As I’ve mentioned in the past, a surprise opportunity to relocate from Boston to Silicon Valley came across my doorstep. That left me with a decision to make about my condo. I had bought it in the summer of 2004 and have a fairly good mortgage rate on it. Unfortunately, if I were to sell it in today’s market, it would probably be a $15,000 loss and that’s if I were able to do it myself with no closing costs or anything (and we know there would be those). With the help of a real estate agent, I might lose up to $25,000.
I couldn’t really stomach that loss and it would negate the opportunity I have out west. So the next option is to rent it out. The only problem? It’s going to be cash flow negative because it’s simply impossible for me to rent it near my mortgage. Doing the math, I will be losing about $550 a month with this development. That’s a loss of $6600 a year. Ouch!
So why am I not upset? I’m trying to take the long-term view of this. If I keep this property for the full 30-year term of my fixed mortgage, I believe I will see a significant gain. In ten years from now, if history is an indication, my place will have appreciated nearly 63%. I’m simply using the historical average of 5% gains in real estate over the past 50 years or so (I wish I had remembered the source so I could cite it properly). That would make my $275K property worth $173K more. Isn’t leverage wonderful? If I even see half of these gains, it will turn my negative situation into a positive one.
The other side of the coin is that over the time, I believe I will be able to raise the rent enough to be even or positive on a cash flow basis. It may take 7 years or more. So again at year 10, I will likely be positive in cash flow, have appreciation, and have paid off a fair amount of the loan (though a lot of it would be interest). There’s just a good chance that I’m able to make this lemon into lemonade.