should I keep or sell?

Question

my wife moved in with me after we got married 4 years ago. She had a condo she put 3.5% down in 2004. we have managed to raise the rent $25/month each year to now being $975. our PITI (including $90 in PMI) + association fees is $945.

We owe $98k on it & i'm guessing it's worth around $65k. We refinanced to a 5.1% 30-year fixed last year. Should we keep it? It turned from an owner occupied to an investment property after we refinanced last year. Thx!

Scott W. · Answer

thank you for your response, leon. depreciation is a catch 22...don't you have to add on depreciation of the property once you sell? yes, i can keep raising the rent & get rid of that PMI hopefully in 4 years, which will greater increase my spread.

Leon Y. · Answer

Hi Scott,

I would recommend keeping the property. Right now you are not losing too much on a monthly basis and you've got a great tenant. In a few years you'll be able to raise the rent enough to cover your expenses. Don't forget the benefits of depreciation and amortization. Always keep them if you can. Good luck.

Scott W. · Answer

& 1 more thing; remember my wife only put 3.5% down. hard to cash flow it when you do that near top of the market & paying $90/month PMI. So leverage is very high, which is good.

Bring cash to the table in 4 year & can certainly cash flow this much better.

Scott W. · Answer

steve, the refi did not require an appraisal last year; it was underwater so there's a government program which doesn't require an appraisal & can still refi.

lynn, i have not spoken to my lender about a SS. I live in Illinois. since it has now been converted to an investment property, I believe I would be responsible for the loss.

Steve Babiak · Answer

Not much principal reduction on a 30 year loan during the first 5 years or so - less than 5% even though that is like 15% of the loan duration.

If values look like they will be recovering, and your tenant is good (pays and keeps things in order at the unit), then keeping is probably your best bet.  You say you refi'd a year ago - how high did it appraise then vs the value you say now?  Seems like it might have dropped quite a bit in that short time.

Scott W. · Answer

my wife bought it for $109k in 2004; i'm guessing it's worth about 65k. in 4 years, i can revisit to get rid of the $90 PMI.  I currently have $120 towards monthly principal.

I have had 2 tenants & a total of 9 vacancy days. My total repair/upgrade/maintenance costs have been roughly $4000 (most being two new windows of $820). Has new furnace.

My current tenant renewed her lease another year; I inspected the property & she has kept it in immaculate condition - she doesn't even put pictures on the walls! So hopefully, that will help minimize costs if/when she moves out one day.

I don't mind the aggrevation; as a matter of fact, I enjoy being a landlord. I am learning how to get more handy & save on labor costs.

Lynn McGeein · Answer

Scott, have you spoken to your lender about a short sale?  I've read recently that it is a possibility with some lenders even if you are on time in payments, and I've also read that your credit score will not be affected too greatly if you are not late.  Some require you to be a few months late on payments to qualify, but even then, if you own your primary residence now and don't plan on major purchases in the next few years, it would still work as your credit would be back to normal in a few years.  If bank would agree to short sale without holding you responsible for the difference, it would probably be worth it to sell as the numbers don't seem to add up for keeping it as a profitable rental.  If they won't agree or want to hold you responsible for the balance, then if you can afford to hold it until prices rise a bit, that is probably best versus trying to come to closing with 30K.

Plus, check to see if your state is a non-recourse loan state, as if you can take the hit to your credit, you can walk away and the bank gets the condo, you lose your investment in it, but they have no right to come after you for any other funds, but only if it's a non-recourse state.  Not a lawyer or accountant, so look into it further if interested, but it's an option if you are in one of those states.

Tyler Byrnes · Answer

It depends on a number of factors. Do you have the money to make up the difference in the selling price and what you owe? How hard has it been to rent the property? If it rents easily and you have little turnover, it may be worth holding on to. Eventually it will be paid off and depending on your income level, you are able to take advantage of the operating expenses, depreciation, etc.

Maxine Valate · Answer

I agree with Michael D, the principal reduction is something you don't really see but would encourage me to keep it.

Michael D. · Answer

Well, to sell it you're going to have to come out of pocket $35-40k. The rent covers the mortgage, but I'm guessing you lose $200/mo in repairs and vacancy - but you know best in that regard. And there's the aggravation of being a landlord to consider as well. I assume you manage it yourself.

Is it worth spending $35,000 to rid yourself of a $200/mo drain plus aggravation? For me it wouldn't be. I'd keep it. Plus you get the principal reduction as well - another few hundred in your [paper] pocket each month.