Poll

What would you do with this condo?

Stick it out - you will have an asset in the end
3 (60%)
Sell it  - you can invest the money elsewhere
2 (40%)
I will buy it!
0 (0%)

Total Members Voted: 5

Voting closed: February 03, 2019, 10:46:01 AM

Author Topic: Should I sell this condo or stick it out? Please send your insights!  (Read 1916 times)

DCcondoconfusion

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I am a married 44 year old mom of a 1 and 3 year old and I work full time.   I have an opportunity to sell a condo that I bought at the height of the market in 2007 and I just cannot decide if I should proceed with the sale.   

I have been a long time reader and fan of your blog and I have read all of your articles on real estate.  Which makes me come to you with a question of if I should sell or not.

Purchase 2007:  245K condo Bethesda, MD
Value today:  180K-215K which is crazy because it is on the Washington, D.C metro line + near NIH

Interest rate: 5.65% and that was refinanced in 2010! So it is up in 2040.   It was 6% before and a second lien which I paid off of 25K at 7.25%.  of course, these were the days that I only put 5% down.  just stupid.

Condo fee $353
Total payment taxes, mortage and condo fee= $1710
Renters pay:  $1500 will renew another 2 years at $1500

I have been renting it for four years now.  It is a 1BR/1BA and all utilities are included in rent

I am sick of paying  the $200 out of pocket each month plus I hate being a landord and I had the high interest rate. 

It is slow to increase in value and is an old unrenovated unit.  I have a private buyer who will take it for $180K and will pay most of closing costs.  My husband think I am nuts and should just stick it out because at the end, we will end up with an asset.

If I sell now, I think I will lose about 100K opportunity for growth but I will give up being a landlord and can just invest in REIT ETFs.  The property may do better than the REITs. 

The condo fee increases about 1-2% max a year.  But the interest of 5.65% burns me up.  I owe 162K still on mortgage.

You guys are super smart.  what would you do?  Stick it out?  I have an offer for 185K and the buyer pays all closing costs.

https://www.redfin.com/MD/Bethesda/10613-Weymouth-St-20814/unit-2/home/145882056
(just in case you want to make an offer)


 activity from the last 6 months. Note that one under contract right now that is listed at $190,000 and has been on the market for 500+ days is a short sale - so that's a whole different thing, and those sell for under market value: View Listings

I saw that he had one comp that was a bank owned sale and one that was a short sale. I think he was trying to choose patio units since this is a patio unit, but distressed sales aren't comparable to standard sales, so they shouldn't be included in comparable sales. I absolutely agree, though, that patio units do sell for less than upper floor units - most upper floor units have sold for well over $200,000 (actually over $215,000).

Patio units like mine do sell for less than upper floor units - most upper floor units have sold for well over $200,000 (actually over $215,000).
« Last Edit: January 04, 2019, 10:49:21 AM by DCcondoconfusion »

jekamom

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #1 on: January 04, 2019, 12:13:31 PM »
The big thing with the interest, even at 5.65% is that it is 100% deductible on a rental, unlike a home mortgage, which is subject to all sorts of limits and standard deductions. 

You are paying out 20.5K a year.  Yes, you get some depreciation probably about $6200, which nets you all told about 8K annually if you are in a 28% bracket. Don't forget the tenants are reducing the principal -- you are 10 years in so maybe $6K a year is reducing the basis.  Its a long term gain, so any increase in gain will be taxed at your CG rate, not your income tax rate.  Your potential is that the value will go UP (maybe a lot--$100k potential?) and any gain won't be taxed as highly as if you earned it as wages (or rental income). Your risks are that you could have earned more elsewhere or the value of the asset won't rise (or will sink).

Investing the $18K you would get from the sale will net you $550 a year if you put it in something that earns qualified dividends, plus whatever gain (or loss) you might get from stock price changes (if you have the chance to grow that $100K with little stress, do it!) Would you continue to add $210 a month to whatever you are investing in? Even if you just save that $2500 a year, you'd be keeping about $3k. No $100K upside.  If you pay off other debt with a higher interest rate, you would earn that rate on your $18K (that return isn't taxable), plus the $2500 you could put in savings. 

To me, if I had good tenants, I'd up the rent (minimally) annually, and think of the $210 as your monthly investment to a bigger windfall with a lower tax rate in the future.  But I am not you.  If it stresses you to put that $210 in every month, or if you can get  a better return by reducing higher interest debt, sell it.  If you can look at it as a real asset (pay attention to the condo board taking care of repairs- and make sure you and the tenant have good insurance) and you can get your head around the idea that you are putting in $210 a month on for a future return, keep the condo until you are sure. 

