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Updated about 6 years ago on . Most recent reply

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Brook L.
  • Jersey City, NJ
4
Votes |
12
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I have a lot of built up equity- should i sell? rent out? etc?

Brook L.
  • Jersey City, NJ
Posted

Hi all! Long time lurker here. Looking for some feedback; what would you do in my situation?

I live in Jersey City, NJ in one bedroom condo that I bought in 2009 for $140k. I put down $40k initially, and refinanced in 2013 to a 20 year loan at 4%. My loan balance is now around $72k. My condo is worth around $210k - $250k currently.

I am married, and my wife and I do not live together currently, though we have a pretty good relationship. I guess you could say our relationship is very non-traditional in a lot of ways. We are both employed full time. I bought my condo prior to us getting married and her name is not on the deed. She lives in Brooklyn with a roommate and has a year lease; I would like to live closer to her and ultimately with her when the time is right for us. The reason we do not live together is very complicated and I don’t really want to get into it here. I also would like to set up our lives so we can be less stressed about money! All of this does factor into my decision. 

So, I think I am in a good position to get more involved in real estate. These are the options I’m thinking about:

  1. Move out of my condo and rent it out. Mortgage, taxes, insurance, and HOA all add up to about $1100. I think I can rent out my condo for somewhere in the range of $1250 - $1500. In this case, I could move closer to my wife. To rent a room in Brooklyn it would cost between $850-$1200.
  2. Sell my condo and buy another property in Hudson County and rent it out entirely. I could then move to Brooklyn and rent a room somewhere. In this case, I’d probably have a decent down payment to use, but would end up with a 30 year loan in all likelihood, and the interest rate would be higher than 4%. I would look for a property where I can get some cash flow. 
  3. Same as situation #2, except I would live in the space, and maybe not get cash flow, but most likely would financially benefit because I could end up paying less for my own housing costs than I would otherwise. I think also in this situation I would be a little less worried about bad tenants.

Some other things to consider:

  • I really want a back yard! It’s not necessary but would be nice.
  • I don’t think I’d want to buy a place that needed many or any renovations.
  • If I stay in NJ, my commute to and from will be a little easier and less stressful than it would be from Brooklyn. Riding a bus is easier than being packed into an over crowded subway like a sardine. 
  • If I bought another property, I could live in it for a while and then move to Brooklyn once I feel more comfortable with tenants I’ve found. 
  • I don’t really want to live with random people but will do it if it means my financial situation will benefit. 
  • I’m a newbie to the rental game. It might be better if I found a property manager, but it also might cost a lot of money, I haven’t really looked into that. 
  • Living close to my wife would be nice because then we can have more impromptu hangouts and dates. 
  • The real estate market is cooling in the US, but it’s hard to say how affected the NYC metro market will be, especially considering Amazon is building a headquarters in Queens.

Regardless, I think I’m losing out on money by continuing to live in my condo so I really need to make a decision.

Any feedback/ advice? Other options I haven’t considered? Thanks!!!

Most Popular Reply

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Llewelyn A.
  • Investor / Broker
  • Brooklyn, NY
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Llewelyn A.
  • Investor / Broker
  • Brooklyn, NY
Replied

@Brook L.

When you say you have a 20 year loan at 4%, I didn't want to make the assumption, but I am guessing it's a fixed rate until 2033?

If it is a fixed Rate, I put together a spreadsheet that can help do a bit of Analysis:

Just to get some sort of understanding, I like to put together a spreadsheet like the above.

For your Principal and Interest Payment (cell B5), I calculate it to be $545.

If you are paying $3k Annual Taxes and $900 Insurance plus $2,100 in HOA fees, your total out of pocket on a monthly bases is around $1,045.

The Chart on the right is your Mortgage Schedule of Payments on a monthly basis. In Column P, you will see that every Payment you make, your Mortgage Balance is going down, which adds to your Equity (or net worth), which is a GOOD THING! Note that the Mortgage Pay Down is accelerating and starts at $245 in your first payment.

Here is a snap shot of the Mortgage Schedule, but closer to today's date:

Note that in 1/1/2019, I calculated that you would increase the Mortgage Pay Down to $312 from the initial $245 where you started, on a per month basis.

The end point of this mortgage will be that it will disappear in 2033.

That means that, if you can rent out the apt now, you will receive a cash flow of $150 to $350, as you indicated.

BUT, if you consider that you are making an additional $300 or so per month from your Mortgage Pay Down, then you will actually be making $450 to $750 per month.

By the year 2033, that Mortgage Disappears and you will increase your cash flow by $545 since you will no longer need it pay the Mortgage.

Now that we did this kind of analysis, if you did choose to sell and buy a new property, you were correct in the assumption that you will NOT get the same Interest rate.

What is worse is that you will be paying 2 other additional closing costs, one as the Seller and the other as the Buyer.

I would consider the following:

1) Try to take out a HELOC for the remaining Equity

2) Rent the Condo at some point where it makes sense for you

3) With the HELOC, you can tap that resource when you are ready for a new Investment

I have been doing something similar for the past 21 years, but mostly on the Investment end of it (for instance, Buy in an LLC, get a Line of Credit versus a HELOC).

The above strategy also lets you keep the Condo which you are intimately familiar with it, so you know it's problems and it's pluses. You know the neighborhood and it's rental value. The research you need to do is minimal, but you will need to know how to be a landlord.

What easier way to start of as a Landlord than your own Condo?

I like to tell new Investors that your first Investment should be the most simplest and easiest one to do which is pretty much guaranteed to make money.

If you wind up with a bad investment your first time going in, you will quickly lose your motivation.

So consider the above as an option.

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