Sell or Hold? Condo almost paid off.

[Red Peterson]

have a 3BR, 3ba partially fin basement almost paid off. Ready to purchase a new home.. i feel if I sell, I’ll get a good equity but I also feel that in the long run, its best to hold. I feel like the real math in my equation is not the price tag i paid but that and all the interest i paid in 12ys so im not sold to just sell the property… hold and get another loan for higher balance and rent out current condo or sell current condo so my loan principal will be lower? If i rent it out, i’ll need to spend 10k to update necessary things.. what woukd you recommend? Noob here…

[Joe Villeneuve]

The exact opposite of everything you just wrote is true.Once your equity grows to twice your DP, you start to lose money...at an accelerated pace.

First, you must understand there is a difference between "your" cost mad the "total" cost for any investment property.  If both are equal, then you must have paid cash for the property...and lost money from the very beginning.  This isn't a question of "whatever you feel most comfortable doing".  It's an example of basic math, in the most simplest form.

"Your" cost, is what you as the investor pays. The "total" cost, includes your cost plus everything else. Which cost is which is defined by where the source of funds used for these payments are coming from.  Everything that is paid for using cash where the source of that cash is you, is a cost to you.  If the source of funds used to make a payment comes from the rent, then the tenant is actually the one making the payments...you're just the one transferring those funds from the rent money to the vendor. Of course this is only true if you have positive cash flow.  If you have negative cash flow, since the source of funds for the negative part comes from you, it adds to your cost with every monthly payment.

This means your cost is, and should be restricted to, the down payment...ONLY.  Any time you use your cash to make a payment, is just adding to your cost...and is losing you money.  Keep in mind, you don't start to make a profit until you have recovered ALL of "your" cost.  So, anytime you add to your cost, you are increasing what you paid for the property, increasing the amount of money you have to recover before a profit is made, and lengthening the amount of time it will take before you start making that profit.

What's worse, is the opportunity cost that is lost.  It's an exponential loss.  When you put up 20%, your DP is worth 5 times what you paid for it.  When you pay all cash, the property is only worth exactly what you paid for it.  When appreciation increases your equity, it does so on a 1 to 1 basis, where every dollar of property value increase equals that same dollar in equity increase.  This is deluding your money.

Sell, and ALL of that equity has a PV of 5 times the DP...and, your CF should double if you buy 2 properties like the one you just sold.