Should I rent out or sell my condo?

Question

Hello,

I bought my condo back in 2011 for 220,000. This was our first home purchase in Woodland Hills, Ca. We put enough down where our mortgage payment is around $750.00 per month, HOA dues are around $310.00 per month, and tax is a few hundred dollars per month. I know other owners can rent their units out for at least $2200.00 per month and our first inclination was to rent this out and purchase another place but there are some issues.

Our condo was built in 1979 and the management company and board are awful. There has been very little if any oversight of contractors; the roofing contractors failure to maintain resulted in water intrusion in my unit which they agreed to fix. Our HVAC system will need to be replaced within the year, and the parking structure and roof are not aging well. I have heard rumors of "special assessments" in the future to cover these costs. The complex also does not have earthquake insurance.

My gut tells me to sell this condo after I get the drywall repairs done; other units are now selling for 380,000 or so. I would appreciate some input from experienced owners so that I know I will be making the right decision.

Thank You,

Mike

Tim Puffer · Answer

@Mike Bagden - Seems like a good time to take the profits. Maybe you rarely that into doing a live-in flip. Then you can also invest some of that money into another deal as well. But as @Grant Rothenburger said, What do you see yourself doing in REI?

Clayton Mobley · Answer

@Mike Bagden while I would typically not recommend selling a property that could cash flow that much, this sounds like the hassle and capex expenditure you'd have to deal with will negate the benefits. Since you've lived in it for more than 2 of the last 5 years (i assume based on your post), I'd sell and take the CG exclusion, take that profit tax-free and use it to invest in lower-maintenance cash flow properties.

HOA fees are a huge waste for a rental - especially since it sounds like they're doing a terrible job. Take your profits, invest in SFR cash flow property with a solid management team (turnkey if you don't have the time/inclination to DIY). If you go turnkey, the property should come with new or nearly new capex items like roof, HVAC, water heater, etc. and have in-house management, which will keep maintenance costs low long-term.

Depending on how much you still owe on this property, you'll have a nice bit of tax-free capital to play with. If you don't need all of it to purchase a new home (maybe you already have one? I can't tell from the OP) and you end up with ~150-200K equity capital to invest, you could potentially leverage that into a tidy little portfolio of 5-7 solid B/B+ turnkey properties (at least here in Birmingham) with a sizeable cash reserve left over. Of course, it all depends on financing, your current housing situation, and your specific investment goals - but based on the info provided, I'd say it's time to ditch this albatross and roll that equity into some cheaper cash flow properties in another market. More cash flow, greater diversification, less hassle.

Best of luck!

Lynn McGeein · Answer

Remember to consider that you can keep the profits from the sale of your primary residence tax-free up to $500,000, married filing jointly.  If you convert it to a rental and lose the primary residence designation (must have lived in it 2 of last 5 years), analyze how many months of rental income (and potential tenant problems) before you make up that difference.

Grant Rothenburger · Answer

@Mike Bagden What do you see yourself doing with REI?

Ryan Cox · Answer

@Mike Bagden Depends on what your goals are but I would sell.  Take my profits and leave poor management.

Thomas S. · Answer

Far too many reason not to keep this property as a investment. The fact that rent to property value is far to low to be a successful income investment property is reason enough by itself.

Take the money and run now.

Sergey Tkachev · Answer

@Mike Bagden, I totally agree with @Ryan Cox that a lot really depends on your goals and where you plan to reinvest your funds.  If you are able to reinvest your funds wisely, there may definitely be much better opportunities and returns if you roll them into another deal(s) - the question is whether you will take the necessary action to seek out a better reinvestment opportunity than what you currently have in the condo.

As to the issue of owning a condo in a poorly managed association - I would say that this is the bigger issue.  A poorly run building and poorly performing association can very quickly start draining funds through special assessments and other way and if things go even further downhill, your unit may not be sell-able due to the overall condition of the association and building, or in a better case, it will fall in value.  Although this maybe unlikely, I've gone through this experience and it's not fun to say the least :).  So the lesson I've learned for myself is it's better to jump off the ship before it sinks.  On the other hand, if you believe not all is lost and there is hope for the building, join the board of directors and help them get things back into shape, but be ready for much drama, politics and failures despite all your effort.  So either sell or take control of the situation and try to turn things around, but make sure to fully consider the opportunity cost of either option.