Two condos: continue renting + cash flowing or cash out and invest?

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rhinopylon
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Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

I outright own Condo #1 that I paid $95,000 for. Zillow now estimates the value at $125,000.
I own another Condo #2 in the same building that I paid $110,000 for. Zillow estimates that value at around $125,000 also.

Condo #1 has no mortgage. Total annual expenses are $4,800. Total annual rent income is $14,400.
Condo #2 has a mortgage balance of $45k at 3.5% with 7 years left. Total annual expenses (including mortgage) are $12,100. Total rent income is $13,200. Once the mortgage is paid off it will have the same annual expenses as Condo #1.

Both rentals are currently being rented at below market rate because I’ve had the same renters and I didn’t feel like raising their rates. When either condo is eventually rented again, I should be able to raise the rent by a couple hundred dollars per month. I’ve owned both units for over a decade and they’re in a desirable area and they get rented within 1-2 months of any vacancy notices. I self manage the units and I could probably chop that 1-2 month float in half if I tried a little harder in between tenants. Most of the time I have long term renters so float periods are not anything I worry about. Managing the units is trivial so there's no real stress or time overhead.

My eventual goal is to FIRE with a SWR of ~3%: for every $1M I save, I can rely on $30k per year. But these condos (once the mortgage is paid off) provide $26,500-$9,600 = $16,900 annual income. That’s the equivalent of a little more than $500k for only having around $200k of my own money invested or Zillows valuation of $250k opportunity cost. Presumably, I could raise the rates in the future and still keep the units rented easily.

I think keeping these units is a pretty easy decision but I wanted a sanity check to see if other people would do the same. I have no plans to pay this mortgage off early so I’ll be carrying the mortgage for another 7 years - if interest rates drop back to 0, I might take my excess cash and pay it off in a lump sum but I’ll decide that when it happens.

Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
exodusNH
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by exodusNH »

rhinopylon wrote: Mon Apr 01, 2024 11:32 am Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
These seem like they provide a reasonable cash flow.

What percent of your net worth is tied up in these condos?

How old are the buildings? What's the status of the reserves? Is there a lot of deferred maintenance?
unwitting_gulag
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by unwitting_gulag »

rhinopylon wrote: Mon Apr 01, 2024 11:32 am My eventual goal is to FIRE with a SWR of ~3%: for every $1M I save, I can rely on $30k per year. But these condos (once the mortgage is paid off) provide $26,500-$9,600 = $16,900 annual income. That’s the equivalent of a little more than $500k for only having around $200k of my own money invested or Zillows valuation of $250k opportunity cost. Presumably, I could raise the rates in the future and still keep the units rented easily.

I think keeping these units is a pretty easy decision but I wanted a sanity check to see if other people would do the same. ...
Even at your below-market rates, you have gross monthly rental receipts of $1200, on a $125K property... almost the mythical 1%/month hawked by the personal finance websites that extol the merits of landlording. I didn't realize that myth could become reality, but your example shows it. Congratulations!

There are some caveats. One is maintenance/repairs, that may be minor in any given year, but could mushroom to maybe $10K in an unlucky year. Another is inexorable growth in property taxes and insurance, which seem to rise whatever happens to property values or aggregate inflation. Yet another is potential building assessments by your condo association - and for that matter, increase in their monthly fees.

Caveats aside, your effective CAGR is around 7%, which - if we accept higher volatility - is slightly inferior to the historical trends in stocks. Then there are the tax consequences... stock --> dividends --> annual taxes (a most apt seasonal gripe right now!); what about your condos? Are the tax-quirks working in your favor? Do they get recaptured if/when you sell?

As a paper-assets person without real estate, I am very much seduced by prospect of diversifying into bricks and dirt... but haven't been able to do so. For those who have, congratulations!... especially if you've learned the system and have a settled cadence. So I'd say, by all means, keep the condos... and possibly even buy more (economy of scale).
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

exodusNH wrote: Mon Apr 01, 2024 11:56 am
rhinopylon wrote: Mon Apr 01, 2024 11:32 am Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
These seem like they provide a reasonable cash flow.

What percent of your net worth is tied up in these condos?

