Help a Reader: What to Do with a Condo

Here's a question I recently received from a reader:

We own a condo, but we had to relocate to another city two years ago. Today we are renting in the new city, and after almost two years we haven't sold the condo yet. We did rent the condo, and we have tried to sell it while is rented. Mission impossible!

At this moment, we do not know if we should keep the condo (rented) or sell it for less that we owe to the bank. The offers that we have received are really low (less that we have to pay the bank) and the mortgage is not covered by the rent. We still have to put extra money to pay the mortgage. What should we do...keep the condo rented until market recovers or sell it, even for less money that we owe to the bank?

What's your advice?

Comments

[Budgeting in the Fun Stuff]

I'm big on reducing stress. To me, it would be less stressful to sell it for a loss and move on with my life than to keep it and constantly be pouring smaller amounts into it.

[jim]

If they can handle the financial loss of selling it now then I'd just sell it and be done with it. You can't expect real estate to go up significantly anytime soon and you're losing money in the meantime.

But it depends on the exact details. If they have $100k income, $50k in the bank and the condo loses $500 a month and would sell at a loss of $5k then I'd say sell it yesterday. On the other hand if they are looking at a $50k loss they can't even afford and the condo rents easily and only loses $25 a month then they might want to hang onto it a while.

[wanzman]

Ditto what Jim said.

It just depends how large of a loss they would take by selling, and how large the monthly cash flow short fall is while renting the condo.

[Matt]

Location,Location,Location. If you are in a location where you will not see again for some time,(Michigan) you will need to cut your losses and move on. There are way to many people I know that are upsidedown on there mortgage that it will be very hard to swollow.

But it is also in the details. How much you can contribute, can you survive the extra $$ and who knows what else. You just may be delaying the inevideable.

Sorry to break the news.

[Steve]

I'm in the same situation as the orginial poster.

For what it's worth, my pretax per month cash flow is almost -$800, however after you factor in the tax benefits and the principal payments, my loss is reduced to $200 per month.

I consider this $200/month loss to be low enough to hold on to my condo until the market eventually turns around. It is my assumption that my cash flow will only get closer to $0, or even positive before I sell.

I've been trying to look at my condo as a long term rental so it will eventually start making me money and cancel out any losses I've had.

I'm certainly interested in what others would do in my (and the original poster's) situation.

[KH]

I agree about "location"--that means everything. If your condo is in manahattan or a desireable inner city or vacation location (not florida unless it is in miami and right on the water), hang onto it because it will eventually be worth more. If not--you are dreaming about its value coming back and you should just sell it now.

Something that no one's mentioned yet---a condo (particularly if you rent it out) will physically deteriorate significantly in 4-5 years to the point where you'd have to put in new carpets and kitchen counters, renovate the bathroom, to get it to look good enought to sell well. An old run-down condo has never been a hot property, even at the top of the bubble. So if you hang onto it, you should plan on that, too.

[sunil]

another thing to consider are tax implications. not saying you should max taxes the primary basis for decision making, but you may also want to consider depreciation/rental related tax deductions into the equation when weighing things out.

[Ed]

Almost the same situation here except out condo is bringing us positive cashflow in excess of $100 per month after all expenses are paid, including the crazy 10% property management fees. Who knows how long it will take for the real estate market to recover where our condo is, Orlando, but as of right now simply renting it has a $300+ impact to our net worth. (positive cash flow + pricipal reduction + federal and state tax benefit)

My advice is to actually take a look at the overall impact this has on your net worth. Although it may be cash out out of pocket, it still can have a positive impact on your net worth.... Plus rents can only go up in the future. The market is saturated right now so rents are much lower than they have been in the past.

[Michelle Wachowski]

Take the loss . . . and keep your life simpler, with fewer hassles. Difficult to manage renters and property maintenance . . . let alone from another city.

Put the money into a venture that will appreciate faster than the slow-moving, presumably eventually recovering housing market.

For example, a relative put $1M into a hedge fund that earned him 9% last MONTH and 3% the month before. Net: $120K in two months!

[MSC]

I agree with Steve and Ed, but also Budgeting the Fun Stuff who points out the value of stress. Money isn't always the top priority. Patience will pay off in a few more years, so if your cash flow is about neutral and the effort is minimal, hold out for prices to go back up.

A lot has to do with location, population growth, overall local economy, and the inventory of similar properties which can be affected by the rate of building permits, or the exit of builders and developers due to bankruptcy.

[Brian]

I agree with Jim above, take a look at the whole picture first. Personally, I look at a home as the place I live in whether you rent or own and any other residences as investments. I view that investment properties should be (at minimum) -5% neutral cash flow as an acceptable cost. For example, the mortgage and all other expenses = $2000/month, so the -5% neutral cost flow point is $100. This means that I am comfortable with paying $100 out of pocket to keep the investment property. Any more and I find it to be a losing investment.

just my opinion...

[Stephan]

I personally would sell it, reduce the stress, and move on. as posted above, you have no idea when the market will improve, you could wait 10 years before you will see a profit on it, or the market could go even lower in your area. Elimiante the guessing game, take the loss, and you will be able to sleep better at night after a while.

[Concojones]

"the mortgage is not covered by the rent. We still have to put extra money to pay the mortgage"

Even if your cashflow is negative, it may still be a good investment worth holding on to. After all, you're paying off a piece of property (that will be yours one day).

To determine whether it's a good investment or not, compare your only your interest (e.g. 5%) on the principal to the rent that's flowing in. Add the costs and tax breaks and now you actually have something to make a decision on. If the picture is still negative, the question is whether to wait for the bear market to end... which is tough, it's like predicting the stock market. I'd look at it from a historical perspective: are house prices in the area typically 3-5x household income (or whatever the criterion is). If not (yet), you might want to sell before prices fall further.