Is breaking even enough?

Question

I own a condo and cannot determine if I should sell or keep it for future rental income. I currently lose about $25 a month after mortgage, insurance, property taxes and homeowner fees.

Facts:

Purchase price in 2005 - $170,000

Current approx value - $195,000

Owe $100,000 on an ARM currently at 4.3% which adjusts in October yearly but cannot fluctuate more than 2% points.

I could raise the rent slightly but try not to because the tenants are so wonderful. Same tenants for past 5 years who are fantastic and great at fixing issues on their own. It's easy. Mortgage paid by tenant and I gain equity.

Should I pay it off and continue rental income into retirement? (I'm 52).

Or sell it and use the money to buy a STR/MTR that may have more monthly potential?

Charles Carillo · Answer

@Jennifer W.I personally do not want to own rental property with negative cashflow. You are negative cash flowing now and whenever there are repairs or assessments; you are negative cash flowing even more. Another point I would like to make is that you have $100k in equity that is earning a negative return. Yes, your tenants are paying a couple hundred dollars of principal every month but you could get a better return with a 2-year Treasury. In other words, your return on equity is very low. Would you buy this property again if you could? Answering that question will give you your answer.

Joe Villeneuve · Answer

You have almost 100k in equity wasting away while you add $300/year to your cost. This makes no sense at all. Plus, as your equity grows, it too is losing money for you. The closer your equity gets to 100%, the closer you get to it being completely useless...all the while you are adding more and more to your cost to buy (negative CF). Buying more equity by paying off the mortgage just adds more to your cost. Buying equity doesn't gain you anything, in actually just adds to your cost.Sell the property, take the equity and buy something with it that has positive CF and a larger PV, and forget this property ever existed.Think about these numbers:Currently:Equity = $95k PV = $195kBuying power of equity = approx. 2 to 1 (this is the true value of your equity)Property Value after 5% appreciation: $293kAfter you sell this property:Equity = $85k (assuming closing costs will take about 10% out)PV = $425k (this is because your equity is now used as a 20% DP), not just $195kBuying Power of equity = 5 to 1Property Value after 5% appreciation: $638k, not just $293kNotice how with appreciation, holding your equity in this property instead of moving it forward is losing even more money/value in the future...and that gap grows wider and wider with every additional appreciation.

Kevin Sobilo · Answer

@Jennifer W., you have gained less than 1% annual market appreciation plus the mortgage pay down and for that you have been subsidizing the cost to hold the property. Paying $25 per month when its occupied and MORE when its vacant between tenants, PLUS maintenance and capital expenses. Keep in mind when you sell, you will also be paying taxes on your gain and MORE because you have been depreciating the value of the home on your taxes. Without doing an in-depth analysis it looks like you aren't getting a lot of return and that you will pay a nice chunk of taxes when you finally do realize that return and sell. Some people do invest in properties for market appreciation but your market is giving you less than 1% per year. If it was giving you 8-20% per year that might be different. You're ARM is likely going to jump 2% this year. So, you will be losing more money soon. Might be time to act!

Rick Bassett · Answer

You purchased this condo in 2005, probably at the top of the market, and it took 17 years to climb back to the purchase price plus a little bit. We had a similar situation when we purchased a condo for 200,000 in 2005 and it didn't climb back up to being worth 200,000 again until 2021; most of the time in between the value was hovering around $150,000. For us the condo pretty much broke even on a cash flow basis for the 16 years that we held it and sometimes it lost a little bit. BUT over the 16 years, about 50% of our mortgage balance was paid down by the tenants, and because it was a condo, we took big depreciation deductions every year (all building, no land), which helped out on our taxes. In 2021 we sold it for $205,000, which was slightly more than we paid for it; we ended up doing a 1031 exchange into another property as we did not want to pay federal and state capital gain taxes and recapture that depreciation. We patiently waited for an exit point that made sense; unfortunately, it took 16 years to get there... By the way, did I mention how much I dislike HOA's? Putting up with the HOA for 16 years was one of the most significant negatives in this equation for us, we will never own another investment property that's part of an HOA.

Nathan Gesner · Answer

I'll jump on board with others. You are losing more than just $25. Your current rent pays mortgage, insurance, property taxes, and homeowner fees. What about maintenance? On average, homeowners pay 10% a year on maintenance and I'm sure you've had some issues over the five years. You haven't had vacancy, but that's probably due to pure luck or because you are below market on the rent and your tenants don't want to lose a good deal.I think it would help if you crunched the numbers to see how much you are actually losing. Here's a guide that describes what good cash flow looks like and how to analyze a property.https://www.biggerpockets.com/...

Richard F. · Answer

Aloha,You also should closely scrutinize your Association's operating budget and reserve funding. If their reserves are underfunded, there will be deferred maintenance that will need to be paid for at some point, either with dramatically increased maintenance fees, or a special assessment in some form. Many Boards feel it is there job to keep maintenance fees low, and may not raise them for years. Unfortunately, their actual job is to properly maintain, protect, and preserve all of the common and limited common elements. They have a fiduciary duty to do so.

Henry Clark · Answer

A couple of ifs. If you have been in your current house as your primary residence for 2 years out of 5 sell it. No taxes. If you can live in the rental property property for two years as your primary residence then sell it. No taxes. ARM finance on a purchase from 2005 about to refi. Never Ever. Never. Buy a long term asset with short term financing. Unless it is with a temporary construction loan. Now you need to decide if you want to be in REI. Depends on your family and work situation for next steps.

Wesley W. · Answer

This is what jumped out at me.The context of your questions says to me that you are you thinking about this property as business with regard to return, but you are OPERATING it like a subsidy for your tenants!You can't have it both ways.If it were me, I would run the numbers again at market rents, add 10-15% maintenance/cap ex (because those chickens will be coming home to roost), add the 2% to your debt service and see where you are. Then, compare that return (or lack thereof) to a lump sum of proceeds from the sale and what return you could get with that. And don't forget the time/effort/liability "premium" for owning and managing this property versus a passive position in an equity or something.

Eliott Elias · Answer

You're going to break even if you sell, and lose money if you keep renting. There are too many high performing assets to keep this one, transition into single family or 2-4 units and make real cash flow.