Advice: Sell or Rent my condo?

[wilkens21]

Hey Everyone...I could use some advice here as I'm a little confused as to what to do.

I have a condo in which it's pretty expensive to maintain but am hesitant to sell right now due to the declining market around me.

The apartment has about $380K left on the mortgage and I can probably sell it north of 450K at the moment (or around there).

So the expenses of the mortgage + maintainance/taxes are about $4000/month.

I can probably get a renter in there for $2600-$2700/month from what a real estate agent told me.

So the question is...is it worth you think to try to rent it out (as I can pretty much write off the taxes/maintainance fees being a landlord), and the rent itself would actually cover the mortgage amount.

Or is that a bad idea (since I need to outlay $4000/month regardless vs getting in about $2600) or I should just dump the apartment while I still can and eat the loss?

Thanks!

 

[Webzter]

Personally, I'd unload it as fast as I could if I were stuck at $4k a month with a $1400/month drain. Sure, you can recoup some taxes there, but run the numbers to see how big of a benefit it'd be. Unless you're 1000% sure that your local market, and not just your local market but your condo in your location, will appreciate nicely (nominal return on that investment versus an investment at $1400 a month), that's a hefty tax on hope.

On the other hand, refinancing into a new 30 year at current rates might make it come a lot closer to breaking even (depends in what you pay for HOA dues and taxes of course).

 

[arebelspy]

See if a refi can make you cash flow positive, otherwise sell, IMO.

 

[FreeAtLast]

It sounds like you can afford the $1400/month hit as you seem to have this option.

Negative cash flow over a long period time without a purpose or direction is not a good thing.

 

[Trawler]

Be sure to check out tax rules for deductabilty of losses as there are income paremeters as to wether you can take the rental losses over and above rental income. Keep in mind if you continue to live there the interest and RE taxes are deductable and If you rent it out I would also look at what it will cost you to live somewhere else. May not be much of a gain in monthly cash flow.
It looks like you would need a annual 3.7% appreciation on $450K value to breakeven on the $16,800 negative cash flow per year.

 

[jimnjana]

I'd dump it. If you decide to rent, you need to make sure with your condo association that you actually can rent it out. Many condo's limit the amount of rentals, so you may have to dump it anyway.

 

[rescueme]

I won't give my opinion (you know the old saying about opinions, don't your? ). However, here's a recent article on the subject:

More than 500 cities see more homes become rentals - USATODAY.com

Although your unit is a condo, it's still a "house", IMHO.

 

[Sandhog]

It all depends on your situation. If you are moving to another state, your property tax will be more since you are owning an investment property by renting.

If I were you, I would sell it and not bother with hassle of having a tenant unless you own a luxury condo in NY with long tax abatement.

 

[wilkens21]

thanks for the responses..

yeah i'm leaning towards dumping it...heavily... problem is that there are short sales going on below the 399K threshold in my building which is killing property prices.

I didn't mention that I am fortunate enough currently to have the liquidity to pay off the entire 380K loan, but i want to have enough for a down payment (+ probably renovation costs) for a one family home as we have 2 kids.

Oh well... we'll see if I can get a deal on that future home and then decide what to do from there...

 

[Lusitan]

Sell before you are underwater.

 

[Nords]

yeah i'm leaning towards dumping it...heavily... problem is that there are short sales going on below the 399K threshold in my building which is killing property prices.

You're asking which is better:
- a big injury which causes some damage and blood loss but from which you'll eventually heal, or
- a long, slow hemorrhage which can only be healed by a big injury which causes some more damage and more blood loss.

Of course you could keep the patient alive with lots of transfusions while hoping that everything heals on its own.

Cut your losses now. Or in 6-12 months you'll be telling us about these short sales going on below the $350K threshold along with how hard it is to find good tenants and how expensive property managers can be.

 

[Gone4Good]

I didn't mention that I am fortunate enough currently to have the liquidity to pay off the entire 380K loan, but i want to have enough for a down payment (+ probably renovation costs) for a one family home as we have 2 kids.

A couple of thoughts:

1) I wouldn't consider the principal portion of your mortgage payment in your calculation
2) If the balance of your monthly payment is still negative, you have to consider what kind of price appreciation you need to make holding on a worthwhile investment. It looks to me like you're talking about at least 3% per year just to stay even.
3) Compare your answer to #2 with the opportunity cost of not having that money otherwise invested.
4) Tenants do not normally increase the market value of a previously owner occupied property.
5) After three years of renting you'll lose the tax deduction for gains on the sale of your residence (assuming there are any gains to be had).
6) Depreciation expenses are clawed back by the tax man when the property is sold. It's possible for them to accumulate and push you into a higher tax bracket.
7) Remember that while you're selling residential housing in a down market, you'll also be buying residential housing in a down market. Net-net, I imagine you're going to be increasing your exposure to the housing market even if you sell the condo by buying a more expensive house.

 

[arebelspy]

Cut your losses now. Or in 6-12 months you'll be telling us about these short sales going on below the $350K threshold along with how hard it is to find good tenants and how expensive property managers can be.

+1

I hope this isn't the case, but I'd guess it's more likely than not.

 

[calmloki]

A couple of thoughts:

.....
5) After three years of renting you'll lose the tax deduction for gains on the sale of your residence (assuming there are any gains to be had).
.....

Thought the current law said if you rent your home out for 1 out of 5 years you can only avoid tax on 80% of profit, if 2 out of 5, 60% and that you must have lived in your home for 2 out of the last 5 years (think that's what you are addressing ).

