bring it back to Malaysia?

      • KCLau

        For foreigner, there is no tax on capital gain for stocks.
        But when the stocks pay out dividend, there is a tax 30% withheld. So the net you get is after tax.

    • Shu lin

      I think should rent it out.. if think of long term, the property will appreciate in the future and i believe you will earn positive cash flow when the time goes by.. given the risk is low with potential return of 7.5% to 12.5% is around the same if invest in stock..

    • BC

      Hello KC …. welcome to Taipei. I have been in Taipei for 2.5 years. My wife and I enjoyed our stay here. Unfortunately my assignment has completed and we will be returning to Singapore in mid-June. Hopefully we will get to come back once the work picks up in Taiwan.

      You mentioned that starting 2022, you will no longer be US tax residents. Since you are in Taipei now, it means you have not spent more than 183 day in USA, so shouldn’t it be that you are no longer US tax resident starting this year? Just an observation.

      • KCLau

        Glad to hear that you enjoyed the time in Taipei too.
        We have got green cards, so considered resident until we give it up.

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