10 Reasons Why I’m Selling My Condo Rental Property
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A few months back, my tenants informed me they found a new rental to accommodate their growing family. After the news, I immediately started preparing to sell my condo rental property.
I bought the unit as my first home in 2006. It’s a one-bedroom condo, not far outside of Washington D.C in northern Virginia. As I watched the real estate bubble burst, I thought it was a perfect time to buy. But then the real estate crisis accelerated followed by the devastating financial crisis.
The property value decreased by $50,000 just two years after I bought it.
But that wasn’t the worst part. The real mistake was the choice I made to take on a $2,300+ monthly housing payment. I wasn’t ready to buy a home, and I realized it was a mistake the day I moved in.
Despite the crippling payment and nasty recession, I decided I wouldn’t be a victim of the housing crisis. I put nearly every extra dollar of savings each month toward the principle of the second loan on the property. Twenty-three months later, I had paid off $43,500 of 8.5% mortgage debt.
Soon after, I refinanced my primary mortgage, then later refinanced again, saving about $300 each go-around. Mrs. RBD moved in. We married. Then we saved enough cash to put 20% down on a home in the suburbs in 2011.
Home values still hadn’t recovered, so we kept the condo. I became an accidental landlord.
Time to Sell
Each time a tenant moves out, I research whether or now I should sell the condo rental property and cash out.
Last time, in Spring of 2017, I met with a few realtors and determined the comparable sales didn’t value my property at what I paid for it (11 years before). So I found another tenant and continued to hold on.
Today, inventory is low, interest rates have decreased, and the future Amazon HQ2 headquarters is three miles away.
It’s a seller’s market.
I’d rather sell when I know it’s a seller’s market, then roll the dice and hope the next unpredictable tenant doesn’t move out during the next recession.
Ten days after the tenants moved out, we put it up for sale. We received three solid offers above asking price within five days of the listing. If all goes smoothly, we could close by the end of the month.
I’ll fill you in on the details once we close, so I don’t jinx the deal. In this post, I’ll explain why I decided to sell my condo rental property even with all the positive growth trends.
10 Reasons Why I’m Selling my Condo Rental Property
1. Condos Aren’t Good Rental Properties
In the world of real estate investing, condos are considered bad rental properties. That’s because you pay fees to the condo association for shared maintenance and services. This condo is part of a multi-acre property with more than 100 units.
As an investor, you want to control your costs. But the condo by-laws always have a say, and you must comply. I pay more than $5,000 in condo fees every year. They cover some usage costs (water, garbage, sewage), but most of it goes to regular upkeep, services, and reserves (for major maintenance repairs).
Condo fees devour cash flow.
2. The Banana Stand is Full
Shortly after moving into the condo with me, Mrs. RBD got me hooked on the TV show Arrested Development. There’s a running joke about how there’s always money in the banana stand. Ever since, I’ve thought of the condo as my banana stand, full of cash in case we’re ever desperate.
Well, we never needed to tap the money in the banana stand, so the equity has continued to grow, paid for by tenants.
Our loan-to-value ratio is now less than 50%, meaning we owe less than half of what the property is worth. That’s a lot of cash to be tied up in a mediocre condo.
3. Cash Flow is Feeble
I’ve managed to raise the rent on the property a few times since turning it into a rental. Each time I place it on the rental market, I’m disappointed with the amount of rent I can get.
If I don’t raise the rent each year, rising costs quickly catch up and lower my profit margin.
Accounting for maintenance, vacancies, taxes, HOAs, and financing costs, I’ve only netted in the range of $1,000-$2,000 in positive cash flow per year over the past eight years. That doesn’t include the tax savings, and I overestimate maintenance and vacancy costs to keep things conservative. But still…
This goose lays regular eggs, not golden ones. I prefer to use use the equity to buy a better investment property or build upon my existing investment income streams.
4. Communal Property Repair Risk
Cash flow has suffered, in part, because the HOA fees keep increasing. The unit is one of 100+ spread over spacious green communal grounds. It’s an attractive place to live, but the sprawling property and age of the buildings require frequent expensive repairs.
Most annoying is the inter-communal water system. We all draw our hot and cold water from the same source. Pipes run underground throughout the property to deliver the water. In the winter, these pipes often break, causing outages and repair costs. And it’s not only the hot and cold water.
A second network of underground pipes delivers a closed water loop used for heating and cooling each unit’s water-source heat pump. Pipe problems mean no heat or AC.
It’s always fun to email the tenants about an AC outage in July.
On top of the pipe issues, the property has several old brick buildings that mortar tuck-pointing. The cost to tuck-point a building is astronomical. The association has put this work off for a decade now. The HOA fees go into the cash reserves so that one day, they can spend it on new mortar.
