Selling Hi-Rise Condo / Poor Returns

[refi]

I need some feedback and could really use some input and a push. I own a rental condo in a high-cost-of-living area with a lot of potential for growth, but I’m thinking I should sell it.

Stats:

• Condo Value: ~$775-800k
• Equity in Property: ~$500k
• Rent: $2,700 (could potentially push to $2,900)
• Cash Flow: $150/month
• 4% loan with 29 years left (originally a 40-year loan)

I’m already FIRE’d, so I don’t necessarily need this income to survive, but I’m considering the pros and cons.

Pros:

• It’s likely to go up in value in the long term, especially with a lot of major development in the area.
• The maintenance is low-touch, so it doesn’t require much effort.
• I have a 4% fixed-rate loan, which is a great deal in today’s market.

Cons:

• The Return on Equity (ROE) is terrible. I have about $500k in equity in the property, but I’m only cash flowing $150 per month, plus principal paydown.
• Appreciation has been much slower compared to single-family homes in the area, and the condo market pretty much flatlined during COVID. I feel like I could deploy this equity elsewhere for better returns.
• I would need to do some work to sell the property and there are frictional costs involved.

Here’s where I’m at: Every bone in my body tells me I should have sold my condo years ago, so kind of reaching out for a nudge to sell it now. The low returns make me feel I should do something, even though I don’t need the money. One other option is to push the rent up, but it still doesn’t seem like a great return.

Any feedback appreciated. Thanks!

 

[Texas Proud]

Who manages the tenents? I did not want to own RE and be a landlord... and paying someone else to manage was costly...

But, you have to put in appreciation to calculate your return... if it is low, then sell and redeploy...

 

[refi]

Who manages the tenents? I did not want to own RE and be a landlord... and paying someone else to manage was costly...

This is a good call out. The $150/mo cash flow does NOT include a PM, vacancy, or repairs (though given the location and quality of the unit, there isn't much in repairs or vacancy).

Appreciation has been pretty flatline for last five years, but over the 15 years of ownership, it's gone up 75%. so conservatively 4% appreciation YoY; nothing out of this world.

 

[Aerides]

I'd get out, you're one defaulter away from a negative proposition, and your money could do far better in a lower risk investment.

But I never like rentals for income, so take that fwiw.

 

[CardsFan]

I know nothing about investing in RE, or being a landlord, but I am curious how much equity the OP has actually invested.

$500 k in equity, I think, includes the loan value. How much did OP put down 11 years ago? If it was $50k with a $450 loan, then the current net on a sale right now would be around $300k, or 6x the invested down payment. Not bad for 11 years.

OTOH, if the down payment was $250k, current net would be about $500k, or 2x. not terrible, but not stellar.

In any event, I would sell because....(see first half of first sentence)

 

[RetiredHappy]

I hate rentals in the US and the depreciation re-capture when you sell the rental. Then, with COVID, tenants didn't have to pay rent. Your next renter may also decided to squat and not pay rent. I hate rentals, so I am biased. Sell, sell, sell!

 

[Another Reader]

I own SF rentals. I dislike condos because you have no control of expenses. If your tenant causes problems, you make enemies with your neighbors and the HOA. I would sell this and consider an exchange into a better property not encumbered by an HOA.

 

[ivinsfan]

I don't think your comment that it's likely to keep going up in value is realistic.

 

[Texas Proud]

This is a good call out. The $150/mo cash flow does NOT include a PM, vacancy, or repairs (though given the location and quality of the unit, there isn't much in repairs or vacancy).

Appreciation has been pretty flatline for last five years, but over the 15 years of ownership, it's gone up 75%. so conservatively 4% appreciation YoY; nothing out of this world.

Yep, I am on the sale side...

Invest in a balanced fund or S&P or total market and enjoy your life...

 

[FreeBear]

This is a good call out. The $150/mo cash flow does NOT include a PM, vacancy, or repairs (though given the location and quality of the unit, there isn't much in repairs or vacancy).

Appreciation has been pretty flatline for last five years, but over the 15 years of ownership, it's gone up 75%. so conservatively 4% appreciation YoY; nothing out of this world.

Long term the 4% appreciation is just covered by the 4% "drag" of the mortgage, and you've got a long way to go on the mortage. I'd be afraid of a 5 figure special assessment. Happened to me and a few other friends. In my situation, the financials looked decent going in, then the money was squandered over the years. It's possible the HOA dues are so high, special assessments may be rare, but that may explain the nearly non-existent cashflow. All risk, essentially no reward, no liquidity. Personally, I'd cash out and let the half mil in equity work for me in the market. Half a million in the market, say using 4% "rule", throwing off $20K inflation adjusted for 30 years, sound compelling to me. But I was never cut out to be a landlord...

 

[refi]

I would clarify for some posts that my actual return was significantly higher because it was leveraged. The property appreciated by 75%, but it was leveraged about 4.5x. My initial down payment was $100k, and I would make around $330-355k net, plus my principal back over 15 years on a sale. However, now that the value of the condo has increased, the return on equity is not as high, and the cash flow is still low.

Funny thing (or not so funny), if I had invested the money in an S&P 500 ETF when I bought the condo, I would have made more with zero work.

Anyway, this gives me something to think about. I'll probably sell and flip it to a place where I have PMs managing my properties and would be more "passive" or throw it in a broad market fund. I’ve noticed that most FIRE boards are less pro-real estate, especially in the FI stage, which makes sense.

 

[pb4uski]

You know your answer, you just have yet to internalize it. Less is more and invetment real estate, especiallly residential rentals, are a nuisance and you are just one bad tenant from a disaster.