I guess that is my big question for you.  Are you thinking the $18K you'd get at closing and not paying the $2.5k in shortage is worth more than the upside growth of $100k and the $3.5K (net) the tenants are paying down on the loan each year ?   Do you have better places to allocate that $18K and the $2500 you wouldn't be investing in the condo?  Can you automate the "landlord" jobs?  Put the shortage in the account annually and just let everything draft with little oversite?  Have the tenants be responsible to call for repairs, have a 3rd party involved in management?

Finally, has the bank removed any pmi premiums they set up because you only put a little down?  That might help reduce that $210 monthly shortage...

DCcondoconfusion

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #2 on: January 04, 2019, 12:21:46 PM »
great insights- I appreciate your feedback.

I have no PMIs- I paid that off when I paid off the second loan at 7.25%

I know you are right- I have to think more long term.  I think it is the landlord part I am struggling with and I see your points about automation.

sounds like you would keep it, huh?

thanks.

AdamJane

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #3 on: January 04, 2019, 11:00:37 PM »
There will be always people that will tell you to keep it and other people will tell you to sell it. You have to do what is right for you.

——————————————————————————————————————
“I am sick of paying  the $200 out of pocket each month plus I hate being a landord and I had the high interest rate. 

It is slow to increase in value and is an old unrenovated unit.  I have a private buyer who will take it for $180K and will pay most of closing costs. “
——————————————————————————————————————

Based on what you wrote above, just sell it, take the loss and move on with life.

My rough estimate of what you would pay for your condo is:
2007 to 2014- $1710 x 12 (months) x 8 (years)= $164,160 +25K
2015 to 2018 - rented. $210 x 12 (months) x 4 (years)= $10,080
2019 to 2040 - rented. $210 x 12 (months) x 21 (years)= $52,920
===============================================
In 2040, you would have paid at least $252,160 out of pocket for your condo provided that you will rent it out for the remaining 21 years. These amounts does not include the 1-2% condo fee increases.

At age 65, when your mortgage is over, you will get at least $1,500 x 12= $18,000 passive income per year from rent. I would think that rent would have increased x% every couple of years. Also, you would have a min of 185K in equity. What will this condo be worth in the future? Will it be worth 185K, 200K, 300K to 400K in 2040?

I would rather just sell the condo.

-Save the 20K yearly which is $1710 x 12 month, the money you would have paid in your mortgage if you did not have a renter. After 21 years, you would have $420K in cash.

-If $1710 is invested monthly in a 4% investment it would be worth 670K after 21 years.
-If $1710 is invested monthly in a 6% investment it would be worth 847K after 21 years
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Any interest earned from the 4% or 6% example is taxable.

-If 20K is invested yearly in 4% municipal bonds, you will have 420K in munis after 21 years. You would collect interest each year and a total of $184,800 tax free interest would be collected after 21 years. You would have $604,800 (420K + 184,800). 420K 4% munis will generate $16,800 tax free 100% passive income every year.

At one point, my parents had 6 mortgages for their 4 houses and 2 buildings. My father was constantly stressed worrying about having enough money to cover the bills. He was over leveraged and had to sell 2 vacation homes at a combined lost of 100K. The 2 buildings were also sold with a small profit. There are now just 2 houses left. They are each 3 families houses in which 5 units provide income to my mom and my brother. These houses were purchasesd for under 70K each in the 1970’s and they are now worth at least 1M each in Queens, NY.  The 30 years mortgage for each house were paid by many GOOD long term tenants that my father rarely rised the rents so they stayed. One couple stayed over 30 years and they paid the entire mortgage for one house. The two 3-family houses are success stories But one of the vacation homes became a rental nightmare. Multiple tenants didn’t pay rent on time. They broke the patio sliding door and the front door, put big holes on the panel walls in the house. The other vacation home was a 4 bedroom house that was very nice, nicer than our small less than 1000 Sq FT home that my wife and I currently own. My parents couldn’t use it every weekend and it became a financial burden. Both vacation homes were sold way below what my parents paid when the RE market was down. My parents seem to always sell when the RE market is down because they were too much in debt and needed to liquidate.

I learned from my parent’s financial mistakes. My wife and I do the financially opposite of my parents. ie. We have no rentals, no tenants, no vacation home(s), just one primary home and no money in the stock market which my father and uncles lost buckets of money picking the wrong stocks. I wish they just purchased the S&P 500 index funds back then.

My bother and I used to follow my father to fix issues with the rentals and I learned early on that is not for me. My brother manages the rentals for my mom. My wife and I only invest after tax money in munis to generate truly passive income to cover 100% of our expenses without any stress.

If your asset is not increasing in value and if rent can’t cover the expenses then you really need to decide if it is worth the aggravation to keep it.