5. Taxation and Waste in the River
The second reason my costs go up each year is the local property taxes. Though property values keep rising and newer townhomes and apartment complexes continue to displace affordable housing, the tax rates that affect all properties keep increasing.
A local politician spoke at my son’s Cub Scout meeting a few months back, and he explained why the Potomac River is polluted. Raw sewage dumps into the river when there are big rain storms. It’s been a problem for a couple of hundred years.
The state of Virginia passed a law requiring the local government to fix it in less than a decade. The cost is a few hundred million. That’s on top of other major development projects and the regular costs of running a town.
Even as the property value and tax rate increase, there’s still not enough money for engineering required to fix the shit-water runoff problem. So I expect higher taxes ahead.
Higher taxes and climbing condo fees make the fight against narrowing profit margins perpetual.
6. Unit Repair Risk
That water-source heat pump I mentioned earlier… remember that? It’s the HVAC unit for the condo.
Water-source heat pumps are uncommon, making them expensive and hard to find anybody that deals with them.
Only two manufacturers make the kind of model my unit needs, and it’s heavy AF. The installers had to haul mine up three flights of stairs, then rent a lift to get it into place. It was a messy and expensive job.
When the HVAC unit goes again, it will wipe out any profits I’ve made over the past couple years.
The condo also has a 38-year-old skylight that will leak soon, and it’s my responsibility. It’s one of the only originals left on the property, so it’s long overdue for replacement.
Each major appliance is at least 13 years old. They are stainless steel and look good, but it’s a matter of time before they start to fail too.
7. Lack of Control
Perhaps the worst part of owning a condo rental property is the reliance upon the volunteer Board and management company. We’ve been lucky to have competent association members over the years, but the management companies haven’t always been reliable.
Within a year of purchasing the condo, the Board levied a $3,500 special assessment on owners with balconies. The balcony replacement project required custom manufacturing job to comply with local zoning regulations. The cost was entirely out of my control.
The association is financially sound, but new repairs and projects are always on the horizon. I could join the Board and have a say, but I have no interest in joining an HOA board.
8. Simplification of My Life and Finances
While assembling our family estate plan, I realized that we have too many separate accounts. Since this realization, I’ve closed a few smaller brokerage accounts, DRIPs, and savings accounts. Then I transferred both my TD Ameritrade and Vanguard accounts into Fidelity.
Now I have fewer accounts and online logins to keep track of, and most of our investment assets are under one roof.
But the rental property is the albatross. Even though it’s been easy to manage over the years, things go wrong from time to time. It’s stressful when it does.
Vacancies require my immediate attention to tidy up the unit and find a new quality tenant. It bleeds cash when it’s empty.
Our tax returns are more complicated too. There are excellent tax advantages with rentals, but I’ll be happy to complete my taxes next year and wash my hair of the condo forever. I’ll need to hire a CPA to figure out depreciation recapture.
9. Cash Abundance
We expect to walk away from the closing with more than $100,000 in cash. We’re not buying another home with it or need it to pay off debt. The check will go directly into a high-yield savings account and await further instruction.
As I wrote in the post called It’s Only Money, we don’t have a fully funded emergency fund. As of today, if something major goes wrong with our house, we might not have enough cash on hand to pay for it.
Our cash savings has grown since then. But after the closing, we’ll have a big chunk of cash in the bank.
My first instinct is to put it into liquid savings or a short-term CD to immediately increase my forward 12-month investment income (F12MII). The cash flow generated will be significantly higher than the condo rental.
It will be a nice boost to passive income. I’m excited about that. We’ll max out eligible IRAs this year, and front-load in January 2020. Then I plan to make regular, measured monthly investments into income-producing assets such as dividend stocks and real estate crowdfunding platforms.
We’ll finally build the new deck we’ve been considering for five years. The deck will improve the usefulness of our backyard and increase the value of our home.
Finally, I plan to keep a very healthy stash of cash in high-yield savings. Some of it will be set aside for unexpected home repairs and to eventually replace aging appliances. Another chunk will cover the cost of a new vehicle when the time comes since I’ve sworn off car debt forever.
Whatever isn’t invested or set aside for specific future expenses will be there for financial security.
I saved the best for last. Selling our condo rental property is a move toward more freedom. Getting rid of the condo and the weight of a bad purchase decision I made 13 years ago will feel incredible.
But it’s far more than that.
The cash we’re pulling out amounts to multiples of our annual expenses. With so much cash in the bank, plus my existing investment income streams, the income I earn from my side business, and a sizable portfolio of retirement assets, I’m damn near the point where I could leave my full-time job forever and still support my family, without moving.
We could move to different cities and towns around the world, rejecting the traditional suburban lifestyle we know today. Fewer obstacles litter that path now if we choose it. Doubtful soon, but possible someday.
