patrick.net

Agree with FortWayne that cost of repairs/maintenance and marketing of condo are underestimated. Computation of accrued gain/loss and cash flow are also incorrect. Assuming the figures given are correct and ignoring capital gain/loss:

Accrued loss = $9332 per year or $778 per month
Cash (cash accounting) flow = negative $7634 per year or $636 per month

Having accrued loss is good as it reduces tax payable thus help in reducing the negative cash flow.

Decision to hold on or sell depends on your:
a. Ability to withstand the negative cash flow
b. Future outlook of RE

Depreciation is tricky. Should your tax rate is higher than present at the point of selling the RE, you would be paying more tax to Uncle Sam than have you not claimed the depreciation.

Raise the rent enough to cover costs. If the tenants decide to move, sell it.

It's all Obamas fault!

zzyzzx says

I would sell.

FortWayne says

our repairs/transportation costs are understated. Rule of thumb is 1% - 2% of the property value. As you know already from your experience, those costs happen sooner or later. And it won't be as low as $500.

Bears repeating. This is way underestimated, especially for a long term hold in which you want to RAISE rent. Nobody actually pays only 500 on maint...they only think they do. Add at least $200/mo to your losses if not $400.

Luke, where did you move away to?

Do you expect to be returning some time? If so, when?, and would you live in that unit?

The call option on the price appreciation plus all the sunk costs (broker's fee, mortgage fees) means that this is really a no-brainer, especially if it's not too much trouble to manage.

BayArea says

Land: $61,500

Improvements: $143,000

Total Real Property: $205,000

Gross Assessment and Tax: $205,000

Homeowners Exemption: $7,000

Net Assessment and Tax: $198,000

How much exactly can I depreciate (1/27.5)? Is the depreciation based on $198,000 or more?

You can only depreciate the improvements, not land value. Therefore, $143k/27.5 years = $5,200/year. Since your income is above $150k, your passive losses will carry forward and off-set your gains in the future when you sell. So not all is lost. This is where being legally married cost you unless both of you are making more than $100k each. What can I say? Our tax code sucks

This is no doubt an alligator. I would bite the bullet and hang onto it for various reasons. If history is any indication, this condo would worth $1M to $1.2M in 30 years. That's a nice chunk of change compared to investing in the stock market. If you sell now, you basically walk away with about $10k. The positive thing is that, you will have about $100k loss that you can write-off for the foreseeable future at a rate of $3k/year. If you have company stock options that you can exercise and off-set the $100k loss in the near future, selling might make some sense.

If you want to make the situation more bearable, you would have to bring money to the table and do a cash-in refinance. You can get interest rate around 4.375% at 75% LTV on an investment condo. If you go with a 5/1 ARM, the interest rate is around 3.5%.

If you believe interest rates will not rise significantly in the future like I do, refinance it into a 1-year ARM at 1.75%. Terms are 1-month LIBOR + 1.56% margin. 1-month LIBOR is around 0.16% the last time I checked. However, they will only loan up to 70% LTV.

Disclosure: I'm currently refinancing two of my investment properties into this loan program. I'm looking at cutting my mortgage payments around $950/month on both. Interest saving is just shy of $17k/year. Loan qualification is based on 6.5% interest rate, which is quite conservative. Minimum loan amount is $200k. I can introduce you to my loan officer if interested.

There is nothing magical about real estate. The more problems you can solve, the more money you make.

Happy New Year.

1) up the rent.

2) bring in cash refinancing. (5 year arm). (Or wait until summer to do the refi and hope for better appraisal then and hope interest stays the same). That is why a lot of people don't want jobs and growth to get too hot as it is more profitable that way.

problem solved.

SFace says

1) up the rent.

Given the value of the condo, $1,900/month in rent sounds about. It's not like we can just up the rent without much consideration. My guess is he can push it to $2k/month max. At $2,100/month and he is at the risk of losing his tenant.

Waiting till summer to refinance is a great idea. I would suggest waiting till fall because the sold comps in the summer be recorded by then. There is a high probability that we will see mid single digit appreciation in 2015. Condos and townhomes have been outperforming SFHs in appreciation in the recent years because they were hit the hardest. So fingers crossed on your condo value in another 2-3 quarters.

Some people might say cash in refi is throwing good money after bad. It depends on your personal financial situation and your risk tolerance. I'd do exactly what I suggested above, but that's me.

Good luck.

E-man says

Some people might say cash in refi is throwing good money after bad. It depends on your personal financial situation and your risk tolerance. I'd do exactly what I suggested above, but that's me.

5.25% is pissing money away when banks are screaming 3.5%. Unless he has better plans with the cash, that returns an excess of 8% (5.25% + delta of 1.75% on 230K) , that's what I will do.

I never understand how people find ways to save a few bucks for coffee, clip coupons, ,line up 2 days to buy some beats headphones on thanksgiving and then piss away thousands every year paying stupid interest rates (vs. peers).

If the renter is not willing to pay the rent, sell the place (vacant).

SF ace,

Given the options, cash in refi makes the most sense to me. I'm totally against the idea of selling. Even losing $200/month, that's $24k in 10 years. If history is any indication, there's a high probability the condo will worth $500k by then.

Although this investment is a dog, he can turn it around with a cash in refi. It's the cost of learning. The alternative is to find another positive cashflow investment to off set this dog. Given where we are in the cycle, finding another property that makes sense is not an easy task. Out of state investing is sure a loser even though the numbers look so rosy on paper.

E-man says

SF ace,

Given the options, cash in refi makes the most sense to me. I'm totally against the idea of selling. Even losing $200/month, that's $24k in 10 years. If history is any indication, there's a high probability the condo will worth $500k by then.

Although this investment is a dog, he can turn it around with a cash in refi. It's the cost of learning. The alternative is to find another positive cashflow investment to off set this dog. Given where we are in the cycle, finding another property that makes sense is not an easy task. Out of state investing is sure a loser even though the numbers look so rosy on paper.

yep, the mistake was made buying at the seventh year of a bull run, at 6.75% fixed rate. Two awful choices.