your first task is to figure out what the depreciable part of the land/structure combo is. you can only depreciate the building, not the land. assuming $400k for the bldg, your first year depreciation is about $14.5k ($400k/27.5 years). this may be a case of the property becoming a keeper just because the thing cannot be sold ...you cannot deduct losses on personal residences so converting it to a "rental" may allow the loss to be deducted. you really need an accountant to treat the several possible outcomes of this situation.
i disagree with home ferret that a year will clean this mess up...my take is end of '09 at best. especially in California where data suggests we are just now seeing the impact of the rate resets in the defaults...until now the foreclosures have been common walk aways and more typical defaultors.
I am a firm believer in keeping your properties if you can afford to do so. Hopefully, your condo will continue top appreciate in value!
You did not include your current loan amount and at what rate? Have you had someone come in and tell you from a professional standpoint what to expect for rent? If you have not, you should. It is a free service provided by most real estate & rental companies. Have you spoken to your Broker about investments and getting a better rate of return? Have you spoken to your accountant about all possible write-offs? Without knowing your full situation NO ONE can truly answer your question.
If I can help further, please contact me.
more importantly you need to decide if you have the DNA to be a landlord...it's not for everyone. no one will take care of your home the way you do. You will need to get up to speed with the rental laws in Calif. and get some solid forms for tenancy...my leases have ballooned to nine pages. up from one in 1994.
One last thought...if you are in the home now you might want to re-fi to a fixed payment loan such as a 7 year interest only to fix that expense now while you get owner occupant rates...i would not be betting on rates for the next five years where i could get todays rates fixed for 7 years.
pay careful attention to ms. cordoni's remark about the sellers remorse...she makes a good point.
You are going into the rental business. Talk to a CPA and run the numbers. See what the rental market will pay for a similalr unit, figure out your net operating income, then look at your mortgage costs and tax situation. How much can you depreciate what impact will it have on your income tax? There are as many different scenarios as there are investors.
Real estate is a great investment and if you can afford to hold, it will pay off. There aren't many investments that you can leverage and keep all the appreciated value when you do sell. During the hold time much of your decision will be based on your own tax situation.
I also can run your numbers and get you in touch with a CPA if you don't have one, but then every Realtor should be able to.
Whether the 5% is reasonable or not for the rate of return will be a good question to ask a Realtor. Depending on the size and location of your unit, they will be better equipped to tell you on that.
To better understand your true cost of holding the property, you should calculate your tax savings. Combine your mortgage interest and taxes first, and then multiply that by your estimated income tax bracket, say 20% to be conservative.
That will be your tax savings.
Subtract from the $20k will give you more a more accurate estimate of the cost to hold the property annually.
Feel free to contact me for further questions or clarifications. firstname.lastname@example.org
And we have a mortgage agent/cpa on our team who will crunch the numbers for you at no obligation or cost.