Keep or sell my condo?

Question

Hi BP community!

I live in a condo located in Walnut Creek that I plan to rent out in the future. I purchased it for approximately $500k, and it is now valued at $635k. My mortgage interest rate is 3%. However, the HOA fees are significantly affecting my cash flow by $600 per month should I rent it out. It’s also located in a very good area where I think the property value will continue to increase in the next 7 years.

I'm interested in purchasing a single-family home (SFH) with an accessory dwelling unit (ADU) in concord, CA of approximately $800K-$900k. Concord doesn’t have good school districts as compared to Walnut Creek though. My plan is to live in the main house while renting out the ADU and the condo. However, I'm concerned about the financial viability since I would be responsible for two mortgages. The net cash flow would be $600 for the condo and $3000 for the SFH approximately.

Given this situation, I'm contemplating whether it would be wiser to sell my condo and purchase an SFH with an ADU, especially considering that SFHs generally appreciate faster than condos. My current mortgage interest rate is 3%, but the new interest rate would be 7%. Equally, I’m thinking it’s a smarter choice to stay in the condo due to lower interest instead.

Given these factors, do you have any recommendations or suggestions on what I should do or anyone in this dilemma? I’m curious to hear your thoughts.  Thank you in advance!

Dan H. · Answer

Some thoughts:

- due to prop 13, you are saving ~$125/month on property tax versus purchasing today.
- 3% rate is less than 50% of current rate.
- your market has produced one of the best residential returns in the nation for this century.
- if you sell, your gains are tax exempt to a limit as long as you have resided in the property for at least 2 of the last 5 years.

It is a virtual certainty if you sell in Walnut Creek you will regret it 10 years from now.

As for the example of type of purchase @Jason Wray referenced

- that price point reflects an appreciation that has not kept up with appreciation.
- using 50% rule, that property is negative cash flow with high LTV loan at current rates.
- I suspect every property in Walnut Creek has produced a far better return than that property in the last decade. I am not talking by a few thousand. I suspect you cannot find one that has had return of at least $100k more than the referenced property.
- my properties are in San Diego area (most not in the city of San Diego). I have owned them various durations. Some purchased with great timing and others purchased with poor timing. My worse appreciating property has appreciated $2700/month over the hold. My best appreciating properties have appreciated over $10k/month over the hold. I suspect your Walnut Creek unit to have performed far better than my worse appreciating property. I invite you to calculate your average monthly appreciation over your hold. I believe doing so would convince you that the referenced property is not worth the effort for you. I believe in the average year of your holding your return exceeds the referenced property’s return for the last decade.

Good luck

Travis Timmons · Answer

Agree with @Dan Heuschele - you own property in one of the absolute best locations in the country...heck, maybe the world. Don't sell it to chase cash flow. Of course, it would be better to own a SFH there rather than a condo, but it's a piece of Walnut Creek...find a way to hold on to it.

Bradley Buxton · Answer

@Ben Lee

If you can move the equity to another deal that makes you more money then sell the condo and buy a SFH.  HOAs on CA have recently swung the pendulum to cover cap ex expenses that were differed for years. Couple that with insurance rates and boards it could be more of a headache in the future.  Look at your timeline horizon for how many more years you want to keep the condo for the appreciation.  Sometimes even with good numbers the headache and stress is not worth it.  I agree just to move for purely cash flow reasons doesn't make sense in the short term.

Jason Wray · Answer

Ben,

The NOI on the condo if fair but based on equity versus mortgage $600 is a little risky knowing how Condo associations tend to hedge up on their HOA fee's.  It's safe to say that your HOA will increase each year especially with inflation, how high rates are right now and will continue into 2025. Once you get hit with a $675 to $750 HOA the NOI will become more of a debt service coverage.

I would sell and if you get hit with a tax just 1031 Exchange it into the new purchase.  If no tax use it as a down payment and any left over renovations.  Most of my customers in CA tend to buy their primary in Cali but build their investment portfolio outside the state.  I would tell you consider other states like FL, IN, OH, TN, AL, GA, even one state up from you on the Oregon Coast.

You can find a solid 2-4 unit in all of those states under $250K. I just closed on one in Florida for $219K in Holiday on a duplex each door was renting for $1250 a month. Put 15% down total PITI payment was $1,750.00.  The take away is $750 a month and that cash flow is off of a $186K loan versus a $500K loan.  Your $600 should be over $1200 a month if you split up that $500K over (2) properties (Outside of California) you could double up on your NOI.

The age old question is out of state management - my reply is if its turn key or renovated it will need very little management other than lawn and once in a blue moon repair.  There are companies who manage rents or you can do it yourself.

Great thing about Bigger Pockets is you can network and find in any state a great property, seasoned agent, Banker for financing, Wholesaler, GC, handyman/property maintenance to make it all happen.

If you ever have any specific questions feel fre to reach out I am always happy to help and talk REI!

Keep or sell my condo?

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