First condo... Does it make sense to keep as rental?

Question

First post from a very longtime lurker. Will try and keep it short and sweet... looking for advice for anyone who can offer!

I bought my first condo this past january (8 months ago). It is a 2 bed 1 bath + office apartment in an old but well maintained building. I put 5% down on 110,000, so $5500. HOA is $175 per month.

This property is in a great location... located in a large urban park in a historic neighborhood currently undergoing serious gentrification (hundreds of millions in multiple residential/commercial developments all over the neighborhood, both city and private money). It's located 3 minutes from downtown in a city with a large fortune 500 presence. 5 minutes from the local university, great hospitals, etc. I could sell it as is for 120k. Other condos in my unit are selling within a week of being on the market 120k-125k, and I have a larger and nicer unit.

I can rent this property now for 1250-1350 per month. After taking into account vacancy, repairs, capex I'd be breaking even until my PMI drops at 20% equity. After the PMI drops, I'd cash flow only 140 per month (again after all expenditures).

I know I can't bet on appreciation, but am I wrong in thinking it could be a good idea to hang onto this place for a bit? My fiancee and I are looking into moving in with her parents soon to build up some savings, and we plan to move onto a multifamily with our next purchase. We happen to live in a strong market with a lot of momentum. I THINK this property will appreciate significantly with what is going on in the neighborhood, but even if it doesn't, I'm confident I can have it rented or sell with a low chance the value dipping below what I paid.

I'm not trying to aggressively expand right now... I'm still working on my degree and working on increasing my income. I guess I'm ok with losing on the 10k I could make from a sale right now if the market turns to take the chance on further appreciation and rising rents. Plus with looking to make the move into multifamily with a purchase next summer, I see this as pretty low risk. I plan on keeping this as the only condo in my portfolio (long-term), as I understand the rarity of a good condo investment. If I wasn't so confident with the development going on in the neighborhood, I'd sell this right now, and that makes me afraid I'm being too optimistic. I'm not emotionally attached to the property or anything... I actually hate it and want to move, but it is certainly a nice unit.

Any thoughts/advice for an inexperienced investor? Thanks!

Michael Dang · Answer

Cash flow is key and look for property that will cash flow day 1.  Don't speculate.  It's going to take you a long while to meet the 20% equity mark to drop PMI.

Ray Harrell · Answer

#1, why is your mortgage payment on a $110,000 property $1,250? Should be close to $1,000 including HOA.

#2, if the area is improving like you said, then even if you're breaking even, it makes sense to keep it and rent it.

#3, if other, smaller units are selling in a week at $125K, see if you can market yours for $135K-$140K. At that price you can break even (down payment, closing costs, improvements, etc.) and get totally out of it.

Eric Adobo · Answer

🔢 S look solid to me.

He only has $5,000 into this deal.

Silly to sell. After 8 months?

Michael Dang · Answer

This is just my opinion.  I think you should study the submarket and who your competitors are.  Factor in rental increase and expense increase in your projections.  Since this is a condo, your comps are the other condos in the complex and within a mile radius.  Depending on your investment threshold, calculate a high single digit or double digit Cash on Cash return.

Dick Stevens · Answer

This is a personal decision.  But I would sell it because I don’t want rentals that don’t have strong monthly cash flow.  Even if it appreciates down the line, you will have to factor in capital gains tax to see if it’s really worth it.  If your goal is to buy a multi, id sell the condo and use the cash to put your goal of owning a multi on a faster track.

If you keep it, make sure you fully understand any HOA requirements or limitations on rentals.

Elijah Proffitt · Answer

Thanks for the advice.

@Michael Dang - I'm concerned I'm speculating too much. Would you say taking into account my market's trends when it comes to rising rents, property values, and moving trends is pure speculation or a legitimate investment analysis? Do you have advice on where to draw the line, or to go off of pure numbers from day one? Because I initially purchased this apartment for me to live in, I wasn't doing too much thinking on it as a potential rental unit at the time. The thought had crossed my mind but nothing serious.

@Ray Harrell -

1. Mortgage payment is $930... taxes and insurance are escrowed, plus $120 of that is PMI. Also have a $175 HOA payment. So, right around $1100 per month is what I pay to live here now (not including utilities). After PMI, it'll be $980, which is right around your 1k number. If I rent at $1250 I'm cash flowing $150 per month but that would all go into savings for variable expenses, so that's why I'm saying I'd break even. Apologies if I came off unclear... could've worded things better.

2. This is what I'm thinking.

3. I would look into selling if I could get $135k-$140k but I think it's too early to bring in that much... will have to do more research. Have been considering putting it on the market for around $135k just because other units have pending offers within a couple of days of being on market.

First condo... Does it make sense to keep as rental?

Most Popular Reply