To sell or not sell a "mistake"

16 Replies

My fiance and I bought a condo about a year ago because we wanted to stop renting. The only thing we could afford in our area, Everett, WA, was a condo in a less desirable area of town. It's large, almost 1400 sf for a 3 bedroom condo built in 2001 (so it has the blonde cabinets) in a gated community that is kept up well. We bought it for $210k with 10% down. It hasn't appreciated much, maybe $10k. We pay about $1100 in mortgage and... here's the kicker... $500 in HOAs. Our realtor estimates we could maybe get $10k out if we sold and we put $20k in, and of course because of interest we haven't paid much into equity this last year.

We bought the condo before we started thinking about being real estate investors, and were planning to stay for at least 5 years and then buy a SFH. Now, it seems that the condo was a bad idea because of the HOAs, and we want to get out. What we want to do is house hack, but we don't want to lose money on this condo, even though we don't want to live in it anymore (neighbors, the neighborhood - very industrial near Boeing, and they took away our ability to have a grill, but I suppose that's neither here nor there).

Now, we could either stay here, rent it, or sell it. The problem is that we are paying $1600 total expenses for the property (WSG is included in the HOA). I would like to rent it possibly, to keep from losing money on it and maybe generate some cash flow, but I'm not sure it's possible with the HOAs. I looked at what similar apartments are selling for (I've tried hunting for what other condos in my complex rent for with little success), and the range is pretty large, anywhere from $1700-2300. We have lesser finishes, but if we refaced the cabinets (since it's cheaper than replacing, and more durable than painting) and swapped the countertops (laminate) we could likely demand more rent, especially since it's a top-floor unit with vaulted ceilings, a huge master, and no shared walls.

So, do we upgrade and rent? Upgrade and sell? No upgrades and rent? No upgrades and sell? We are also scratching our heads about how to really find out what we could rent it for, and if we can only rent it for $1800, is $200 enough cash flow (self-managed) that it would be worth keeping the property?

Thank you!

Hi @Amy Jo Holweger ,

Welcome to the site. Also I will disclose that I do not know your area at all so consider anything I said just me throwing words on the screen that one little piece of data could make completely invalid any longer.

Personally I am not a fan of renting out places with an HOA. All it takes is a wild hair and you are dealing with nothing but pain and misery. My area has very few HOA's so perhaps I just have a jaded view and if I knew more I would like them. So my gut feeling just based on what you said would be to get it "freshened up" (6 panel doors, some nice paint, replace some carpets, remove clutter, heavy cleaning, clean ducts) and get as much as you can out of it. That $500 a month is a ton in the grand scheme on something you would own outright.

Just my 2 cents and good luck!

Eh.... you have a tough situation! Condos are a tough market for investment potential, mostly because often times the HOA fees make it nearly impossible to justify the financials.

You know your situation better than anyone else but:

1.) If you sell now, you'll likely break even (after commissions) and you can take your money and buy something else better suited for what you need.

2.) If you rent it, check Craigslist or Zillow for local rent ranges. Also check your condo docs for what is required for rental units in your complex. There might be restrictions. If you think you can only get $200/month extra from the rent... that's not a lot of room for error, should something go wrong or get broken and needs replacement. Might not be worth it.

It doesn't sounds like making the financial investment for upgrades whether you choose to sell or rent also makes sense.

I'd cut and bail, take your money and do something a little better with it. That's my opinion. Good luck!

Step 1 is to check the rules of the HOA - you may specifically be prohibited from renting out the condo.

You put $21k into the property, and it has appreciated another $10k, so you have ~$30k of equity in the condo. If you were you make $200/month in net cash flow, this is $2400/yr cash return on your $30k of equity, which is an 8% return (2.4k/30k), plus any tax benefits, appreciation, & principal paydown on the loan. What you have to decide, is this  return worth it to you? 

@Amy Jo Holweger what was the HOA when you bought it? Has it gone up a lot?

What’s the interest rate on the loan? Do you still have PMI? What’s the PMI cost per month? If you have a lot in PMI cost, then you could pay down the loan until that’s gonna and that may help your cash flow situation.

If I just do a quick split of the range you gave, and assume rent is 2000. At 1600 I’m expenses, that’s going to be tight. You could self manage and save there but that would be about all you could do.

