Should I sell or refinance condo to invest apartment?

Question

In 2020, I purchased two 3-bedroom condos in Palo Alto, CA.

The first unit:       1.0M purchase price, 500K mortgage with rate 3%.

The second unit: 1.2M purchase price, 700K mortgage with rate 2.375%.

With the HOA, Property Tax, Mortgage and Insurance, the cash flow doens't break event yet after 6 years. Every month, I still need to put additional $500~$800 to each unit to cover the whole cost. I found out that condo has very poor performance on cash flow.

Now, I like apartment investing and needs some fund. To prepare my own fund, I can either establish a line of credit or sell the condo:

a). Selling the condo has big transcation cost and the current market is not good for condo sell. What is worse, it will also occupy me three months to remodel, stage, listing and I have limited time as my W2 work is quite busy. The good side is that I can allocate all of my asset in aparments investing.

b). Establishing a line of credit has the drawback that equity in the condos has poor turn over and it allocates too much resource of my existing assets. The good side is that I can avoid the big cost of selling.

Question: May I have your suggestion whether to sell the condo or establish a line of credit?

Vijay Friedman · Answer

@Zhenyang JinSince both of your mortgages have exceptionally low interest rates, I'd compare the opportunity cost of giving them up before deciding to sell. I'd also model both scenarios side by side—including transaction costs, available equity, carrying costs, and the projected returns from the apartment investment. Sometimes preserving low-cost debt while accessing equity can provide more flexibility, depending on your acquisition strategy.

Haseeb Awan · Answer

Have they appreciated ( which I am sure they would've). I would suggest keeping them as it's a prime real estate and consider Airbnb/Short term rental if it's allowed or even turn it into corporate housing

Richard F. · Answer

You are not factoring in the financial condition of the HOA. How many units in the project? How up to date is their most recent Reserve Study; how complete and accurate is their Reserve Funding Plan; What is the current year "percentage funded"? What percent of the current monthly fee is allocated to fund the reserves?

G. Brian Davis · Answer

Nice to meet you here on biggerpockets @Zhenyang Jin! At your rates, the condos are cheap debt, so selling just to redeploy may not be optimal unless you are confident you can consistently outperform after taxes and transaction costs. A practical approach could be to using HELOC first to unlock liquidity while keeping the low rate mortgages intact. That gives you flexibility to start moving into apartments without disrupting your current positions. You can then decide on selling later if the condos continue to drag and you find a clearly better replacement use of capital.

I have invested in many apartments in my club. So if you do decide that route, a little advice.. Underwrite with downside scenarios, assume higher vacancies, higher expenses, etc..If a deal only works in the most optimistic conditions it's a no for me.

Tyler Mcclean · Answer

How big of a loss would you take selling? I mean they're already a huge financial burden. Would making the improvements give you a solid roi if you sold? Idk how bad it is but I would be looking at stopping the bleeding at any cost and just cutting your losses. You have super low rates you no chance of cash flowing positive now let alone pulling out another line of credit. I would head for the hills personally.

Zhenyang Jin · Answer

@Tyler Mcclean

Thank you for replying

Considering the commission, title and escrow cost, vacancy during selling, I estimated the total cost for selling one unit is about 80K. This makes me a bit hesitate to sell.

With the 30 year fixed low rate, it is likely make money in the long run. In my opinion, holding it is not a mistake. If this investment can make money in the long run, why do we need to pay the cost to sell it? Just tapping some equity out can help to improve the money efficiency might be the simple and efficient way.

Should I sell or refinance condo to invest apartment?

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