A few years ago. I launched a personal challenge I called the 2022 project. I described it as a near-term, pre-retirement lifestyle adjustment. What if I could leave my full-time career and focus more on family, health, and passion projects rather than continue with the corporate grind until age 55?
Selling the condo was part of the plan and helps to makes it possible.
The only complication is that I like my full-time job now. I’m no longer unhappy and dissatisfied with my employer and career. My career may still be the optimal route, so I’m in to hurry to leave.
The sale reduces complexity in our lives while giving us more flexibility and opportunities. That’s what I like best about saving and investing. Saved money gives us options.
Do you own a condo rental property? Would you rather it be out of your life, or is it working for you?
Photo via DepositPhotos used under license
Craig is a former IT professional who left his 20-year career to be a full-time personal finance blogger. He lives in Northern Virginia with his wife and three children. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his stock and real estate income portfolios. Craig earned a Finance degree from Michigan State University. Read more HERE.
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I am happy for you that you will have more freedom ! I was one that had numerous rentals , when people move out we need it painted, maintence taxes, HOA fees, ect Just like you..so I sold them all except for my cute little condo in Chicago..near Michigan Ave..I dont make much $$, but I get the best people in my place and they stay for years..I love the idea of passive income, so Ill keep this one and the rest have been sold ! It will be paid off in 15 years..
Location is a big part of rentals. This location is excellent. Tenants can walk to grocery stores, the Metro, there’s a bike trail nearby, and the future Amazon campus. Good tenants are easy to come by when the location is good. But the cons outweigh the pros. I’ve wanted to sell this property for eight years now. I’m using this opportunity to get rid of it. The liquid cash in hand is a nice outcome.
I also have rentals, my concern about selling is taxes. You have taken some depreciation, how will that effect your tax bill? I understand the desire to simplify things, I share your desire. My worry is what will taxes do to me if and when that time comes. As much as I dislike dealing with bad tenants and large repair bills, the tax bill scares me more. So far, in my head, I carry them as something I will leave for the beneficiaries of my estate to deal with. Please keep us updated on the process. I’m very curious. Best of luck with the sale.
I’ll learn more about the taxes when I file next spring. I’m considering reaching out to a CPA this summer while their not busy to prepare. A few years back, I hired a CPA to do a sales analysis, including the depreciation recapture. I’ve taken depreciation for the last eight years. One thing working in my favor, is my property hasn’t appreciated very much over the past 13 years. In fact, I’m only getting about $20k above what I paid for it. Horrible return! But, that will certainly reduce my tax burden. I’m not a CPA, but I remember from the analysis that the depreciation recapture has less impact if there’s lower appreciation.
To be cautious, I’m going to keep most of the cash windfall in a liquid savings account in case I’m hit with a large tax bill. Most of the cash is equity from the mortgage payments I’ve made over the years.
You barely mentioned it ! Go see an income tax person NOW. Your walk away cash may drop by 10k-20k in federal and Virginia TAX.
True. Taxes aren’t the reason I’m selling. It’s a deterrent from selling. That’s why I didn’t focus on it much today. But I’m well aware I’ll have to pay the piper one day, and that day will come next spring. Good advice to see a CPA now. I’m not sure what they’ll tell me to do, other than assemble the documents and receipts I’ll need when I file. Any insight to what I can do today to help prepare for taxes next year? I haven’t lived in the unit for 8 years.
Go assemble and compute your gain your self and let the your CPA check your work and he/she will tell you about how much you will have to pay in taxes on April 15th AND you “may” need to make an estimated tax BEFORE year end to avoid a tax penalty of paying in 90% of current year taxes -Maybe.
I spoke to a CPA and I’m probably going to have her look at it this summer to help me get it right. Then I’ll file on my own. I won’t need to make an extra estimated tax payment, but I do expect a tax bill next year. So I’m going to set aside a suitably sized chunk of cash slated to cover the bill next year..
That makes a lot of sense to sell given all the reasons you’ve listed. Freedom is one key reason to sell.
great post rbd. And congrats on the sale. I love the thought process behind it.
Our first house was a condo corp townhouse.
I hated the lack of control and the yearly condo fee increases.
“Some units toilets must be leaking because we are using a tonne of water” they would say….
Meh screw that, i take care of our place. I shouldn’t fork out more money because others dont.
Anyways congrats again!
I’m selling our condos too. Single family homes are much better investment. Lots of stuff are out of your control with condos. Although, it is much easier to manage because of less maintenance. The condo market slowed down significantly here so we’re having a tough time selling. Hope the right buyer comes along soon.
Condo market is very hot in our area. We going to close in a few days. We priced it to sell and got an all cash offer above listing price. So we’re excited to get this done.