Financial decisions about property ownership
April 17, 2012 9:10 AM   Subscribe

How do we calculate whether to hold onto this property or sell it? Are there formulas for comparing renting at a loss against selling at a loss or ways to calculate the long term value of not selling an extra residence? As a side note: Is this what financial planners do?

We (married, two professional incomes, no kids, late 40's) live in my husband's house, but we still own my condo in the same city, about two miles away. My condo (mortgage + association fees + insurance + taxes) is $1600/ month and my renter pays $1300/month for it. It's a one bed/one bath near public transportation and the lakefront in Chicago. Rent is on the low end of high rents in the neighborhood but we never have trouble finding a new tenant when the old one moves out. My only additional cost associated with being a landlord come from finding new tenants when old ones move out. All maintenance is handled by the building staff and is paid for by my association fees.

I bought it for about 190k, still owe about 183k. Mortgage is fixed at 6.25%. No major renovations to the place since before I bought it, so it's not one of the nicer units in the building, although all the lighting fixtures and ceiling fans are new. Honestly, it needs a new kitchen--the kitchen is totally functional (fridge is new, stove is 7ish years old), but the cabinets are ugly. That said, it's on a higher floor with an unobstructed view of Lake Michigan and the building itself is well-maintained and in a desirable neighborhood with amenities like a doorman, decks, dry cleaner on premises, et cetera. It's a beautiful building from 1924 with a gorgeous lobby and all those charming vintage features, including high ceilings, hardwood floors, and radiator heat.

At least 3 one-bedrooms in the building are currently on the market. My exact unit--two floors above with an expensively redone kitchen (it's the unit I did not buy when I bought mine--it has been more nicely restored than mine and I couldn't afford it when I bought) is listed at $226k. The owner did not sell it 6 years ago and has relisted it. Of the other two, one is a corner unit (slightly larger and different layout than mine) for $200; the other is at the back of the building (no lake view, slightly smaller) for $130,000.

Emotionally, I'm not ready to sell it, but I know that's irrational and not a good reason to hold on to it, if it makes financial sense to sell it. I can come to terms with not wanting to sell it, if we really should. But we need guidance in valuing the options of selling now or selling later or not selling at all.

If this is, in fact, what financial planners do, what does that cost? Do you know any in Chicago you can recommend?

posted by anonymous to Work & Money (7 answers total) 5 users marked this as a favorite
Can you refinance, and raise the rent 10%? That might get you close enough to breaking even that you could just forget about it (not sell, in other words).

You also need to include the tax benefits of owning rental property in your calculations.
posted by lohmannn at 9:27 AM on April 17, 2012 [2 favorites]

Khan Academy has a few videos comparing renting vs. buying. It's not the exact same question you're asking, but they are very thorough with the calculations and I think you could use them as a resource to do it yourself.
posted by Tarumba at 9:33 AM on April 17, 2012

Agree with @lohmannn.

Right now, you're paying $300 a month to have the place, thus, if the tax benefits are >$3600 a year, it makes rational sense to keep it right now, assuming you are not expecting to incur substantial maintainance costs.

If you sell now, you'll probably break-even on the loan and any costs involved (based on your description of the kitchen, etc.). You would do this to mitigate future risk of exposure, either in terms of maintainance costs, time empty, etc.

Further, you will be taking a net loss on the investment as a whole, I imagine, for I have you roughly 8 years into a thirty-year mortagage, with the information given. Again, that does not include tax savings, so that may change the figures.

Additionally, the fact that there are currently three places on the market at the moment may not help you sell it now, for there is competition and substitutes.

If you keep it now to sell later, you will be doing so with the expectation of greater value in the future, however you will be exposed to the aforementioned risks.

If you decide to not keep it at all, you are looking toward the long-term and eventually having a passive income stream. In that case, you are exposed to the rental risks but not the long-term value of the property risks.

I think you should talk to an appraiser first and get a strong sense of what the house would sell for if you put it on the market. It will be hard to make an informed decision previous to doing that.

You can always do some self-appraisal on Zillow or something. You're looking for specifics (what are the trends in your building, similar buildings, similar units) and what are the directional trends in the market (strengthen, stable, weakening).

To say it another way, once you have the value of your property, either self-deduced or professionally deduced, then you can look at the macro-trends.

At that point, I would go see a financial advisor, for at this point, his first question will be "what is the asset worth?". Until you know that, it's all a bit hypothetical for what is a substantial amount of money.
posted by nickrussell at 9:40 AM on April 17, 2012 [3 favorites]

We are pondering the same issue though for our current residence not a second home. You should absolutely look into refinancing options. The rules now are very owner friendly and far more flexible for second homes than they used to be. If you could get your mortgage payment more in line with what you're renting then there's really no reason to sell.

Consider that one of the problems with condos is that whatever the lowest current selling price in the building is probably your lowest selling price. So, what's the most recent actual sale? Listing for $200k doesn't mean much if it won't sell for that. But, let's say you could list your condo at 200k and sell it for that -- what would you do with the income plus the income that you were spending to make up the shortfall on your rental? If that's more valuable to you than a long-term investment then maybe it's worth selling.

I think the first person you should talk to is an accountant -- they can point out the tax pros and cons to keeping the property verses selling and maybe even tell you how to make the most of your sale if you do sell. Then you could talk to a real estate broker or trusted professional and try to get an idea of what you could sell yours for. And, really, if you think you are going to keep it, please look into refinancing. This is the time to do it, for sure.

Would you and your husband ever want to retire and move into this condo? Consider that as well.
posted by amanda at 9:42 AM on April 17, 2012

This is absolutely the kind of thing that fee-based financial planners advise people about.
posted by Sidhedevil at 9:44 AM on April 17, 2012

If you decide to not keep it at all should be not to sell it at all!
posted by nickrussell at 9:45 AM on April 17, 2012

Remember that the mortgage cost is principal plus interest. You need to recalculate your $1600 cost with the principal removed and then see how your actual cost compares to your rent income.
posted by ssg at 9:59 AM on April 17, 2012

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