I don't see the economics of the property as compelling at all. If you had that $500k of equity invested at 5% you would be yielding $25k a year or over $2k/month with negligible risk and effort.

 

[MarieIG]

If I were in that situation, based upon the information you provided, I would sell. I would also formulate a plan in advance regarding as to how I would deploy the proceeds.

 

[Koolau]

I think it's difficult to make enough money renting in a HCOL area - if you consider the current value of the property. IIRC the "rule of thumb" is to rent at something close to 1% of property value per month. You just can't charge that much rent in a HCOL area. I see this issue in the Islands. We rented a property for several years just to hold it until we could move. That part w*rked okay, but the return was pretty pathetic. YMMV

 

[aja8888]

Is the tax man in your future for capital gains on the eventual sale?

 

[HarveyS]

Your rent is waaaaaay too low for a property of that value. Sell it.

 

[Koolau]

Your rent is waaaaaay too low for a property of that value. Sell it.

I agree but that's what you can charge in HCOL areas. Our Condo units have been selling for $700K and when people rent them out instead of selling they get $2400 to $2600 for them. From that, you subtract almost $1000 HOA fees! So, WAY too low - but that's what you can get. Million dollar houses are renting for $3500. You do the math and YMMV.

 

[Lsbcal]

Depends a lot on what your want for your future life. Do the exercise on the financial side including maybe the full taxes picture.

Personally I think RE is a good long term investment for some but as we get older it becomes a life issue. I'd want to just enjoy life: travel, reduce risks, read books, do gardening, exercise ... breath and enjoy.

 

[Lorenzo]

Appreciation has been much slower compared to single-family homes in the area, and the condo market pretty much flatlined during COVID. I feel like I could deploy this equity elsewhere for better returns.

DW and I lived in such a condo for 22 years. We got tired of seeing single-family homes appreciate by 100% or more over that time while our condo appreciated by a mere 40%. We sold the condo and moved into a single-family home that we felt would appreciate faster than the condo. (If I had bought this home 22 years ago I could have afforded it plus the one next door!) If you want to continue in the rental business and can handle the cost of acquisition, consider selling the condo and buying a single-family home.

 

[Koolau]

DW and I lived in such a condo for 22 years. We got tired of seeing single-family homes appreciate by 100% or more over that time while our condo appreciated by a mere 40%. We sold the condo and moved into a single-family home that we felt would appreciate faster than the condo. (If I had bought this home 22 years ago I could have afforded it plus the one next door!) If you want to continue in the rental business and can handle the cost of acquisition, consider selling the condo and buying a single-family home.

Whether condos appreciate as fast as SFHs depends on the location (I mean general location.) Here is a site suggesting near parity at the time the figures were run (2017, I believe.) YMMV of course.

Hawaii Living – Condo Or Single-Family Home? - Oahu Real Estate Blog | Outstanding Info

Hawaii Living - Some astute Hawaii home buyers are selecting condos instead of single-family homes. Explore the pros and cons and discover some unique advantages of Honolulu condo living.

www.hawaiiliving.com

 

[refi]

If I were in that situation, based upon the information you provided, I would sell. I would also formulate a plan in advance regarding as to how I would deploy the proceeds.

Is the tax man in your future for capital gains on the eventual sale?

Will most likely 1031 to defer taxes into a multi-family in the market where I have good property management. Having good property management makes owning real estate passive (or much closer to it) vs. bad property management which makes going back to corporate work appealing.

 

[refi]

I agree but that's what you can charge in HCOL areas. Our Condo units have been selling for $700K and when people rent them out instead of selling they get $2400 to $2600 for them. From that, you subtract almost $1000 HOA fees! So, WAY too low - but that's what you can get. Million dollar houses are renting for $3500. You do the math and YMMV.

yes, these numbers sound about right in my area. The HOAs in the luxury condos really get you bad. In general Buy and Hold in VHCOL is difficult. Maybe if you can do Short Term Rentals, but usually condos don't allow that.

 

[refi]

DW and I lived in such a condo for 22 years. We got tired of seeing single-family homes appreciate by 100% or more over that time while our condo appreciated by a mere 40%. We sold the condo and moved into a single-family home that we felt would appreciate faster than the condo. (If I had bought this home 22 years ago I could have afforded it plus the one next door!) If you want to continue in the rental business and can handle the cost of acquisition, consider selling the condo and buying a single-family home.

Same feeling. If I had purchased a single family home at that same time, the house would be worth about 1.5-2m. Oh well, lesson learned and a lesson now I try to impart on to others

 

[Lorenzo]

Whether condos appreciate as fast as SFHs depends on the location (I mean general location.) Here is a site suggesting near parity at the time the figures were run (2017, I believe.) YMMV of course.

Hawaii Living – Condo Or Single-Family Home? - Oahu Real Estate Blog | Outstanding Info

Hawaii Living - Some astute Hawaii home buyers are selecting condos instead of single-family homes. Explore the pros and cons and discover some unique advantages of Honolulu condo living.

www.hawaiiliving.com

Real estate in Hawaii is a different animal, I think. In most places, the land will almost always appreciate more than what is built on it.

 

[Kings over Queens]

I'll throw in a vote for selling it too.

Personally, I'm not a fan of HOA's and condo's boards are facing scrutiny on a legislative front in terms of holding sufficient cash reserves for maintenance and improvements. I think it's going to get worse before it gets better.

Also, I don't have a landlord mindset...it's not my business and something I'm simply not wired for.

If it were me, I'd roll the proceeds into an S&P index fund or a REIT if you are looking for real estate exposure/diversity and not look back.