Should I sell?

Question

I have an investment condo that I am thinking about selling. Here are the numbers. I am only hesitating because the great mortgage rate and term I get.

Rent: $1850/month

Cost: 0% vacancy for past 5 years

5% cap exp (appliances only as others are covered by HOA)

HOA $360 Going up 10%/year

Mortgage 15 year for 3.25% Monthly payment with P&I $1700

Worth: $330000 Bought it for $225000 Owe $140000

Downside: It has been negative cash flow due to the 15 year mortgage on this. I could be missing out opportunity to find better place with better returns on cash flow, but maybe not as great appreciation. I don't really like HOA.

Upside: This is in high demand area with no issue renting at high price. My goal is retire in 10-12 years, in which case this place will be paid off and I would profit about $1400 dollars even with the HOA. Great appreciation likely.

Should I sell it?

Thanks a bunch.

Elisa

Eric B. · Answer

Two things that I don't allow to override my decisions are taxes and Mortgage rates.  They are peices of the analytical puzzle sure but in the end they can be really more of an emotional reason for a decision.  If you take 60k and go from a 0% return to a 15% return that's $9,000 per year in profits.  That pays for allot of mortgage interest.

People who arent in the game always ask me about taxes and mortgage rates.  I tell them that if they are basing their decision on those two things the margins on a deal are too thin and they need to move on or not make the deal in the first place.  Deals with that kind of return are speculative.  That being said seattle is a speculative play right now and it may be worth waiting it depends on what you want to accoplish at the moment.  I have a property that looks the same on the numbers but I don't have  any equity.  Its been apprciating 9% a year for the last 18 months.  so I don't see any harm in waiting as it is stabilized with a tenant who is a neat freak and likes the place.  Its speculative but like I said I wouldnt get enough money out of it to make an investment anywhere else.  $60k goes a ways towards an investment property.

Feel free to give me a call if you would like to talk it over further.

Brent Coombs · Answer

@Elisa Zhang, I agree that you "could be missing out opportunity to find better place with better returns on cash flow". Am I right that, at the moment you are out of pocket all of your original say $60k, and ongoing negative cash flow since then? ie. The only way to make money on it is to turn its appreciation into real dollars?

I reckon: sell. No-one ever went broke cashing in on a profit!

Of course, the question becomes: what will you do with the proceeds?

Let your new search begin...

I reckon: sell. No-one ever went broke cashing in on a profit!

Of course, the question becomes: what will you do with the proceeds?

Let your new search begin...

Mike C. · Answer

Hi Elisa,

Interesting question, I'm contemplating the same with a condo I purchased a year ago in SLU which has been my primary residence to date.  I plan to rent it out within the next year, but it will be cash flow negative by about $500/month, with the use of property management.

I think the best path depends strongly on what kinds of returns are you looking to get and the expected appreciation.

I decided to develop a modeling tool to analyze both of our situations, so I thought I'd share some of the results and open it up for discussion.

I'm making the following assumptions:

• You put 25% down at purchase
• Market value equaled your purchase price when you bought 5 years ago
• You're self-managing
• Monthly expenses of $200 maintenance (to cover risk of special assessment, improvements to interior, replacement of appliances, etc.), 5% vacancy, $50 insurance, $200 taxes
• Increases in rent just absorb increases in other monthly expenses
• 3% annual inflation
• Cost to purchase was 2% of purchase price; cost to sell is 9.5% of final sale price
• You're not doing a 1031 exchange, resulting in 15% capital gains tax when sell

Below I've plotted what I'm calling the "effective interest rate" (there's probably a more correct term, but I'm defining this as the annual interest rate that would result in the same net return on your invested capital that you would get by selling your condo in year X) assuming a 3%, 5%, and 7% appreciation:

To me, this means that if you think the annual appreciation of your condo will be around 5% and you're happy with effectively getting a > 10% return over the next 10-15 years, then I'd wait to sell until that time has elapsed and the market is not depressed.

For reference, I pulled data for all 1 bedroom condos in zip code 98121 sold from 1995 onward, and you'll see an average appreciation rate of about 7% in this data set:

But, if you think you can get equal or better returns elsewhere at lower risk (perhaps you're seeing the HOA as one of these risk factors - otherwise it seems pretty safe to me...), then perhaps you can take your great return now (which I'm assuming will be about 150-200% of your original investment, or over 10% annualized return over 5 years) and put that to good use elsewhere!

Happy to discuss further and review my model with you (made it yesterday afternoon so it may still need some tweaks), and perhaps I'll post some details about my own condo situation once I wrap my head around it further.

Regards,

Mike Catalfamo

Sarah Ziehr · Answer

How great is your negative cash flow? Does it exceed your tax write offs?

If you are closer to breaking even, then hold on to it and let your tenant pay off that mortgage for you. Then in 15 years, you net the full market value.

Only other consideration is if you sell now can you avoid paying capital gains? If you are still within that window then I would consider selling now.

James Masotti · Answer

Prices in the Seattle market are pretty crazy high right now. Of course with Amazon and Microsoft's growth..and Starbucks, Costco, Boeing there...this isn't likely to change for awhile.

If you can sell and move your profits to multiple properties in a slightly less expensive area near by (go to @Brandon Turner's neck of the woods) then you can probably do even better for yourself.

Lucas Pinto · Answer

@Elisa Zhang

Hey Elisa, I'm also an investor and agent in the Seattle area. This is an unbiased opinion. I say Sell it. I think the single biggest key factors in this scenario is the HOA and negative cash flow. And if you take into account that the market in Seattle is at an All time high, with inventory at All time lows. You as the seller would have leverage to get the most for your home. I think you can get a better return elsewhere. Feel free to PM me if you have any questions or need any help.  Good Luck!

Steve Vaughan · Answer

@Elisa Zhang if the HOA wasn't involved, I would vote for keeping it.  Even if you can get a slightly higher ROI elsewhere, there is something to be said for staying the course and having a great paid-off asset soon.  With the HOA, it could go either way for me.  If they run things well and you don't see them disallowing rentals anytime soon it's a toss up IMO.

I sold a 3-family this year and am just sitting on cash.  I had to refi or sell because of a balloon deadline.  Having a hard time finding a comparable deal.  You may find the same.  I would wait to exchange until you ID your new opportunity either way.

@Elizabeth Grahsl- I am always super tempted to take a tax-free gain.  Lots of options once you have the cash, especially facing a 5% mortgage.  My coin.

Best of luck to both of you!

Elisa Zhang · Answer

Thank you, Eric, for the insight. We are learning on sell at this point, but am a bit stuck with Seattle's market right now, as it is hard to find where I put the money into. I am going to try for a 1031, but good advice on not having the tax clouding my judgement as well. This advice helps me clear my head and cut my emotional tie with the condo. I generally just don't like the HOA.

Account Closed · Answer

The grass always looks greener on the other side...but if your making 10% ROI on an investment that on average returns around 7% in your area, I'd say the grass is pretty green where you are. Think of it as your 401k. My 2 cents.

Should I sell?

Most Popular Reply