Deciding to rent or sell

[Brendan Chisholm]

In the Summer of 2016, my wife and I made our first real estate purchase. We bought a 2 bedroom / 2-bathroom condominium in a Northeast city’s downtown area. When we initially bought the condo, we had all intentions of renting it eventually. Fast forward to 2020, we are almost ready to move into our new home. Now we have been flip-flopping on whether we want to rent or sell..

Two of our goals at the onset of 2020 were to first find a new home, and second rent this condominium. When we spoke to our mortgage broker for pre-approval, we asked that they provide us approvals based on carrying two mortgages. We were and are incredibly lucky that we were approved for our new home’s mortgage while carrying the current mortgage. While getting our future home under contract, my wife and I started to conduct analysis market comps for similar style properties to see if the condominium would financially pencil (*full disclosure, I should have done this in 2016*)

When we were approaching our closing date on our eventual home, we ramped up the market research. I noticed that during the summer months (and to an extent today) that comparable rents would offer minimal returns. The return on equity and Cash on Cash had small to no margin. I began questioning whether that the rental was the optimal strategy. We wanted to explore another option.

Shortly after we closed and started our rehab, we continued to hear and read that home prices were rising. Days on market, supply, and mortgage rates were down. Living in a market that has seen a decline in home values for the better part of the decade, we thought we might as well strike while the iron is hot. We put our condo on the market.

What we found out quickly, the demand in single family homes did not carryover to our condominium. Although home prices were rising, the value of our condo, and similar style condos were flat. After a couple price reductions, we are now at a point where it does not make total sense for us to sell. We were again stuck contemplating the big question whether we should rent or sell.

After Living here for four years, putting 20% down on a thirty-year mortgage, most of the monthly payments have been made towards interest. We have equity in the property, as we have been able to make additional payments each month to pay down principal. However, with little to no appreciation in the value of our condo, it would be a stretch to make the money back on our initial investment. 

Now that we have an approximate date to move in (knock on wood), we still have the opportunity to rent the condo. It will still offer minimum cash returns. The return on equity is also still low. BUT this is the beauty of real estate, there is more than one way to make money. Even with a smaller cash on cash return, there is the opportunity for principle pay-down while we have it rented. Depending on how long we hold it, and if the market remains flat, we will have paid down the loan even further. And who knows, the market for condominiums could change over the course of our holding period. If so, great. However, I will not count on it.

There are a few lessons from my first real estate purchase. First, you make money when you purchase. We paid retail for the property, and in a non-appreciating market, it is difficult to make money with a small holding period, in our case four years. Second, this is specific to my condo, HOA fees account for almost fifty percent of my monthly expenses. There will be less capital expenditures to worry about over the holding period, but this is an expense item to account for when purchasing into an HOA. Third, every investment needs a business plan. As part of your business plan, there needs to be multiple (exit) strategies. In our case, it was to either rent or sell the condo. For every investor, understand what you want to do during purchase, ownership, and selling of the property.

All of what I have written is A GOOD PROBLEM TO HAVE. I am trying to make decisions not just now, but that will be beneficial to my growing family for the long term. Everything that is written and I have talked about above is valuable experience.