Would like to know whether a certain property is a bad investment or not

[John Brewder]

I would like your opinions on whether a condo owned by a friend on mine is a bad investment or not. A friend of mine bought a three bedroom condominium in Laguna Niguel in Orange County a few miles from the ocean about five years ago for $490,000. Since the beginning he has only paid the interest and taxes on the place and none of the principal because he cannot afford anymore than the interest and taxes. Because he could not make the payments a few years ago the lender reduced the interest rate to just under 4% and extended the mortgage from thirty years to forty. The current payment, both interest and taxes, is $2600 per month. The condo also dropped in value when the bubble bursted by how much I don‘t know but probably a significant amount. The condo probably will not reach the original $490,000 value again because the reason that real estate values went so high was the ease of lending which probably won’t happen again because lending is more regulated now and lending institutions are not as heavily backed by the insurance industry so heavily hit when the bubble bursted as a result of the economic downswing. When doing the present value calculations of the mortgage payments on the condo and comparing that to rents of a comparable place in a comparable area the condo is almost definitely a better deal than renting in the long run but when compared to condos in a more reasonably priced area the difference in the total amount paid on interest is huge. Also, since my friend will probably only have one other person contributing to the mortgage payment throughout the length of the mortgage a two bedroom condo in a cheaper area makes even more investment sense. My friend says that he can short sell the condo and get away with not having to pay for the drop in value to get the place off his hands. I believe short selling the place and eventually buying a two bedroom condo in a cheaper but still nice area for around $300,000 is the best option out of keeping the condo he has, renting in the same area, or renting a two bedroom place in southern California in an area that is cheaper yet still pleasant. What do you think?