Advice with sell vs rent in Cambridge, MA

[Konstantin Klitenik]

I'm moving to a bigger place and wanted advice on what to do with my current condo.  Here are the details:

Location: Cambridge, MA USA

Purchase price:       $310,000 (2009)

Mortgage Balance: $185,000

Monthly Payment: $1,533 (includes mortgage, insurance, property tax)

Rental potential: $2,350/mo

Sell potential: $490,000

The way I see it, I have an opportunity cost of $490k-$185k less 6% commission = $275k.

My rental would net $9,800/yr less any vacancies and improvements, so that's $8k/yr.

To me that appears to be a 3% return.  Not to mention that if I keep this for at least two years, I'll have to pay capital gains on the sale when I do decide to sell.  Now, the property may appreciate over the next several years but it would need to clear the 20% cap gains tax to make a dent.

Am I missing anything in this calculation?  Would you recommend to sell or rent?

Thanks!

[Dan K.]

Hi Konstantin,

This is the conundrum with properties in high value areas. Don't forget, at some point you're also going to have a condo assessment. Have you checked with your condo docs to confirm that you can rent the condo -- some Cambridge condo buildings cap the number of units that can be rented and there can be long waitlists to rent. Or they may cap the number of consecutive years that a unit can be rented.

One way of increasing your Return on Cash is to refinance the mortgage -- I assume your rate would go up, but you'd be able to pull out a significant amount of cash. If you can refinance with 20% down, you might be able to pull out about $392,000 in cash. You'd then be left with $98,000 in the property. Taking advantage of leverage is one of the biggest advantages investors have in Real Estate.

You don't have to take out as much cash as possible, you may want to take out less to avoid PMI or to just lower your monthly payments.

Additionally, although rates are up, so long as you are still living in the property as your primary residence, you could still get an owner occupied 30-year mortgage.

Of course you'll need to do the calculations to see if the mortgage payments plus taxes, insurance and HOA will be covered from the rent.

Further consideration-- If you walk away with $275K, do you have a plan to invest that money?