How old are the buildings? What's the status of the reserves? Is there a lot of deferred maintenance?
The condos are about 10% of my total NW. The buildings were built in the 80s. Reserves are good but HOAs increase every couple years by maybe $20/year - not enough to cause me any concern so far. Maintenance activities are kept up with as far as I've been able to determine. Siding/rails/paint/stairs/etc... all fixed as needed.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

unwitting_gulag wrote: Mon Apr 01, 2024 12:13 pm
rhinopylon wrote: Mon Apr 01, 2024 11:32 am My eventual goal is to FIRE with a SWR of ~3%: for every $1M I save, I can rely on $30k per year. But these condos (once the mortgage is paid off) provide $26,500-$9,600 = $16,900 annual income. That’s the equivalent of a little more than $500k for only having around $200k of my own money invested or Zillows valuation of $250k opportunity cost. Presumably, I could raise the rates in the future and still keep the units rented easily.

I think keeping these units is a pretty easy decision but I wanted a sanity check to see if other people would do the same. ...
Caveats aside, your effective CAGR is around 7%, which - if we accept higher volatility - is slightly inferior to the historical trends in stocks. Then there are the tax consequences... stock --> dividends --> annual taxes (a most apt seasonal gripe right now!); what about your condos? Are the tax-quirks working in your favor? Do they get recaptured if/when you sell?

As a paper-assets person without real estate, I am very much seduced by prospect of diversifying into bricks and dirt... but haven't been able to do so. For those who have, congratulations!... especially if you've learned the system and have a settled cadence. So I'd say, by all means, keep the condos... and possibly even buy more (economy of scale).
I'm not aware of any tax benefits from owning these units. The rent is taxed at my income level and if I ever do sell them, I'll not have the benefit of having lived in it in the last 3/5 years to shelter the profit.

I have considered buying more units in this building but they very rarely ever go on the market and then recently I've been wondering if continuing to own them was even the right idea. From your first comment it sounds like they're still ok to hold onto. Thank you!
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by exodusNH »

rhinopylon wrote: Mon Apr 01, 2024 1:27 pm
exodusNH wrote: Mon Apr 01, 2024 11:56 am
rhinopylon wrote: Mon Apr 01, 2024 11:32 am Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
These seem like they provide a reasonable cash flow.

What percent of your net worth is tied up in these condos?

How old are the buildings? What's the status of the reserves? Is there a lot of deferred maintenance?
The condos are about 10% of my total NW. The buildings were built in the 80s. Reserves are good but HOAs increase every couple years by maybe $20/year - not enough to cause me any concern so far. Maintenance activities are kept up with as far as I've been able to determine. Siding/rails/paint/stairs/etc... all fixed as needed.
For example, could they could replace the roof without a special assessment?

You're not in Florida, right?
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

exodusNH wrote: Mon Apr 01, 2024 1:43 pm
rhinopylon wrote: Mon Apr 01, 2024 1:27 pm
exodusNH wrote: Mon Apr 01, 2024 11:56 am
rhinopylon wrote: Mon Apr 01, 2024 11:32 am Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
These seem like they provide a reasonable cash flow.

What percent of your net worth is tied up in these condos?

How old are the buildings? What's the status of the reserves? Is there a lot of deferred maintenance?
The condos are about 10% of my total NW. The buildings were built in the 80s. Reserves are good but HOAs increase every couple years by maybe $20/year - not enough to cause me any concern so far. Maintenance activities are kept up with as far as I've been able to determine. Siding/rails/paint/stairs/etc... all fixed as needed.
For example, could they could replace the roof without a special assessment?

You're not in Florida, right?
Not in FL! I haven't checked the newsletter in over a year or so but last time I reviewed it their summary showed plenty of money for big ticket repairs. I just don't remember specifics but I remember thinking, that seems like enough. I could probably be a lot more engaged but it's been a pretty easy asset to just coast on. I actually lived there myself for several years prior to renting it out.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by exodusNH »

rhinopylon wrote: Mon Apr 01, 2024 3:48 pm
exodusNH wrote: Mon Apr 01, 2024 1:43 pm
rhinopylon wrote: Mon Apr 01, 2024 1:27 pm
exodusNH wrote: Mon Apr 01, 2024 11:56 am
rhinopylon wrote: Mon Apr 01, 2024 11:32 am Would you guys keep these condos and let it provide income for the next 50 years?

Would you cash it out and use the money to invest for the next 7 years (and on through retirement)?
These seem like they provide a reasonable cash flow.

What percent of your net worth is tied up in these condos?

