I have some cash (around 80k) on hand (on top of my emergency funds) that I am considering using to buy a rental property to generate some cash flow. I own the condo which I am living in currently with a ~100k mortgage with a 4% rate. I am trying to figure out the smartest investment move. A few things to consider:
a) I have built around 180-200k equity in my condo
b) the HOA fees are somewhat high in this community, ~400/month.
c) This condo is in an area with growth potential as a new project (The Dallas Midtown project) is going to start soon (it has been getting delayed for quite a few years so not completely confident in it actually starting).
d) I would like to move out of this condo in the next 6 months (potentially out of state)
So I am considering these options and would love some feedback:
1) Sell the condo, take the equity 150-200k, add my 80-100K on top and buy a SFH cash and rent it out, and personally live in a smaller apartment (rent would be similar to what I am paying on my mortgage now) so technically whatever I make from the rental property would be my cash flow .
2) Keep the condo and rent it out, cash flow will not be huge, maybe $400-$500 after expenses (due to high HOA fees), and take out another mortgage with the current high interest rates, use the 80k as down payment for a second rental property (unsure what the numbers would be given the mortgage payment, probably not a whole lot) and rent an apt to live in.
3) Any other ideas/hacks I am not thinking about? Take a loan from 401k? buy a bigger property as my primary residence, live for 6 months and then rent it out?
Sounds like you don't need the money terribly so hear's a conservative strategy. Keep condo as a rental. Put half of the 80k into a new primary in a nice area. Hold the 40k for operating expenses and lifestyle.
I have some cash (around 80k) on hand (on top of my emergency funds) that I am considering using to buy a rental property to generate some cash flow. I own the condo which I am living in currently with a ~100k mortgage with a 4% rate. I am trying to figure out the smartest investment move. A few things to consider:
a) I have built around 180-200k equity in my condo
b) the HOA fees are somewhat high in this community, ~400/month.
c) This condo is in an area with growth potential as a new project (The Dallas Midtown project) is going to start soon (it has been getting delayed for quite a few years so not completely confident in it actually starting).
d) I would like to move out of this condo in the next 6 months (potentially out of state)
So I am considering these options and would love some feedback:
1) Sell the condo, take the equity 150-200k, add my 80-100K on top and buy a SFH cash and rent it out, and personally live in a smaller apartment (rent would be similar to what I am paying on my mortgage now) so technically whatever I make from the rental property would be my cash flow .
2) Keep the condo and rent it out, cash flow will not be huge, maybe $400-$500 after expenses (due to high HOA fees), and take out another mortgage with the current high interest rates, use the 80k as down payment for a second rental property (unsure what the numbers would be given the mortgage payment, probably not a whole lot) and rent an apt to live in.
3) Any other ideas/hacks I am not thinking about? Take a loan from 401k? buy a bigger property as my primary residence, live for 6 months and then rent it out?
Lots to unpack there. First, before you do anything, make sure what your options are on your condo. Some don't allow rentals, some only after certain number of years, and some limit the number of rentals based on a percentage, and some get involved in screening your tenants. All those things may drive your decision before you even get to the next one. HOA's are pretty much never set up in a landlord's favor, AND you get to pay them monthly for that privilege!
Selling your condo comes with a tax consequence and you have a descent rate on your loan, so that is a double whammy there, losing your rate and paying $20-30,000 in capital gains.
If rates were lower a Heloc might be worth considering , but not the best idea right now…. Plus you are buying into a high market with high interest rates. None of that is good either.
If you are going to make a move I would think about renting out the condo. (Presuming you can), and taking out a loan on a personal property you could live in (you’ll get a lower interest rate that way -although still a high one), and then down the line refi it when the rates get better.
But truthfully there’s not a great move to make when rates and properties are expensive… so really the BEST move would be to sit tight for the next year or so, let your $80,000 collect 5% interest in a high yield savings account and pull the trigger when rates improve. This lets you avoid $3-5,000 in refi costs by not taking out a high interest loan now.
Homeowner · Portland, OR · Member since 2023 · 15 posts · 3 votes
3y
I believe if you are willing to relocate to a market that is cheaper than Dallas you could make either option work.
