Should I keep a $500k condo on $2200 Rent because of Interest Rates

Question

Hey BP,

New to this forum and thankful to be a part of the community. I have a 2bd/2bath condo in DC that I purchased with my family back in 2019. The condo at the time was around $500k and we put down a large downpayment to keep our monthly mortgage low. In 2022, however, I got a new job that brought me overseas and thinking we may come back, we decided to rent it out temporarily. However, we will most likely never return to this house. Here are our numbers.

- Mortgage plus HOA ($1800)- Interest (3%)- Rent ($2200) will most likely raise rent to 2300 in July 2024. - Rate of appreciation is pretty low

The only pro we have going for us is the interest rate. But I don't know if it's worth maintaining. Would love to hear your thoughts.

Chris Seveney · Answer

@John Kim

Question we ask when people propose this is -

What are you going to do with the money? If you have a better investment opportunity then yes absolutely sell it. These decisions should look at whole picture of what will you do

It does not always need to be a “higher return” investment but also allocate to lower risk

Hope this helps

Josh Young · Answer

@John Kim you need to calculate your Return On Equity ((Cash Flow + Principle Paydown + Projected Appreciation)/Equity). Make sure you use net cash flow, so you are accounting for maintenance, repairs, cap ex, vacancy, and property management; based on the numbers you provided your net cash flow is probably less than $1k per year.  The 3% interest rate is an important part of this calculation because the principle paydown portion of your payment is significant, I'm going to guess you owe about $300k on your loan which would make it about $7k per year. The projected appreciation is tough to assign a value to, but if it's low maybe use 2%, so maybe $10k per year. So if you have $200k in equity and your return is $18k per year that's a 9% Return On Equity, or if you have $300k in equity that would be a 6% Return on Equity. So, you have to ask yourself, if you sold it, could you get a better return than that by investing in something else? There are also tax considerations, such as depreciation and IRS Section 121 Exclusion.

Steven De Lange · Answer

Hey John,

My mentor always told me to never sell any properties because the property will keep increasing in value over time.

And if you are thinking about buying more Real Estate, you can take the equity out of this property :)

Another advantage is the cashflow! Hope this helps :)

Eric Douglas · Answer

This 100%

Eric Douglas · Answer

I don't think fair to make this assessment yet. We don't know how much is left on the mortgage at 3%. This property is likely cashflowing pretty well even if its not in the best location for appreciation.

But to an earlier point, only focusing on "low interest rate" is the wrong way to look at this. An IRR needs to be ran on existing property to see what the return is on the existing property. That gives us something to compare to other opportunities in more desirable location where prices will be higher and financing costs will double compared to existing investment.

Jack Seiden · Answer

I don’t generally disagree with that, I just think, & it’s just my opinion that that submarket & condos especially in that sub market has multiple headwinds that make the juice just not worth the squeeze and a few hundred dollars of cash flow wouldn’t make the difference, he could even just take his cash out & put it in an money market & make 4-5%. Again just my opinion but I don’t think I’d make really any major investment decision over a few hundred a month in cash flow.

Jack Seiden · Answer

I’d probably lean selling in that case, h st which that area prices really revolve around is in rough shape, and in addition you kind of end up competing against the massive amount of new apartments/condo’s on the h st/noma/union market area, it’s possible it increases in price but 1031ing that into a Property in pg county or something seems like a much easier play/bet

Russell Brazil · Answer

You're looking at close to a push on price. Probably $525k, so after transfers youll get your money back out.

Condos are inversely cyclical to other assets though. They tend to heat up when rowhouses cool off and vice versa. So a couple months ago when rates were higher, rowhouses cooled and condos did better. Rates dropped though into the new year pushing more buyers away from condos and back to rowhouses.

John Kim · Answer

Hey Russel, it's in Kingman Park.

Jack Seiden · Answer

It really depends on where, the building itself, the hoa etc. The condo market in D.C. is probably one of the worst sub-markets in the country right now, so is that a reason to hold and hope it comes back? Or is it an asset class that going to continue to fall or even at best stagnate. Keep in mind it’s still significantly cheaper to rent a condo than buy the equivalent one right now which in theory could mean they have farther to fall otoh you have condo’s in the nations capital selling at like 2012 prices. Again would really depend on location, building, hoa regime & how much if any equity you have.

Should I keep a $500k condo on $2200 Rent because of Interest Rates

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