Adam
« Last Edit: January 05, 2019, 07:59:55 PM by AdamJane »

Sam

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #4 on: January 05, 2019, 05:05:02 AM »
Jekamom and AdamJane - Thank you for providing such a detailed response!

When selling, I’m just worried about where to go next and the downsides that go with it. With two small kids, perhaps stability of staying is best.
Regards,

Sam

DCcondoconfusion

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #5 on: January 05, 2019, 09:11:43 AM »
this forum is awesome!

thank you readers and Sam for your insight. 

Only thing I have to add is that I actually do not live in the unit to which I refer - we rent it.

We have our primary home in another state-  We bought a townhome (at 3.75% interest) last year and love it and won't move for a long long time.

Sam

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #6 on: January 05, 2019, 10:26:37 AM »
this forum is awesome!

thank you readers and Sam for your insight. 

Only thing I have to add is that I actually do not live in the unit to which I refer - we rent it.

We have our primary home in another state-  We bought a townhome (at 3.75% interest) last year and love it and won't move for a long long time.

Ah........ now that was a key element you left out. Why?
Regards,

Sam

DCcondoconfusion

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #7 on: January 05, 2019, 10:41:24 AM »
there are a few paragraphs where I say what the renters pay, that they would renew 2 years, and the loss between the rent and mortgage each month ($200)

I said I have been renting it for four years now and that I don't love being a landlord
« Last Edit: January 05, 2019, 11:05:01 AM by DCcondoconfusion »

Money Ronin

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #8 on: January 22, 2019, 06:57:48 PM »
I started my real estate investing career buying homes in the Midwest (sight unseen) because they looked good on paper.  I took my California real estate sensibilities and applied it to another state.  Being an absentee landlord is tough--I would never buy more than 1.5 hours away from home again unless as part of an institutional investment.  I may have been the only person to buy real estate in 2010 and still lose money selling in 2017/2018 because of operating costs.

Now I own several apartments within driving distance of my home and have become a much savvier investor.  There are many lessons to be learned in your situation, but the short answer is "sell".

Here's why:

1. You don't like being a landlord (neither do I). All things being equal, you should be getting an out sized return because you are doing something you don't like.  Perhaps you might be okay being a landlord under different circumstances (e.g., a professionally management apartment) or something closer to home, but this isn't it.
2. Your interest rate seems high--not sure why that is.  It is putting you at a distinct disadvantage.  If you decide to keep it a bit longer, I would take Financial Samurai's advice and refi to a lower interest rate with an ARM.  You don't need to a 30 year loan on something you don't plan to keep 30 years.
3. As for continued appreciation, no one can say.  It's not easy to build in California; that is why real estate is expensive.  I don't know about your area.   I held my Midwest properties 6 to 7 years and appreciation was negligible.  I would have made a killing in California during the same time but I didn't have the money to buy in California at the time.  Real estate almost always appreciates eventually but is it worth the opportunity cost of waiting?
4. You are cash flow negative.  This is perhaps the biggest reason to get out.  It's financially and emotionally draining to feed a losing investment.  Perhaps you can refi to change this but I still think the returns are to slim to stay in.

If you do sell, DO NOT sell to a private investor and DO NOT sell in Winter.  You have nothing to lose by putting it on the market and seeing what you can get.  Spend a little money to spruce it up (e.g., paint, new light fixtures, maybe new flooring). 

Real estate is a wonderful investment--don't be discouraged.  I've doubled my net worth in 4 years in large part due to real estate investments.  My goal was primarily diversification--not huge returns--but it worked out better than expected.  I'm 50% in stocks and 50% in real estate, but due to leverage, real estate returns have soundly beaten the stock market.  You need to figure out what works for you personally and what works in your area (whether it's single family homes, apartments, high end, low end, flipping, etc.) and be ready for the next cycle.  Real estate cycles are much longer than stock market.  You can see it go up and down over months/years giving you time to react.  Get your cash position, credit score, financing options, etc., in order before the next cycle. 

You can also go with REITs but I would expect those returns to be much more in line with the S&P 500.  That's okay, too, if that's your speed.  REITs are also the better option if you are not comfortable with leverage. 

DCcondoconfusion

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Re: Should I sell this condo or stick it out? Please send your insights!
« Reply #9 on: January 23, 2019, 10:34:55 AM »
thank you so much, Money Ronin.   Really great insight!   I am selling but against your advice, I am selling to private investor to avoid stress of listing it, DOM, back and forth offers, etc.  I am getting in line with the comps without the commission so I am good!  I know it is the right decision because I am totally relieved to get rid of it.  And I am going to take the REIT path. I think I prefer to manage all my investments on paper.
Thanks everyone for your advice!