How to exit a real estate investment with highest ROI?

[Manuel Bueno]

Dear All,

I would like some advice about my current investment. I own a condo in Washington DC. I bought it for $450K, paid 10% down and got a 30yr mortgage for 4.125% for the remaining amount ($405K).

I bought the condo as a means of building my asset base and attracted by high ROI thanks to leverage. I break even in terms of cash. The condo has a cap rate of about 5% ( originally thought it would be 6%, but was too optimistic) and increase in condo value is between 2%-3%/year.

My question to you is what to do now to maximize asset build-up? Right now I am making an ROI of 34% (if I am estimating it properly - details below).

a) Return through rent: 5% annual return over $450K – 4% interest rate over $405K = $6.3K, which is a 14% return over my investment ($45K)

b) Return thanks to value increase: The place is worth $450K. Throughout the year its value increases 2%, so it is now worth $459. The bank owns $405K, so I now own $59K. I made $9K, a 20% return over my investment ($45K)

As a result, in total I made a 34% Return on investment.

So - great, I am building my asset base nicely and should not use my savings to prepay principal to avoid lowering my ROI. Maybe I can put them in an index fund (let me know if you disagree!). However, if I try to exit this investment now, I will get hit by the real estate sale fees. I need to keep the condo for several years, until the value of the place builds up. The problem is that the ROI will fall with the years (because I need to pay back the principal too as per the terms of the loan). At some point I may as well refinance (to keep the ROI high), or exit and put the new assets in an index fund.

Does anyone have any ideas on how / when to make that decision?

Thanks!