I dont think you have to pay capital gains tax on the condo since it was your personal residence. You could potentially take all the proceeds from the sale tax free and put it into a better property that has no HOA fee.
The HOA fee may be costing you more than the high rates right now
Investor · Flower Mound, TX · Member since 2016 · 245 posts · 192 votes
3y
In my experience, condos usually lag single family homes when it comes to cash flow and appreciation.
When I'm considering options like yours (sell or keep), I try to weigh the opportunity cost of the equity deployed. In this case you have $150-200k invested in the condo, if you keep the condo how much profit will you make in 5-10 years? If you sell the condo and redeploy that capital into other investments (maybe 2 single family rentals) will that expected return be greater than the first option?
Real Estate Agent · Arlington, TX · Member since 2016 · 151 posts · 54 votes
3y
If your goals are to build a rental portfolio I would keep the property. You can always access the equity with HELOC if you need the funds. Check with your HOA about renting in your association. Maybe you consider doing a MTR or STR for higher cash flow? If you need help renting it/selling it, I would be happy to help provide some further info on current market financials.
Sounds like you don't need the money terribly so hear's a conservative strategy. Keep condo as a rental. Put half of the 80k into a new primary in a nice area. Hold the 40k for operating expenses and lifestyle.
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
3y
#1 Sell it. Condos are rarely good investments as rentals. Nice places to live, but not good for rentals....for a dozen or more reasons....HOA dues kill your returns, renting these can cause all kinds of neighborly issues...like leaving trash out on the wrong day, keeping stuff on balconies when they're not supposed to, noise, parking in the wrong spots and so many more issues you can't control. Like leaks from above or fires from below that damage your unit and can cause you issues with tenants or cause you to have trouble with neighbors.
#2 Midtown may never happen. The best laid development plans if not in place and financing secured will be difficult. Heck they even had a hard time with demo, so construction will be even more difficult. I've seen the plans for years...what at least 4-5 years and maybe longer. Forgot what all they want to build there, but office is probably not going to happen for several years. Condo financing for new build is tough to impossible to get. I'd be shocked if they can get hotel financing. Multifamily probably doesn't pencil today....so what is left is perhaps either some retail in a different format than the old valley view mall....or maybe a giant warehouse district. Probably not zoned for that, not at all what P&Z probably wants there, but developers seem to be slipping big warehouses in everywhere including some very unusual spots. No matter what goes in there, it is all probably years away even if they could start construction TODAY. Honestly though I don't think that does much for values around there. Wishful think for many on north side of 635, but if anything maybe it hurts values to put an extra 5000 vehicles on the road around there.
#3 There are more and more issues with condos it seems that make many harder to finance. That limits your exit strategies. Can't tell you how many lawsuits there are right now from 2021 freeze and those lawsuits create financing issues for buyers or their lenders. For years Dallas condos have often deferred maintenance. If we start implementing laws like they have in Florida after the mid-rise collapse, that will make selling even more troublesome.
#4 As time goes on if you don't have a very proactive HOA board, this also creates issues. Lenders don't like to see too many investors or rentals. So that is catch 22 for you. Turn your owner occupied unit into a rental and that could put you over the allowed number of rentals for your development and then bingo..you can only sell to cash buyers, which tend to be investors and the cycle continues....and investors never want to pay full price. If your board hasn't already limited the number or rentals to avoid this, then maybe at some point they implement new rules....maybe they freeze the number of rentals and you can't rent it. I've also seen some places where they allow 20 rentals max, so if 21 owners want to rent, then they rotate the rentals. So here you are renting it out for the next 4 years, but year 5 it goes vacant and they make you go on a waiting list and have to leave it vacant for a year or 2 or 3 before you can rent it again. There goes all your profit....and in them meantime you're paying the HOA dues, so double whammy.
#5 I've seen HOAs make all kinds of rules against renters...like owners can have pets, but not renters. Probably 80% of the renters have pets....so if something like that gets implemented you could get hurt...longer vacancy periods, etc...or they get really belligerent and want to approve all renters and see their background checks and things like that, which may or may not be illegal but when they start to have pitchfork mob mentality you pay the price. Typically you can't share credit and background reports....they're for your eyes only. So then you get stuck between the HOA rule and the law. What if they implement the rule and only meet once every 2 months...so your place is vacant, you get an app that you need approved, but they don't meet for two months. Are you going to sit with it vacant paying HOA dues, taxes, insurance, utilities, and will your tenant wait 2-3 months for approval and movein?
