Condo in NW IL Burbs - Keep renting or sell it?

Question

I bought a 2 BR 2 BATH coach house in the NW burbs of Illinois in 2004. I was 24 at the time and it was my first home purchase. The coach house used to be my primary home. When I lived in it, I was renting out the 2nd bedroom to friends. Then, my wife moved in with me. When we started having kids we needed a bigger house, so we moved out and kept the unit and just rented it. I paid $140k in 2004 and owe $108,500k on the mortgage. The $108,500k includes the principal, interest, taxes, and insurance. It's renting for $1,100 per month. My monthly mortgage payment plus HOA fees total $930.13. This year, I've gotten really lucky and have not had any cap ex or repair services yet this year. However, in the event it does require some this year, I'm not cash flowing and more breaking even every month. The condo units in this complex lost a lot of value during the market crash and just now are going back up in value. The condo unit in the same building across from my unit with the same square footage and layout sold for $126k in June of this year. Five years ago, these units were only selling for $80k. My current very reliable tenants have hinted that they will be moving out when their lease ends in March of this year. The area is nice and is in within walking distance to a commuter train to Chicago. There are lots of good restaurants in the area and is close to the downtown area of the town. I'm just trying to determine if I have a rental property I should hold on to, or if I should I sell it and make the $20k in equity while I can and invest that money somewhere else. I'm a complete newbie and only have this one property that I'm renting. I'm in the process of learning how to make it possible to purchase more real estate and have some cash flowing properties for passive income. I'm hoping to purchase some single-family homes and rent them out in the next 5 years or so. Can you help with analyzing this rental?

Israel Torres · Answer

I'd say play the long game.  From the details of your post, you don't have enough equity built up to sell and acquire another property.  Your cost to sell is going to eat up a lot of your equity you have paid down.  One thing I did notice in your post is you purchased another property.  Not sure what your LTV is on that purchase but if that house has appreciated you might have some cash available in that house.  Have you considered that?

Ron Fletcher · Answer

Don't sell until Amazon makes their final decision on 2nd headquarters this year.  Schaumburg is suppossed to be

on the short list.  If it happens your property will be an easy rent and for good money

Ron Fletcher · Answer

Don't sell until Amazon makes their final decision on 2nd headquarters this year.  Schaumburg is suppossed to be

on the short list.  If it happens your property will be an easy rent and for good money.

George Skidis · Answer

Good luck whatever you choose.

Ryan Marker · Answer

@George Skidis The coach house does not include the land. I only own the “studs in” as you say. So I should say it’s a condo and not a coach home. My mortgage balance of 108,500 does include my real estate taxes and insurance. I pay escrow. I’ve seen other units renting for maybe $100 or $200 more per month. I think I could rent to new tenants for $1,200 per month making my monthy cash flow $269 not including vacancy or cap ex costs. The extra $100 per month would most likely just cover vacancy and cap ex costs so I’m still not cash flowing very well on this property. I’m leaning toward selling when my current tenants move.

Ryan Marker · Answer

@Patrice Boenzi Thank you, I will connect with you and take you up on your offer.

Bob Floss II · Answer

@Ryan Marker You have several factors going against you. Slim profit margin, any repairs costs have you going negative, upcoming vacancy costs will have you coming out of pocket, and the asset isn't appreciating in a way that will generate profit. I would recommend selling it.

George Skidis · Answer

Do not forget to include the equity you are building with each mortgage payment. Rent less expenses equals cash flow. You are correct in that a cash flow of $169.87 is not going to take you to the moon. However, barring any major issues that is over $2,000 a year.

Condos and coach houses are not the same thing. To me a coach house is a converted stable or garage. It could even be an old servants quarters. As such they are not good comps for one another. Does your coach house include land? Or is it part of a complex and you own everything from the studs in. If it is studs in it is a condo, even if it is a free standing unit.

Your mortgage balance of $105,500 does not include the real estate taxes or insurance. Your mortgage payment "can" include them if they are placed in escrow.

Without more information it would be hard for anyone to give you good advice. So do a Ben Franklin "T" analysis. On the left side of the T write the Pros of selling this property. On the Right side list the cons. Here are the first two PRO receive an equity payment at sale. Con lose $14,000 of value before calculating the costs of sale. 6% commission is another $7,560 Pro rata taxes at sale say $2,000 to $3,000. Tax stamps and other costs of sale $500 to $1,500.

With new tenants can come higher rents. What are the other Condos renting for. Would that increase your cash flow enough to make it more palatable?

In 1993 my first rental was a 3/1 on a slab. Monthly costs were Mortgage $280 Taxes $100 Insurance $60. Rent was $500 starting out. My positive cash flow was $80 a month. I was however on a 10 year note. I owned that house for until 2005 selling it at a huge profit just before the bubble burst.

Have you checked into refinancing at a lower rate or being relieved of paying PMI?

Real estate markets have highs and lows. Unless your neighborhood is deteriorating it may be advisable to hold out until prices are higher and your equity position is increased. Only you can make the decision.

If you sell for $126,000 and pay off the mortgage and closing costs you will only have 5 to 10 thousand to invest. Where are you going to invest $10,000 and get a 20% return on you investment?

Zack Karp · Answer

@Ryan Marker tough call.  The safe play is cash out now when you know that you can.  You can try to ride the wave a little while longer, but my gut says we are due a market correction coming soon.  Will that affect you?  Who knows.  There's no right or wrong answer right now, you won't know the right answer until hindsight.  But if you're not even breaking even factoring in vacancy or repairs, then that's probably your answer.  Sell, take the money, and re-invest into a better ROI.

Best of luck!

Patrice Boenzi · Answer

@ Ryan Marker I am an investor and Realtor with Fathom Realty in the great Chicagoland area. I would be happy to run some comps for you and let you know what your market is doing. A few months ago the townhouse/condo market was hot! Recently, we slowed down a bit (as usual), but see things picking up again for the fall market. I am seeing some areas are still a sellers's market while others have evened out a bit. Let me know how I can help.