By DAVID HOUCK
Qualifying Broker
Atomic Realty

Before deciding whether to rent or sell your home, carefully weigh the financial, legal, and personal implications. Consider the following:

Property Management: DIY or Hire?

1. Self-Management: Managing the property yourself saves on costs but requires time, energy, and reliable local contacts—especially in emergencies (e.g., a furnace breaking while you’re on vacation).
2. Hiring a Property Manager: Professional management typically costs 10–20% of your gross rent. While this reduces your stress, especially if you live out of the area, finding a dedicated and capable property manager can be challenging. Avoid managers who also sell real estate or work other jobs—they may lack the focus needed for proper management.

Key Considerations

1. Vacancy Rate: Even a single month without a tenant can significantly reduce your annual profits.
2. Tenant Laws in New Mexico: New Mexico is considered a tenant-friendly state. Evictions—whether for nonpayment or holdovers—can be slow, costly, and complex. Any legal missteps could delay the process while you collect no rent.
3. Potential Damage: A typical damage deposit (one month’s rent) may not cover extensive repairs. Be prepared to cover out-of-pocket expenses.
4. Maintenance Costs: Budget 5–20% of annual rental income for maintenance—older homes usually need more upkeep.
5. Tax Obligations: Rental income must be reported. Failure to do so could be considered tax fraud, potentially jeopardizing your job and triggering IRS penalties.
6. Return on Equity: Would selling your home and investing the proceeds generate better returns with less effort? If you’ve lived in the home 2 out of the past 5 years, you may qualify for a capital gains tax exemption—up to $250,000 (single) or $500,000 (married filing jointly).

Basic Return on Investment (ROI) Estimate

Step 1: Calculate Home Equity

• Estimated Sales Price: $_________
• Less Mortgage Payoff: $_________
• = Equity: $_________

Step 2: Estimate Net Rental Income

1. Gross Annual Rent (monthly rent × 12): $_________
2. Minus your annual mortgage payments (principal and interest)
3. Minus Property Taxes: $_________
4. Minus Homeowners Insurance: $_________
5. Minus Property Management (10–20% of gross rent): $_________ Even if you manage it
   yourself, your time has value—account for it.
6. Minus Vacancy Loss (expect at least 1 month/year): $_________
7. Minus Maintenance (10% of gross rent is a good estimate): $_________
8. Minus Estimated Income Taxes: $_________

Estimated Net Annual Income: What you actually have left in your pocket $_________

Return on equity: Divide you Equity from above by your estimated net annual income to get the return on your equity. Can you make the same or more in other investments with less effort? (Stocks, bonds, etc)

Tax and Depreciation Considerations

• Depreciation: Residential rental property is typically depreciated over 27.5 years. Advanced techniques like cost segregation can increase deductions but require a tax professional. Important: Depreciation is recaptured (taxed) when you sell the property.
• Capital Gains Taxes: If owned > 1 year and not a primary residence, expect 15% long-term capital gains tax. If owned < 1 year, gains are taxed at your ordinary income rate

Other Factors

• Market Uncertainty: Real estate values fluctuate. Appreciation is not guaranteed.
• Mortgage Paydown: Tenants help pay off your mortgage over time, growing your equity.
• Alternative Uses for Equity: Consider whether that equity could work harder in stocks, bonds, or paying off high-interest debt—with less involvement on your part.
• Did you inherit the property. If inherited, you may be able to utilize a “stepped up basis” to reduce you tax burden on your gains from selling

Final Thought

Focus on net income, not just cash flow. In business, they use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), but as a homeowner, your concern is simpler: How much money do you actually keep after all expenses and risks?

David Houck is the Qualifying Broker of Atomic Realty (AtomicRealty.net). With over 40 years of real estate experience, a BS in math and physics, and a law degree, he currently serves on the NM Association of Realtors Forms Committee. While licensed as a property manager, Atomic Realty focuses exclusively on property sales—we believe in doing one thing well.