How old are the buildings? What's the status of the reserves? Is there a lot of deferred maintenance?
The condos are about 10% of my total NW. The buildings were built in the 80s. Reserves are good but HOAs increase every couple years by maybe $20/year - not enough to cause me any concern so far. Maintenance activities are kept up with as far as I've been able to determine. Siding/rails/paint/stairs/etc... all fixed as needed.
For example, could they could replace the roof without a special assessment?

You're not in Florida, right?
Not in FL! I haven't checked the newsletter in over a year or so but last time I reviewed it their summary showed plenty of money for big ticket repairs. I just don't remember specifics but I remember thinking, that seems like enough. I could probably be a lot more engaged but it's been a pretty easy asset to just coast on. I actually lived there myself for several years prior to renting it out.
The risk with condos is that the board continually puts off repairs and doesn't collect enough reserves. Then you get hit with special assessment after special assessment.

Florida condo owners are in for a lot of sadness.

At any rate, it seems like you've got an ideal set up here. Keep and eye on the maintenance and reserves, since having those in good shape will make it easier to sell.

10% is probably a good level of your net worth. Since they're in the same area, you've got a geographic concentration. I don't know that I'd take on more risk here.

If you look at my past posts, I usually advise people to sell. But you look to have set yourself up pretty well.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

Thanks, it's always good to have a sanity check every now and then. I was just recently reading some posts about the opportunity cost loss and it got me nervous because I hadn't really considered that beyond what I was cash flowing. In fact, it might have even been your posts that got me nervous in other threads :mrgreen:
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by Hebell »

I'd sell. At 50 years, you're coming up on expensive plumbing repairs (pipes), balcony slab edge repairs, replacing hydraulic pumps of elevators, corroded steel framing internal to the exterior walls if there's been any sort of problem (crack stucco, defects along the roof drip line etc), concrete deck problems under the roof, complete overhaul of elevator electrical systems, upgrades to fire suppression systems to meet new fire codes, failing expansion joints in the cat walks, and a whole ton of other stuff you can't see.

These condos are getting really old. If you can get a good price I'd sell. Speaking as an ex-condo association president who just finished up a two and a half year restoration project costing millions of dollars.

The only exception would be if these buildings are in a historic district, and the surrounding buildings have a history of keeping up with everything, too.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by runswithscissors »

OP - what is the square footage of the condos?
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

Hebell wrote: Mon Apr 01, 2024 6:55 pm I'd sell. At 50 years, you're coming up on expensive plumbing repairs (pipes), balcony slab edge repairs, replacing hydraulic pumps of elevators, corroded steel framing internal to the exterior walls if there's been any sort of problem (crack stucco, defects along the roof drip line etc), concrete deck problems under the roof, complete overhaul of elevator electrical systems, upgrades to fire suppression systems to meet new fire codes, failing expansion joints in the cat walks, and a whole ton of other stuff you can't see.

These condos are getting really old. If you can get a good price I'd sell. Speaking as an ex-condo association president who just finished up a two and a half year restoration project costing millions of dollars.

The only exception would be if these buildings are in a historic district, and the surrounding buildings have a history of keeping up with everything, too.
Thanks, those are good points about the advanced age. It's a little simpler than what you're comparing it to; it's just a two story building with no elevators or anything like that - all exterior access. They have repaired/replaced the siding on the exterior in the past but I'm not sure about if the roofing has ever been replaced. There is a significant amount of money in the reserves though... I'll have to do a little more research on this I think.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

runswithscissors wrote: Mon Apr 01, 2024 7:20 pm OP - what is the square footage of the condos?
They're 1-BRs at roughly 700sf.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by illumination »

Do you like being a landlord? I feel like that question is the most important one. When I owned a rental property, I hated it.

I'm also not a big fan of condos. I have some in-laws that have had to cough up like tens of thousands of dollars in a single year for massive projects on their rentals like redoing all the plumbing, redoing the roof, common areas, etc. They also felt like they needed to be on the board and really involved to make sure their nest egg was being properly managed.

