Sell It or Keep It?
Preface: I'm aware that I'm also fighting the emotional bias of this being my first home with my wife so my brain is making some justifications to keep it.
Back in 2006, long before I was smart about buying rental property, I bought a condo for my wife and I at the top of the market on the near north side of Chicago. The condo showed amazingly, had recently been on HGTV - my wife was hook, line, sinker and I was young, with a new, high paying job and said sure. When the market crashed, our condo lost over 100k in value overnight and when my wife and I needed a bigger place to start raising a family, I had no choice but to rent it out. Started renting it out in June 2011 and it's never been vacant - I've been able to find young, professional, low maintenance, highly quality tenants on day 1 ever since. While the condo has come up in value, it's no where near where it used to be. I currently lose about $150/month on it and while that seems bad, my tenants have been paying down over $8000/year in principal on the unit and I'm able to depreciate the value of the unit and my paper losses against my other, better performing rental properties, so while it's not ideal, it's not a complete loser. I've been talking to my accountant lately about selling it to replace it with better performing rental property but with 6% realtor fees and all, I'd have to pitch in about 30k just to sell it. Tonight as I thought about this, I was thinking about how much more would it take to turn this property around into a decent investment and I calculate about another 28k. So for a total of 56k, I could turn this property in a decent investment. I'm able to do this because I have a 1st and 2nd mortgage on the unit and could pay the 2nd mortgage off. Compared to my other rental properties, these numbers downright suck, but there is a part of me thinks there is a silver lining here. Bear with me :)
I could pay 30k and sell it and I:
- Lose $8k/year in principal pay down
- Stop losing $150/month
- Lose depreciation against my other rental properties
- Start making about $250/month
- Continue to pay down my principal by over $8k/year which will continue to increase with time
- Continue to depreciate the unit against my income and my other rental properties
This is where my brain doesn't know how to distill my own thoughts. :) Since I planned to sell it for $30k out of pocket, do I consider that part of the pay down for keeping it. Part of my brain says yes, but part of brain says no because if I was willing to pay $30k just to sell it, I would lose all benefits of the property but for an additional 28k, I continue to keep the following benefits:
- The delta between losing $150/month and making $250/month is $400 so my actual benefit is $4800/year
- $8000/year principal pay down
- For a total of $12,800/year
- Plus depreciation of the unit against this income and my other rental properties
$12.8k/$28k = 45.7%
Who in their right mind wouldn't pay 28K to keep an 12.8k benefit and the depreciation in a great, stable neighborhood with professional, low maintenance tenants? Even if we included the 30k in the pay down to keep it, the numbers are:
$12.8k/$56k = 22.8%
Still not too shabby.
Part of my brain says I can't keep the 8k principal pay down benefit in these equations because I still get this benefit today without paying anything down but if I sell, I lose this benefit so part of my brain says keep it in. If the property was high maintenance, I think this might be a easier decision. Can anyone help me better understand how to think about opportunity costs or cost/benefit analysis so I can make a good decision here?
Thanks again,
David
P.S - I'm an engineer by trade so I'm aware that I sometimes over analyze and over engineer things. :)