@Ryan D. We can rent without restrictions - there’s no rental cap.

@Caleb Heimsoth Right when we bought the condo the HOAs increased by 15%. This year they went up 2%. PMI is $47 per month. The interest is 4.37%. What would a reasonable cash flow be?

@Amy Jo Holweger I’d say 200 bucks a month is fair after accounting for PM, mortgage, repairs, capex insurance and taxes 

@Amy Jo Holweger is the 1100, just your P/I or taxes and insurance too? I would try to get the top rent, if you can’t id probably sell and move on. 

@Caleb Heimsoth $1094 is the total we pay which includes mortgage, taxes and PMI. I'd think repairs would be a small expense to prepare for, I'd hope, barring the water heater going down, since the HOA handles exterior maintenance and the interior is well-kept.

then I'd probabmt rent it assuming you can get around 2300 and hope you break even. That HOA is gonna make it tough as it will only go higher

A lot of folks around this side of the state have a tough time finding even 200 a month cash flow, so that's not a terrible deal to hold onto. But you do run the risk of the HOA eating that up over time with increased fees. I think it should come down to what your other alternatives will look like.

This sounds like a decent opportunity to do a lease option. You might be able to find someone who can give you a decent down payment to effectively pull some cash out of the property. Then you can likely rent for a premium. If they back out, it'll hopefully have appreciated past your break-even point and you can sell. 

Profits from real estate come from cash flow, appreciation, and principal reduction. Cash flow is only one component. Determine your estimated IRR and compare that with investment alternatives.

Your cash flow will not be $ will be negative after insurance, management fees, repairs, turnover, cap ex.  Management fees should be calculated whether you self-manage or deserve to get paid for that work separately from the return on the investment.  Plus, stuff happens...move, marriage, divorce, kids, can't management, don't want to manage...and you want the property to support your life decisions.

We psychologically inflate the value of things that we already own over items we don't's called the endowment effect.  Let it goooooo, let it gooooo, can't hold you back any mooooore!

@Mike Dymski

"We psychologically inflate the value of things that we already own over items we don't's called the endowment effect"

That is so very true. Back in the day the guy that mentored me carried around a stamp it had "15%" on it. When he asked how much they thought it was worth he would put the stamp on it and show them the materials showing his recommended price. Which was always 15% lower than what they thought.

@Amy Jo Holweger

I think you need to sit down and crunch all the numbers.

You said it appreciated $10k in “about a year”, thats 4.8% on your purchase price, not bad. But you only put $20k in, thats a 50% gain on your equity. That seems great to me.

Plus you can have someone else pay your mortgage and cashflow $200/mth for about an 8% cash on cash return. I agree the maintenance costs should be well below a SFR.

Add to that the mortgage pay down and this seems far from a “mistake” to me.

You really should calculate your total return on what you have invested and I think you see the glass is half full. Real estate is a long game, if you want to get rich quick your going to have to look at something with far more risk.

I have not read all of the other posts, so forgive me if someone else has mentioned already. 

Also, I do not know your market or how HOA's work exactly, but have you thought about Airbnb?? First you would need to see if it would be allowable. But having Boeing close by, I bet they have contractors that come in and need short term rentals. If you rented it out for $200/night and averaged 15 nights a month, that would be $3000/mo. I have an RV that was just sitting in our shop and I decided to put it on Airbnb and we live in a more rural area, I get at least $1000/mo out of it.

I know there are a couple pod cast on here about Airbnb also..look those up :) Best of Luck!

@Amy Jo Holweger be conservative with rents when you run your numbers. $2300 in the "rougher part of town" sounds pretty high. Your vacancy is typically going to be higher too for a 3bd. And if you want good tenants with decent credit scores and high income they are not very likely going to be paying top dollar rent in the "rougher part of town". Just some food for thought. 

Strictly from a investment perspective this condo is a turkey.

You will not achieve positive cash flow therefor all you have is speculation on appreciation. The down side is if the market should turn during your ownership the value will drop and a condo will be the last to recover. You could be upside down and stuck with a negative cash flow property for a very long time. Or you would be forced to sell at a greater loss than you now face.

Although real estate investing at the best of times is high risk what you face with this property, in my opinion, is a 100% gamble.  

Holding this property is definatly not something I would plan on doing for very long in your shoes.

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