Rent at lower rate or sell for big loss

[sara54]

Before we were married, my husband owned a condo. We moved just before the crash, but we couldn't sell it. Since then, we've rented it. We currently have a renter in there now who is possibly interested in renewing the lease for another year, but she would need us to lower the rent in order to stay (she recently started her own business, so her cash flow situation is different than it was when she originally signed the lease last May).

We're trying to figure out if it would be better to try to sell at a big loss, or just renegotiate with our current tenant. We don't like being landlords, and, if we sold the condo, even at a big loss, we would use the cash to pay off our primary residence and my husband would retire. He could possibly still retire with renting out the condo - we would just use the condo income to cover our primary residence mortgage (which is at a very low 2.875 rate, so we're not in rush necessarily to pay it off for obvious reasons).

Here are all of the pertinent details I can think of:

Originally bought condo in 2003: $169K
Monthly mortgage payment: $540 (we have about $50K balance on mortgage)
Lapses in tenants since 2005: total of 6 months
Community fee: $215/month
Insurance: $250 annually
Total monthly costs: $776

Current rent: $1200 per month
Realtor wants to list condo at: $129,900

We've been waiting for the "market to come back" in this area for nearly ten years. It is a great location, but the neighborhood has many elderly residents who have died and whose kids then sell the properties for fire-sale prices, so our comps are abysmal. If we renew the tenant's lease, she can't go over $1000/month in order to stay. I would prefer to either renew with her or try to sell it because we just aren't cut out to be landlords at this stage in our lives, but I also hate the thought of taking that big of a loss on selling it now (even though I doubt the prices there will recover much there in the next few years). We will also probably need to put at least $2500 into the condo just to get it on the market (new carpet, painted, other maintenance issues).

So what would you do?

Thanks for your help and ideas!

[MKinVA]

I would sell. I am a similar position with a rental we have. We want to move toward retirement, but I have realized this rental is holding us back. We are admitting, like you, that it just doesn't fit in with our future plans. We will continue to be landlords, just not with this property. See if your tenant will agree to a month to month at the $1,000 rate and put it on the market. At least it will pay its bills while you are selling it.

[Another Reader]

We're trying to figure out if it would be better to try to sell at a big loss, or just renegotiate with our current tenant. We don't like being landlords, and, if we sold the condo, even at a big loss, we would use the cash to pay off our primary residence and my husband would retire. He could possibly still retire with renting out the condo - we would just use the condo income to cover our primary residence mortgage (which is at a very low 2.875 rate, so we're not in rush necessarily to pay it off for obvious reasons).

Sell.  Today.  Your husband can retire.  That alone is worth taking the loss.

[Rebecca Stapler]

With only a $250/month minimum net and you not enjoying being LLs, I don't see the draw. I would sell. Particularly because you know the neighborhood and it doesn't seem to have potential to rebound. Have the prices also gone down in the past year? 

Otherwise, I know you trust your tenant, but if you want to keep the property profitable and keep renting it out, you could find a new tenant. One of the benefits of having a rental property is that your mortgage payment is fixed, but the rental payments can incrementally increase each year. With this tenant, they're going in the wrong direction.

[Another Reader]

If you do keep it, in your shoes, I would replace the tenant.  She cannot afford to live in your rental.  Renters with a "temporary" reduction of income, whatever the cause, rarely survive.  Renters wanting you to pay the difference while they spend their money on something else are a big red flag.  If the business fails, you will be left with several months rent loss trying to remove a failing tenant.  Figure out what market rent is, and offer her a renewal at that rent.  If she does not accept, move on.

[DoubleDown]

If you do keep it, in your shoes, I would replace the tenant.  She cannot afford to live in your rental.  Renters with a "temporary" reduction of income, whatever the cause, rarely survive.  Renters wanting you to pay the difference while they spend their money on something else are a big red flag.  If the business fails, you will be left with several months rent loss trying to remove a failing tenant.  Figure out what market rent is, and offer her a renewal at that rent.  If she does not accept, move on.

+1

[arebelspy]

Actually this is a good question that I don't have an answer to aside from running the numbers every individual situation.

1) Are there any good rules of thumb for when you should dump a property that bleeds you versus holding onto it based on potential appreciation?

2) Are there any good calculators online for comparing a slow loss over time versus a big loss now?

[chubbybunny]

...We don't like being landlords...we just aren't cut out to be landlords at this stage in our lives...

That's your decision right there.  As others stated, there is a risk your tenant won't pay, then you're still out all your expenses, not to mention additional repairs that come up. I would definitely notify the tenant that you won't be renewing the lease. Give your realtor the opportunity to set the right price and get it out of your lives.  Then you can invest the proceeds in a mutual fund and make yourself some money with much less stress!

Also, I'm not biased against rental properties.  We actually own two.  One is fully paid for and the other has a mortgage, but we are turning a profit and I don't mind being in it for the long haul.