Should we sell our condo or rent it out?

Asked by crazydancr, San Jose, CA Thu Jul 18, 2013

We are vacating a 3 br, 2.5 bath condo with attached garage on the border of Willow Glen South. We are trying to figure out if we should sell it or rent it out for a couple of years first. We are low maintenance people and the thought of being a landlord worries me. But, I don't want to miss out on an opportunity to have a great rental investment. We don't believe we'll be able to charge rent at an amount to cover our mortgage, property tax, HOA fees and possibly any maintenance issues that could come up. But, it still might balance out at the end of the year from a tax perspective. My question is what is the going rental rate for this type of condo in our location? And is it worth it to incur losses in the short term in hopes that the market will increase even more and maximize our gains once we do sell? We purchased the condo for $625K.

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Thu Jul 18, 2013
The amount you purchased it for is irrelevant. What is it worth NOW?

If you are in a position to sell and walk away with money, then I'm inclined to advise you to sell. Many areas right now are experiencing a resurgence in values since low mortgage rates have made more buyers come out of the woodwork and the low number of homes on the market have created a supply and demand issue.

But a lot of the economic issues that were present when the market crashed a few years ago are still there - they've just been covered up somewhat due to the government's economic stimulus plans. So you can't just assume that prices will continue to go up, as opposed to staying flat or even declining.

Unless you are generating POSITIVE CASH FLOW on a rental, I wouldn't become a landlord. That's just my two cents though...
1 vote
Samuel Tucker, Agent, Cincinnati, OH
Thu Jul 18, 2013
Many Condominium Associations severely limit the number of rentals because (1) these Associations have little control over the tenants and (2) some tenants might ignore the rules for living in the area.
0 votes
Robert Chome…, , San Diego, CA
Thu Jul 18, 2013
I personally would not rent out a property unless you can a pre-tax positive cash flow. I think holding on to an asset that looses money is not a great financial decision. You have to also make sure you factor in maintenance, repairs, turnover, vacancy. When a tenant moves out it can easily cost you $5,000+ in costs to paint, repair, re-carpet and also the lost rent while you are trying to find a new tenant. I'm a huge fan of rental property, but only if it has a substantial positive cash flow before taxes.
0 votes
Grace Hanamo…, Agent, Cupertino, CA
Thu Jul 18, 2013
Hi Crazy and thanks for your post.

To be frank, as the others mentioned, as much as most of us would love to advise you to sell AND to list your home with us (, lol), the true answer to a question of this nature will depend greatly on your "entire" financial picture. Questions such as "Where are you planning to move?", "how much do you make?", "what are your long term financial goals?" will all figure into what is the best way to handle your current condominium.

There are plenty of multi-millionaires out there who began just as you are contemplating one home, live in it for a while, purchase a new home and use the rental income to provide an income stream now and in the future. So it makes sense to, at the very least, contemplate this possibility if you can afford it. However, keep in mind that there are also a lot of homeowners out there who purchased a lot of homes and lost all of them in the last economic meltdown, so if you're going to have rental property and incur a negative income stream, it's best to talk with financial professionals to ensure that you can actually afford this.

Contact your CPA and, as my buddy Rob Spinosa (below) mentioned, your favorite mortgage broker about the opportunities and consequences of keeping the condominium.

Good luck!
Grace Morioka
Allison James Estates & Homes
Tel (408) 426-1616
0 votes
Robert Spino…, Mortgage Broker Or Lender, Mill Valley, CA
Thu Jul 18, 2013
I just want to take a slightly different angle here and mention that if you retain the property and rent it out AND also plan to purchase a new home once you vacate, please consult your lender (or a lender) about what are know as "departure property guidelines." These parameters will determine how the lender on any new mortgage you take will treat the property you are "departing" and renting out. This can have a material impact on your future qualification.

If you have any questions, please let me know.

Rob Spinosa
0 votes
Jose Adame, Agent, San Jose, CA
Thu Jul 18, 2013
Crazydancr (love the user name)

You've got very good advise here from my peers.

