rent this condo out or sell it?

Question

I've moved in with my partner & am considering whether to rent my condo out, which is just a few miles away. Because the condo is so close I think it would be fairly easy to deal with. Here are some numbers:

$119,450 balance on a 2.5% fixed rate mortgage with 179 payments remaining (I have no other debt). The condo is valued at $230,000 (close to what I originally paid for it).
The monthly payment is $1,375... approx. $750 of that payment goes towards condo HOA dues, property taxes, mortgage interest, & hazard insurance... the rest goes towards principal.
The condo would rent for $1,500/month (I've realistically compared it to similar condos).

I don't anticipate any major repairs/upgrades anytime soon... the HVAC, appliances, & windows were recently replaced, there's new paint throughout, & refinished hardwood floors.

Does it make sense to rent the condo out or sell it?

Any feedback would be much appreciated.

David Cole · Answer

Ok, thanks again for the feedback.  I have most of my net worth invested in stocks and bonds, so renting this condo out will be a way to diversify.  Going forward, a 7% ROI (on principal paydown) could very well be higher than the return on stocks (& certainly bonds).  And if I'm careful about selecting good tenants, it will involve less risk than investing in stocks.

Kevin Siedlecki · Answer

@David Cole - in that case, I would put it in the stock market, unless your play is for market appreciation. The kind of speculation is pretty universally discouraged here, since one of the benefits of buy and hold rentals is that they are much more stable than stocks. Just understand going in that you are probably going to be putting money into the house every year - hopefully not a lot - and that your strategy relies on appreciation. If that's a risk you're willing to take, then go for it.

David Cole · Answer

@Kevin Siedlecki  Thank you for the feedback.  I make 90k a year and am not really concerned about cash flow... it's not important to me.  Rather, I am interested in using other people's money to build my net worth while I'm living in the area.  Your recommendation of using the $100k in equity to buy 2-3 properties makes sense, but I have no interest in getting involved in that.  At most I'd be willing to deal with this one property that I already have.

Kevin Siedlecki · Answer

@David Cole, Sell. You have $111k in equity, and you're losing money if you rent it. You don't even need to run the numbers in any depth. After the mortgage, taxes, insurance, and HOA, you've got $125. One month of vacancy wipes out your profit for a whole year. If you have to put some work into the turnover - paint, carpet, and an appliance or two, then you are out 2 years of profit every time you have a one-month vacancy. Add to that the need to replace a furnace or the water heater, and you'll never see cash flow on this place. Your great interest rate gives you over $600 of principal pay down, but that works out to barely 7% annual ROI. You can do better.

Take your $100k and buy 2 or 3 places that will get some better cashflow for you. Instead of losing cash and making a few hundred in equity every month, I would want to be getting a few thousand in cash flow in addition to a few hundred in equity out of that $100k.