A lot of people ask me: “should I sell my condo?” Usually in the context of buying a house or looking at investment options. In this video I show you how to think about it and crunch the numbers so you can make the right choice!
I am not the type of realtor to tell you to sell something just to get you to sell something. Rarely will I tell you to sell freehold (houses) but often I will tell you to sell a condo because the cap rate on condos usually sucks.
The cap rate measures how much income a property generates versus the current value, irrespective of financing.
This can be confusing because you may be cash flowing nicely on a condo rental that you bought some time ago. But that capital could be better deployed elsewhere.
So let’s look at an example:
• A condo that recently sold for $600,000
• Generates $2100/month in revenue (most recent rental in the building)
• Net operating income after taxes, insurance, and maintenance is $16,468
• Cap rate (NOI/Price) = 2.74%
• Cash flow is negative $426 but because you are paying down the mortgage the cash on cash return is 4.7%
And if you want to know what all these calculations mean please check out this video: https://youtu.be/BUixAghYuO8
Let’s compare that to a Freehold property:
• I helped clients buy a triplex for $1.05M
• It generates $6000/month in revenue
• Net operating income after expenses is $58,900
• Cap rate (NOI/Price) = 5.6%
• Cash flow is $1761/month and the cash on cash return is 16.8%
So to summarize, the numbers work so much better on freehold because you generate much more income for every dollar of cost. In this case the property is 1.75 times the cost but 3.58 times the income.
And yes, it costs more so if that purchase price is unavailable to you, you will either have to wait to build capital or partner up with someone. And in the case of the triplex I partnered two groups that would otherwise be unable to afford that property.
Okay so now to make the decision you need to know other thing you need to know is what is happening in the market.
• A buyers’ market is when sales are 40% or lower than new listings
• A sellers’ market is when sales are 60% or higher than new listings
• And a balanced market is between the two.
Right now condos are entering a buyers’ market and freeholds are still in a strong sellers’ market in the city. So if you are looking to sell a condo and buy a freehold it can be tough. If both were in a sellers’ market it would be easier. Or seller’s to buyer’s market would be amazing!
Another consideration to note is that if you do have a tenant in your condo it can be more difficult to sell. Especially if you aren’t getting market rents.