I personally do not recommend to have negative cash flow investments since it means that you are basing your investment strategy purely on appreciation. I think is a very dangerous risk when the investment decision is based only on current market conditions. I've heard thousands of sellers over the years, online and off, about the same theory and many got caught off guard when values dropped back in 2008.

Understanding that most bay area markets are currently experiencing rapid value increases we must not assume that it will keep happening. As a matter of fact, we are already experiencing a slow down in some areas.

With the somewhat limited information that you've provided my inclination would be to sell and look for better investment opportunities.

The moral of my story? Get financial and real estate information from real estate professional, CPAs and Financial planner on what would be the best investment to make according to you level or risk and investment returns.


Jose Adame, Real Estate Broker
CA BRE Broker Lic. #01383543

- Knowledge
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- Process expertise
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0 votes
PollyAnna Sn…, Agent, Bozeman, MT
Thu Jul 18, 2013
The answer to your question is variable on your goals...what is it you are looking to accomplish? Monthly cash flow - rent it if it flows positively. Lump cash - sell it if you have equity? What will you be doing with the money if you sell? 1031 exchange to another property? Hard question to advise on w/o knowing your goals. Cheers and hope this helps!
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Mitchell Pea…, Agent, San Jose, CA
Thu Jul 18, 2013

First off, if you sell now, you'll sell the condo for more than you paid for it, making a nice profit that is exempt from capital gains. Second, as long as you sell it within 2 years of vacating it, you'll be exempt from capital gains. Third, employment will continue to rise at a faster rate than the number of houses being built in Santa Clara County, so prices will continue to go up, as will rents. Fourth, you should be able to rent out the condo for at least $2,500, maybe $3,000, depending on location and its condition.

All that said, before yesterday, I would have said hold on to it for 1.5 years then sell. Make your lease for 1.5 years with a notice to vacate and notice of non-renewal at end of term as a condition of signing the lease. It is much easier to sell a condo vacant of tenants than with tenants. Your sweet spot for maximum tax free gain is just before the end of the end of the two year tax exempt period.

Better yet, lock in both rent and sale by offering your condo as a lease with option to buy proposal today. You'll get a tenant, maximize your rent, and have an assured sale at the end of term. Your realtor would market the condo as a lease to buy sale. You'll be flooded with offers because such terms are so rare and the demand is so large. In a lease to buy, the lease is above market, with the above market portion applied toward the purchase price. If the lessee is unable to convert to sale, you keep the extra income from the lease. If the tenant does convert to sale, you earn income without having any vacancy during the sale period of the condo at the end of the lease term. Price for the condo at sale can be fixed now based upon current market projections.

Because the lease to buy option is a form of financing, only a realtor with a mortgage origination endorsement or license can arrange the sale for you. I have such an endorsement.

Now why did yesterday's news give me pause? As of yesterday, Congress is considering eliminating Fannie Mae and Freddie Mac entirely. Almost the entire loan industry is currently dependent on these two institutions for originating loans because it is their computer programs that are the basis for underwriting every single home mortgage in this country. Eliminating the entities eliminates the standardization that underpins the market for mortgage backed securities. With no standard, generated by a US government backed entity, the market for American mortgages will crash much worse than what we are now just recovering from. Interest rates may skyrocket and length of loans may shorten, forcing down prices of homes no matter what else is happening in the economy.

In the meantime, interest rates will steadily climb during the Congressional debate and eventual dismantling of Fannie Mae and Freddie Mac as we now know them. This is a given for the future, the only question is whether any standardized loan software, with the imprimatur of our government backing will be left intact among the wreckage. Without the entities creating the loan securitization, the ability to maintain such software disappears, so the answer is most likely no.

Now, Congress is slow to act, but when it acts, it almost always does the wrong thing for the economy. Congress will act before the next elections on this issue, not today. So you probably have just under a year to rent and then sell without risk of your investment plans being torn up by the stupidity in Washington DC. If you want absolute lack of future risk, sell now and invest in something that will not be so damaged by the changes in mortgage financing coming down the pike. By entering into a least to sell contract, you can manage that risk now and maximize your profits.

