Q: In June, 2005, we took out a home equity loan of $150,000 on a rental property we own in New York that’s valued at about $375,000. I have only $6,000 left to pay on the original mortgage.
With some of the home equity cash, my wife and I bought a 2-bedroom condo for $230,000 on the intracoastal waterway last September in a new exclusive golf resort in Myrtle Beach, South Carolina.
The purchase was intended to be for investment purposes and we planned to rent it by the week or month, and then maybe use it for the occasional vacation. We put down $50,000 and have a 30-year loan at 5.625 percent.
The condo is rented by the local management group, and I receive a check from there for $1,110 per month, guaranteed. The problem is, I’m $400 in the hole each month, because my mortgage, tax, utilities and association fees are $1,500.
We knew the market was slowing when we bought it. But we hoped the condo would continue to appreciate. Now, I’m wondering if we should hold onto the condo in this current real estate market or sell and get out.
In addition to the investment condo, we also have $90,000 in our 401(k) and IRAs, $80,000 in CDs at the bank, and my wife and I have two children, 6 and 7 years of age. College tuition is on the horizon.
I know there are tax advantages and over the long run, I’m sure the condo will go up in value. But how long should I hold out with something like this?
A: It seems that you went into this investment knowing that you were going to lose about $400 per month, or $4,800 per year. And, that’s happening. But you also seem to think that the long-term potential is good. Myrtle Beach, SC has been a long-time favorite vacation destination for many people who like sun, sand, and good golf resorts.
You also seem to have a pretty good handle on your finances. You have money in the bank, you’ve saved for retirement, you’re paying down your mortgages, and you were smart enough to get a 30-year loan at a super rate (don’t give that up!).
I haven’t been to Myrtle Beach in years, and I don’t know this particular development. But that doesn’t matter. What does matter is if you would buy into this development again today if you could. That’s the real test of an investment — would you buy it again? If not, either because the company or climate has changed, then you should think about selling it.
However, I assume you knew what you were getting into last September. Trying to “dump” the condo now in a slowing market might be a mistake. Real estate isn’t like stocks and bonds in that it is relatively illiquid. And when you go into investment real estate, you need to have an exit strategy in mind.
If you feel this development has long-term potential, and you can afford the monthly hit, you should tough it out and wait for your longer-term reward. On the other hand, if you feel that you can’t afford to lose $20,000 over 3 or 4 years, and that the appreciation won’t more than make up for this loss, then you should try to sell the condo.
Take out a paper and pencil and try to work out the best and worst case scenario. Then, try to figure out what will allow you to sleep at night.
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