What if your HOA decides to sue the insurance company for water damage after the 2021 freeze and they can't get a court date until 2024? So then you can't sell with financing because no lender wants to take on a property involved in unlimited unresolved lawsuits. Plenty of this going on in Dallas right now. Maybe not your place, but what happens if we get the same freeze next winter?
Single family much of this you have much more control over. I say get on the board or start going to the meetings. Push them to get the building FHA approved. That may mean reserves, that may mean budgets, that may mean some repairs.....but if you can get that building approved, it opens you up to a whole world of alternative buyers. You have six months. GO.
Borrowing from 401k is super tempting...but these days I don't recommend it. Save or borrow outside of it....maybe from a life insurance policy vs 401k. The trouble with 401k is you have six months to repay without penalty if you are no longer with the company...fired, quit, they go out of business. So you either perhaps have to scramble to repay it or pay big taxes and penalties on it. That also never happens at a great time...Covid was example, people get fired..so now have this big bill, but couldn't get hired for a few months...so all the cards crash at once.
If you have stock account, potentially you could borrow margin again it. Might be cheaper than a mortgage.
Not 100% sure about this, but you probably loose the personal residence tax exemption if you turn it into a rental. Check with your CPA about this. So selling today you may have a nice tax free gain, but turn it into a rental and sell 5 years from now, you just bought yourself a nice big tax bill for long term gains.
Wrap up...sell the condo....roll it into another property if you can...either one you will live in or investment property.
Thank you for your feedback. I am allowed to rent my condo unit out but you do make a good point, I need to look more carefully into all the "rules" imposed by the HOA with regards to renting out a unit.
I do not think I would be subject to capital gains tax as the profits won't exceed 250k and I was using this unit as my primary residence, however to your point the high rates and expensive prices do make me hesitate in wanting to purchase now vs waiting another year or so. Appreciate your input.
Thanks for your input Andrew. You are correct, I would be exempt from capital gains tax since profit would not exceed 250k and the unit is my primary residence. The main reason I am considering keeping the unit even with the high HOA is the growth potential due to this major development: https://dallasinnovates.com/va...
Thank you so much for your input Tyler. You make a very good point. I think I need to start looking at potential properties I can buy with the proceeds of the sale of my condo + financing and do some projections as far as returns on both options.
Thank you for your input Jennifer! I do plan on building a rental portfolio. I need to check the HOA rules around rentals to see what is allowed, thanks for the idea around MTRs and STRs. I will definitely keep you in mind for when I start looking into selling/renting.
Thanks for your input William! You are correct, I really do not need the money, I just want to start generating some cash flow (to be reinvested in the stock market/RE). Despite the high interest rates right now, this strategy seems to be what most are recommending (taking a loan out on a nicer primary and renting the condo out).
Thanks for your input William! You are correct, I really do not need the money, I just want to start generating some cash flow (to be reinvested in the stock market/RE). Despite the high interest rates right now, this strategy seems to be what most are recommending (taking a loan out on a nicer primary and renting the condo out).
Thank you so much Bruce for your detailed reply. I agree, HOAs are a major pain. While I do like not worrying about pool and lawn and roof maintenance for my residence, I can see it becoming a major hurdle if I were to turn this unit into a rental.
And don't even get me started on the Midtown project.... quite frankly I think if development does not start by Jan/Feb 2024 I will lose all hope for that ever actually happening.
I will have to do some number crunching to see what I can get if I were to sell this and roll the profits into a SFH in terms of cash flow (with and without financing) and go from there. If I were to turn the condo into a rental and sell down the line in a few years, would I not be able to utilize the 1031 exchange to defer the cap gain taxes?
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
3y
@Shahrzad Amin You can use the 1031, but then you have to keep rolling and rolling into bigger properties to avoid paying the capital gains taxes. 1031 can be a PIA, especially right now. Maybe easy to sell, but not as easy to find the replacement property. Probably better tax wise now to sell and profit with no taxes I imagine. We never know how that will play out.