As you know, the Real Estate Market is HOT! Properties are selling at record levels and quickly. I am sure the thought has crossed your mind about selling your property. But then the question becomes what should I do with that gain? Well i f you own a condominium you are renting out with LRS, I want you to consider “leveling-up” your condo. If you could sell your condo and buy a single family home at an equivalent value, would you?
It all depends on your goals for your property. This idea came up with a client recently and the numbers I will share with you below are their numbers for their condo.
Before I continue, please allow me to introduce myself.
My name is Russell Kochis, I am the
Director of Operations for LRS i n San Diego. I manage single family homes, condos and multi-family properties. I have bought, sold and managed hundreds of homes in my 23 year career and I really enjoy helping my clients determine their best course of action.
Recently I met with a couple who have a condo they bought i n 2013. They have a good equity position and make a decent profit each month. The place rents very quickly but they were searching for some direction on what to do with the condo when the tenant leaves in a few weeks. They know the market is hot but they were seeking some direction. They asked my advice on what I thought they should do with the property. And I knew immediately what I would do if it were me, I would buy a single family home on a 1031 exchange.
The value-ceiling for the condo is lower than the value-ceiling for the single family home. The value-ceiling is the maximum value that the property could eventually be worth. A single family home has far greater potential to become worth $1M than a condo does. Unless your condo has a premiere address by the beach, the likelihood of a condo becoming worth $1M in the next 10 years is very low. A single family home on the other hand could increase much quicker if the
right variables come together.
See if this sounds similar to your situation. A 2 or 3 bedroom condo, with 2 baths between 1100 - 1600 sqft renting for $2400/mo. There is a low mortgage balance of about $260,000 that has a monthly payment just above $1000. The HOA is $450/mo. You are cash flowing around $1000. The property is worth about $630,000 on the market today.
There is the opportunity to buy a 4 bed/ 3 bath property in another part of town, with very high rental demand, for just over $600,000 that rents for about $3300 with an HOA of $150/mo. If you rolled your $260,000 loan balance into that home, your cash flow is going to be greater and the potential for a larger gain in appreciation will be substantial.
Assuming a smooth transaction, would you take that deal? Does it match your goals for your property?
In my opinion, if you plan on renting out your property for the foreseeable future and you want the highest possible value-ceiling available, then a single family home of this size has much more potential to be worth $1M than a 2 bed/2 bath 1200 square foot condo does.
It also lowers your risk from the market-rent perspective. Let’s say rental demand went down, you could still lease it out for $2400 a month and make as much money as you were with the condo. The demand for single family home rentals is always greater than for condos. Yes, there is the potential for greater expenses in maintenance and repairs. But i f you minimize the risk at the purchase by closely analyzing the big-ticket items like the roof, the HVAC, windows, plumbing etc., you should be in good shape.
When you lay out the numbers side by side, it is clear to me that leveling up your condo to a single family home makes great sense. If you would like to know where we can do this in your market, give your manager a call.