 

[Gone4Good]

Thought the current law said if you rent your home out for 1 out of 5 years you can only avoid tax on 80% of profit, if 2 out of 5, 60% and that you must have lived in your home for 2 out of the last 5 years (think that's what you are addressing ).

That is only partly right. The correct part is that you need to have lived in the house for at least two of the previous five years. The amount of the gain you can exclude from taxes is not reduced by the time the property was used as a rental. You do have to pay taxes on any depreciation you were eligible to claim during that time period, however.

This is covered in IRS Pub 523

 

[calmloki]

Wish you were right, but see comprehensive example 3 in that IRS publication. Qualified versus non-qualified use effective 12/31/2008. Kinda puts the hurts to rental property owners who had in mind to move every two years into another rental property and sell and exclude gains.

Relevant part of that IRS example: (sorry - the formatting didn't come across - check comprehensive example 3 worksheet)

5. Gain or (loss) on the sale. Subtract line 4 from line 3. If this is a loss, stop here 5. 127,541 Part 2. Exclusion and Taxable Gain 6. Enter any depreciation allowed or allowable on the property for periods after May 6, 1997.
If none, enter -0- 6. 1,791 7. Subtract line 6 from line 5. If the result is less than zero, enter -0- 7. 125,750 8. Aggregate number of days of nonqualified use after 12/31/2008 8. 151 9. Number of days taxpayer owned the property 9. 4,273 10. Divide the amount on line 8 by the amount on line 9. Enter the result as a decimal (rounded to at least 3 places). But do not enter an amount greater than 1.00 10. .035 11. Gain allocated to nonqualified use. (Line 7 multiplied by line 10) 11. 4,401 12. Gain eligible for exclusion. Subtract line 11 from line 7. 12. 121,349 13. If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ).
If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. If you do
not qualify to exclude gain, enter -0- 13. 250,000 14. Exclusion. Enter the smaller of line 12 or line 13 14. 121,349

 

[Gone4Good]

Wish you were right, but see comprehensive example 3 in that IRS publication. Qualified versus non-qualified use effective 12/31/2008. \

It's important to read definitions . . .

Nonqualified Use
Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. In most cases, nonqualified use means any period in 2009 or later where neither you nor your spouse (or your former spouse) used the property as a main home with certain exceptions (see next).

Exceptions. A period of nonqualified use does not include:

1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;

 

[calmloki]

IRS example:

Emily White, a single person, bought a home on May 1, 1998. She lived in the home until May 31, 2008, when she moved out and put it up for rent. Emily rented her home until May 31, 2009. She moved back into the house and lived there until she sold it on January 11, 2010.

So if Emily had lived in her place from 1/10/95 to 1/10/97, then rented her place for the following three years before sale the rental use would have been an exception. Her order of use was expensive. Looks like the rule was designed to keep crafty landlords from moving into their rentals post hasty.

Thanks

 

[Gone4Good]

IRS example:

Emily White, a single person, bought a home on May 1, 1998. She lived in the home until May 31, 2008, when she moved out and put it up for rent. Emily rented her home until May 31, 2009. She moved back into the house and lived there until she sold it on January 11, 2010.

So if Emily had lived in her place from 1/10/95 to 1/10/97, then rented her place for the following three years before sale the rental use would have been an exception. Her order of use was expensive. Looks like the rule was designed to keep crafty landlords from moving into their rentals post hasty.

Thanks

Yes, the rule is designed to prevent people from moving out of the property, renting it out, moving back in and claiming the full exemption. It does not impact people who rent out the property and never move back in as long as they meet the 2 in 5 criteria.

Please consult a tax professional for further advice.

 

[kcowan]

7) Remember that while you're selling residential housing in a down market, you'll also be buying residential housing in a down market. Net-net, I imagine you're going to be increasing your exposure to the housing market even if you sell the condo by buying a more expensive house.

Always upgrade in a down market.

Just make sure you sell first before you make another offer (to avoid a short squeeze).

 

[Texas Proud]

First.... I do not see you eating a loss.... you have a gain from what you say...

Sure, you probably could have sold it for more before the crisis... but that just means you gain is not as much...



I will tell you what I did with my house.... sold it... probably down 12% from the high and 8% less than I was asking... I got one offer in one year... and I am not in a place that was overvalued like the coasts...

But, I would much rather have the money to invest somewhere else than be a landlord... not to mention the tax issues that people have mentioned...

 

[clifp]

Hey Everyone...I could use some advice here as I'm a little confused as to what to do.

I have a condo in which it's pretty expensive to maintain but am hesitant to sell right now due to the declining market around me.

The apartment has about $380K left on the mortgage and I can probably sell it north of 450K at the moment (or around there).

So the expenses of the mortgage + maintainance/taxes are about $4000/month.

!

This is what I don't understand why are your expenses 4K/month? A quick check with a mortgage calculator shows that payments in the 4.25% to 4.375% range is just under 2K/month. Even with a $400-$500/month for a condo fee and taxes of 5K a year, I would think your expenses would be just north of $3K/month. If you can rent it for 2600 then you are looking at 400 a month, which I think would be pretty close to break even after figuring the tax deductions and the amount of principal you are paying off.

 

[mexico]

It is always a lot more work renting a place, especially if you do not live close, than many people realize. With the numbers you are mentioning, I would sell it as fast as I could. You might not be able to get the 450 but who cares if you are above water.