The past isn't prologue, but a Total Market fund has outperformed this particular condo investment and is a true "passive" investments versus owning 2 condos. The last 10 years, the annual growth rate has been close to 12%. Likely more tax efficient also.
rhinopylon wrote: Mon Apr 01, 2024 11:32 am I outright own Condo #1 that I paid $95,000 for. Zillow now estimates the value at $125,000.
I’ve owned both units for over a decade...
$95k in VTI from 2014 to today would be $307,287. Over 10 years and the number gets way bigger.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

illumination wrote: Tue Apr 02, 2024 10:59 am Do you like being a landlord? I feel like that question is the most important one. When I owned a rental property, I hated it.
I don't mind being a landlord. They truly have been set and forget over the last 10 years.
illumination wrote: Tue Apr 02, 2024 10:59 am $95k in VTI from 2014 to today would be $307,287. Over 10 years and the number gets way bigger.
This is where I begin to get confused and I still feel like the condo has been a better deal. I intend on FIREing in the next several years so I'm stuck in this groove of looking at investments as what can they give me at a SWR of 3-4%. In this case, if I had invested that $95k back in 2014, I'd have $307k today. A SWR of 4% coming out of that $307k is $12,291 (or $1,024/month). I've been receiving $1,200 per month on this condo SINCE 2014 and I can expect to continue receiving $1,200 per month into the future and forever - hopefully increasing with inflation and market demands of course.

All that is predicated on me making the decision 10 years ago to invest that money in the market and relying on the growth of it over the last 10 years. Since I did not do that, taking the money out now seems dangerous as I would be resetting the clock and I'd only have the original $95k back in hand (probably closer to $115k-120k considering the increase in value minus realtor/taxes). So then I'd have to invest the $120k into the market and wait another 10 years before that investment could provide the same income the condo has been providing.

This is where I really begin to bog down on the different models though and that's why I brought this question to the forum. I feel like I may be kinda locked into the decision to hold these condos as I've already lost 10 years of investment opportunity, and now I'm limiting my future horizon to an early retirement so I can't afford to let it sit for 15-20 years. I'm hoping to retire in 5 years at the most.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by Hebell »

I keep one townhouse and I rent it out in Asheville North Carolina, because it's had a stable tenant for years, and he's getting older and will probably die in the place.

I keep it in my portfolio for one reason. Geographic diversity for a place to live. I have better things I can do with the money (though as Asheville has become more cosmopolitan I have been able to raise the rent). But if I ever want to leave the higher tax state I'm in, and its estate tax, I can go there.

By living in a high tax state, I'm hoping it encourages me to give charitably through the upcoming years God willing.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by illumination »

rhinopylon wrote: Tue Apr 02, 2024 11:36 am
illumination wrote: Tue Apr 02, 2024 10:59 am Do you like being a landlord? I feel like that question is the most important one. When I owned a rental property, I hated it.
I don't mind being a landlord. They truly have been set and forget over the last 10 years.
illumination wrote: Tue Apr 02, 2024 10:59 am $95k in VTI from 2014 to today would be $307,287. Over 10 years and the number gets way bigger.
This is where I begin to get confused and I still feel like the condo has been a better deal. I intend on FIREing in the next several years so I'm stuck in this groove of looking at investments as what can they give me at a SWR of 3-4%. In this case, if I had invested that $95k back in 2014, I'd have $307k today. A SWR of 4% coming out of that $307k is $12,291 (or $1,024/month). I've been receiving $1,200 per month on this condo SINCE 2014 and I can expect to continue receiving $1,200 per month into the future and forever - hopefully increasing with inflation and market demands of course.
Is that $1,200 monthly gross revenue before expenses or net after expenses? What about property taxes? HOA fees? maintenance? remodeling? Vacancy gaps?
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by exodusNH »

rhinopylon wrote: Tue Apr 02, 2024 11:36 am [quote=illumination post_id=7800805 time=1712073565
All that is predicated on me making the decision 10 years ago to invest that money in the market and relying on the growth of it over the last 10 years. Since I did not do that, taking the money out now seems dangerous as I would be resetting the clock and I'd only have the original $95k back in hand (probably closer to $115k-120k considering the increase in value minus realtor/taxes).
You're also going to have to pay depreciation recapture. I won't try to explain it, because I don't fully understand it as I've never had to deal with it. But it's something to keep in mind. Some part of your gain will be taxed at a rate higher than capital gains.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by runswithscissors »

rhinopylon wrote: Tue Apr 02, 2024 10:44 am
runswithscissors wrote: Mon Apr 01, 2024 7:20 pm OP - what is the square footage of the condos?
They're 1-BRs at roughly 700sf.