Do not buy bonds at this time. As yields go up, prices go down, resulting in a loss to you unless you plan to hold the current low interest rates for the coming decades. As long as QE2 continues, inflationary pressure is being built into the economy for the foreseeable future. For more advice on investing alternatives should you decide to sell now, I suggest you call my brother, Peter Pearce, at 800-756-2779. He manages private wealth for private clients equal to the pension funds of many of our states. Had I listened to his advice over the past five years, I would be have quadrupled or more my money. Instead, I funded my wife's new business, which has not done as well.

All the above is the tax and risk risk climate for your decision. Whether you should rent for up to a year and a half, sell now, or offer your condo as a lease to sell now, really depends on how your expected rate of return pencils out and your cash flow needs. For that, a personal consultation going over your specific situation and goals is in order and should not be done on a public forum. I invite you to call me, Mitchell Pearce, at 408-639-0211 at no obligation.

Mitchell Pearce
0 votes
Mitchell, I just found your reply to the original post. It is 2015. I would love to hear your thoughts on your advise, and how it would change if you had to give it again today, to SELL or Continue to Rent?
Flag Sun Feb 15, 2015
Terri Vellios, Agent, Campbell, CA
Thu Jul 18, 2013
It sounds like perhaps your condo is in Communication Hill. I don't live far from there and new development is planned for the area.

This website, may assist you in determining the going rate for rent. Enter your address and an estimate of rent and you will see where it falls in the meter. It will also show you surrounding condos and what the going rate for those on a pinned map.

I have a lot of questions as to why you are thinking of selling. What is your long range goal?

I've been a landlord and I can speak to that. As for what is it worth to incur losses that is a personal decision. If you would like to sit down with me - no obligation - no pressure - and run some numbers, I'd be happy to assist.
0 votes
Norman Aless…, Agent, San Jose, CA
Thu Jul 18, 2013
I agree with Ron, you need to go over the finances with a pro. Also remember if you rent it out for a couple of years you lose your tax rite off on any profit you make. You have to look at what you would like to achieve in your future. The real estate market can and will change and you may lose your option to sell at a profit. Please consider all your options before you decide.
If you have any questions please feel free to contact me.
At your service,
Certified Distressed Property Expert
0 votes
Maria Cipoll…, Agent, Coral Springs, FL
Thu Jul 18, 2013
Each real estate market is different, so do not listen to the real estate news, because the housing market can vary from one neighborhood to another one. The only way to truly understand what you should do is to speak to a local real estate agent that can give you the estimate of what your condo is worth and how much could you rent it out for.

After you know this figures, is only you that can take any decision.

Best of Luck,

Maria Cipollone
0 votes
Ron Thomas, Agent, Fresno, CA
Thu Jul 18, 2013
You need to discuss this with your Financial Advisor, (with a Net Worth over a Mil you should have one).
There are many considerations for you:
Accumulation of Assets?
Do you need the money for something else?
Can you use that $$ to buy several rentals?
Do you need Tax deductions?
Do you even want to be a landlord?
Should you use a Property Management company?
How good are your Tenants?
Does the HOA allow rentals?
What is the Net Income projection over 5-10 years?
0 votes
chris mosher, Agent, San Jose, CA
Thu Jul 18, 2013
I think it depends on a couple factors and knowing exactly where the home is located before I could give you specifics. After that, determining what the current market value is would help you in deciding which route will be best. Knowing more details about the home ( location, age, size) would help give me a better understanding about rent estimations also. Lots of things can change with the housing market in the next couple years. We have seen a tremendous improvements this year and it would be nice to see that continue but it has got lots of people off the fence so far. I think once you saw clear numbers then you'll be able to make the right decision. Please feel free to contact me and I'll be glad to help you out.

Thank you,

Chris Mosher
1100 Lincoln Ave #170
San Jose, 95125
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