Condo Equity... What Would You Do with It?

Question

Hi BP Family!

I'm currently living in Chicago in a condo that I bought almost 5 years ago as a foreclosure. I'm trying to figure out what my next best move would be, now that I'm trying to get started in real estate investing.

Here's the deal- I have a ton of equity. I really lucked out (bc I had no idea what I was doing when I bought it lol) - I know that I have at least $50K of equity in this place, if not more.

BUT... my hubby & I are also in debt (cc's, cars, loans, etc- not including a ridiculous amount of student loans. sigh). I'm an educator & my hubby is a filmmaker.

We have been going back & forth on all of our options. Here are a few:

1). Sell the condo, get every penny of equity (upwards of $50K),  use most to pay debt- rent for a bit, and then buy an investment home (I'm thinking a multi-unit to live in one and rent out the other(s))

2) Cash-out refinance the condo, use cash & current income to pay off debt. Start saving to invest later.

3) Stay in condo, use income from work to pay debt, wait to refinance until most of debt is paid off & then we can use most of the equity to invest in real estate.

Your thoughts are appreciated! Please be nice- we made some money mistakes, but I can guarantee you we won't be in this place forever!

Bill Exeter · Answer

Hi Vincent,

They are actually living in the condo and have lived in the condo for well over two (2) years, so the 1031 Exchange would not apply since it is not held for rental or investment purposes.

However, since they can say they have lived in the property as their primary residence for two (2) out of the last five (5) years, they qualify for the tax-free exclusion of up to $500,000 in capital gains as a married couple (pursuant to Section 121 of the Internal Revenue Code).  They can sell the condo and pay no capital gain taxes unless their gain exceeds $500,000.

Dave Foster · Answer

@Vincent Crane, Just an FYI but I read that @Taylor Cadeis living in that condo.  As their primary residence it is not eligible for a 1031 exchange.  Good thought though!

Cal C. · Answer

Option 1 is far and away the best choice.  Condos are probably the worst of investments for rental properties, particularly well into a real estate cycle like we are now. Since it is your primary residence and you have lived there for most two years without renting it you will not have to pay any capital gains.

Here are a few reasons condos are a bad (relative to other housing) investment.

1) Condos tend to fall first when real estate prices drop, yes they go up first too, but yours has already gone up.  You'd be waiting for the cycle to go from peak to trough back to peak and that could take a decade.

2) Condo associations.  Enough said. There are tons of threads on this very subject.

3) As one of the other posters mentioned it may be difficult already to sell to a fannie or freddie financed buyer.  That will probably only get worse until real estate peaks.

Vincent Crane · Answer

1031 exchange into a new property so you don't have to pay HOA fees anymore

Lumi Ispas · Answer

@Taylor

@Taylor Cade it all depends of your goal. You can still qualify to use an FHA loan to buy a 3-4 flat if you did not use that type of loan when you purchased the condo, or use a conventional 5% down and have the seller pay your closing costs.

First you'll need to talk to a good lender that will identify what you can do with the condo in your credit for farther purchases. With that info, you'll be able to look at the options clearly!

Taylor Cade · Answer

Thank you for all of your replies!

See what I mean? This isn't an easy decision. Lol. Here's another wrench- the area that my condo is in right now is a slowly expanding neighborhood. I have no doubt that in 5-10 years my home will be worth more. I've been struggling with the idea of refinancing and holding on to it- when I could sell it and probably make money faster (and save money!) by paying off my debts, buying a multi-unit home, and living in one unit . And I'm nervous about refi-ing the condo, renting it out, and buying a multi-unit bc I'm not sure if I would qualify for a mortgage for the multi-unit because our student loan balance raises our DTI.

In a perfect world, I would hold on to this place, refi, buy a multi-unit to rent out, etc. BUT I'm not sure if we would be able to obtain financing this way. I know that our DTI and credit scores are everything when it comes to real estate investing.

Have any of you guys been in our shoes before?

Denise Calabrese · Answer

Before putting your condo on  the market I would check to see if it is "Warrantable or Non-Warrantable" this means that it is eligiblee to be sold to Fannie or Freddie. There is no reason to list the property that cannot get financing. With all the investors flooding the market many condo's can no longer get Fannie or Freddie loans due to the rentals in the complex. To find out more about this go to Freddie or Fannies guidlines at there website.

Also, you may want to hold on to it for your own rental in future.

Jeff Lezark · Answer

Sorry, meant to type and comment on your option #3

Jeff Lezark · Answer

If your able to get conventional financing (by that I mean 'Bank' financing, not private or HML) then my opinion is to sell the condo and buy at least a duplex so you have housing that's partially being paid for via rent collected from the other side. You must eliminate your personal debt after this is accomplished as it's an incredible waste of resources. But you already know that so no pontificating from me.

Your option #1 is a good, conservative plan but I hate renting so it doesn't work for me.

Your option #2 makes some sense also but will be dependent upon interest rate fluctuations while you're waiting. It's unlikely rates are going anywhere but up from here so waiting to refinance will cost you in higher long term rates down the road. Plus, I dare say the rates on your personal debt are significantly higher than a typical mortgage so waiting only means you pay more interest than necessary.

David Stefanovic · Answer

I personally would sell the condo and buy a multi-family property. I recently sold my condo and plan on using the equity to pay off the mortgage on a multi-family property I have.

Condo Equity... What Would You Do with It?

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