As the market is showing a little bit more buying activity and inventory is reaching new lows, many owners can't help but wonder if now is finally a good time to unload their properties.  This is especially true for those who have been renting out their condo where the current tenant is moving out in a few months.  

To sell or not to sell…  

Recently, a client of mine who owns an one bedroom, 850 square foot condo in Belltown in a fairly new building was contemplating this very same decision. He is an out-of-state owner with a tenant moving out in the summer. Unlike some sellers who bought during the peak and are carrying two mortgages on their condo, he only has one mortgage.  So even if the value still has not returned to his original purchasing price, if he sells it, he doesn't need to bring any cash to the closing table. 

So, it comes down whether he should continue renting it or selling it and moving onto something else. Let's look at some hypothetical numbers for his case. 

Bought $320,000 (2006)  

Current Market value $260,000-$280,000

Mortgage balance. $220,000 

Mortgage payment 1,280/month

Property tax $208/month

Homeowner dues $350/month

Home insurance $25/month

Monthly expenses $1,863/month         

Rental $1,600/month
 

In the worst case scenario, if he were to sell his condo for $260,000, he will probably net around $16,800 at closing (getting a small portion of his down payment back). If he were to continue renting the condo out, he will only have a negative cash flow of a few hundred bucks a month. The numbers do not look bad in his case with renting.

Here are a couple of reasons why he should and shouldn't sell.  Note that there are many other arguments one could make and every situation is different so just calling out some of the bigger ones for the purposes of illustration.

Sell: 

  • He should cut his losses and deploy whatever is left from the condo and reinvest in something else that could give him a higher yield
  • Inventory level for his price tier (<$350,000) is at it's lowest level in years, making it favorable for him to sell now. 
  • There may be shadow inventory waiting to come on the market which could further impact the value of his condo.
  • Interest rates are lower making it affordable for more buyers to get into the market. 

Continue renting:

  • Rental market is relatively strong.
  • There are some tax benefits for renting it. 
  • Tenant can continue to pay for his mortgage
  • In the long run, the value is likely to appreciate and unlikely to go lower than the low prices of 2011.
  • Because the property is leveraged, it may be hard to beat the returns he'd get from a $280K asset appreciating over the years versus taking his $16.8K check at closing and netting 5% return.

My recommendation:

The rental market is pretty strong now. He should continue renting and raise the rent. It has been a few years since he last raised his rent. In today's market, his condo could reasonably rent for $1,800/month and this could help him close up the gap on his monthly expenses. With minimal negative cash flow, the mortgage is basically paid for by the tenant and he can capture appreciaton over the next few years that will likely be greater than cashing out and re-investing in other asset classes with similar risk levels.  

By Wendy Leung with Seattle Condo Review: A guide to Seattle condos exclusively for buyers and sellers.