700 SF is a lot of square footage considering the market value of the unit. At $120k valuation that doesn't even cover the replacement cost of the structure. With that square footage there is long term maintenance risks relative to the income you're receiving. One special assessment could wipe out years of cash flow. Unless the condo is in a historic district, in prime urban location, near the water or have unobstructed protected views, the condo isn't likely to appreciate much over time. As they age they lose value. Appreciation is in the land, the building only depreciates. And since a condo is mostly just building there is very little upside for long term appreciation. As long as you're ok with the condo not appreciating over 50 years and happy with the cash flow it generates despite maintenance cost risk, I would keep it. If you're anticipating appreciation I would sell them.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

illumination wrote: Tue Apr 02, 2024 12:42 pm
rhinopylon wrote: Tue Apr 02, 2024 11:36 am
illumination wrote: Tue Apr 02, 2024 10:59 am Do you like being a landlord? I feel like that question is the most important one. When I owned a rental property, I hated it.
I don't mind being a landlord. They truly have been set and forget over the last 10 years.
illumination wrote: Tue Apr 02, 2024 10:59 am $95k in VTI from 2014 to today would be $307,287. Over 10 years and the number gets way bigger.
This is where I begin to get confused and I still feel like the condo has been a better deal. I intend on FIREing in the next several years so I'm stuck in this groove of looking at investments as what can they give me at a SWR of 3-4%. In this case, if I had invested that $95k back in 2014, I'd have $307k today. A SWR of 4% coming out of that $307k is $12,291 (or $1,024/month). I've been receiving $1,200 per month on this condo SINCE 2014 and I can expect to continue receiving $1,200 per month into the future and forever - hopefully increasing with inflation and market demands of course.
Is that $1,200 monthly gross revenue before expenses or net after expenses? What about property taxes? HOA fees? maintenance? remodeling? Vacancy gaps?
Good point - I always forget that off the cuff. Net income is $800 per month. Which is only $240k at a 4% withdrawal rate. That's a lot closer to $120k than I was thinking.. although according to Bankrate ROI calculator it would take 12 years for 120k to grow to 240k at 7% rate.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

exodusNH wrote: Tue Apr 02, 2024 12:58 pm
rhinopylon wrote: Tue Apr 02, 2024 11:36 am [quote=illumination post_id=7800805 time=1712073565
All that is predicated on me making the decision 10 years ago to invest that money in the market and relying on the growth of it over the last 10 years. Since I did not do that, taking the money out now seems dangerous as I would be resetting the clock and I'd only have the original $95k back in hand (probably closer to $115k-120k considering the increase in value minus realtor/taxes).
You're also going to have to pay depreciation recapture. I won't try to explain it, because I don't fully understand it as I've never had to deal with it. But it's something to keep in mind. Some part of your gain will be taxed at a rate higher than capital gains.
Good point, I'm not sure how that would work either. And likely, I'm not going to sell it anyway, seems I'm locked into my decision from 10 years ago.
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Re: Two condos: continue renting + cash flowing or cash out and invest?

Post by rhinopylon »

runswithscissors wrote: Tue Apr 02, 2024 1:31 pm
rhinopylon wrote: Tue Apr 02, 2024 10:44 am
runswithscissors wrote: Mon Apr 01, 2024 7:20 pm OP - what is the square footage of the condos?
They're 1-BRs at roughly 700sf.

700 SF is a lot of square footage considering the market value of the unit. At $120k valuation that doesn't even cover the replacement cost of the structure. With that square footage there is long term maintenance risks relative to the income you're receiving. One special assessment could wipe out years of cash flow. Unless the condo is in a historic district, in prime urban location, near the water or have unobstructed protected views, the condo isn't likely to appreciate much over time. As they age they lose value. Appreciation is in the land, the building only depreciates. And since a condo is mostly just building there is very little upside for long term appreciation. As long as you're ok with the condo not appreciating over 50 years and happy with the cash flow it generates despite maintenance cost risk, I would keep it. If you're anticipating appreciation I would sell them.
I'm not anticipating appreciation as I was thinking that keeping them as rentals was the right thing. I hope there's no massive assessments in the future but that's something I should start paying more attention to. Looking back, maybe it would have been better to invest the initial ~100k in the market 10 years ago. Of course, that doesn't reflect that at that time, I didn't actually have $100k and I carried a mortgage for a portion of those 10 years. I also lived in the unit myself for several years so that's an issue as well.
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