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Rent the condo or sell for the profit?
My husband wants to sell and invest the gain in stocks. I want to hold on to the condo and rent it.
August 19, 2005: 12:32 PM EDT
By Walter Updegrave, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - My husband and I are live in a condo in Southern California, but we're now buying a townhouse because our family needs more space. Question is, what should we do with the condo? My husband wants to sell it and use the gain to invest in stocks. He expects the real estate market to cool. I want to hold on to the condo and rent it out, even if the rent doesn't cover our mortgage payment initially. Which do you think is the better way to go?

-- Ping, San Diego, Calif.

I'm reluctant to get myself into the middle of these husband-wife disputes about finances (or anything else, for that matter). But I've got to say I side with your hubby on this one.

Not because I think he's clairvoyant about the future prospects for the housing market, but because I think his approach probably makes more sense within the context of your overall financial picture.

Let me explain.

As I've said before, I think the main reason for owning residential real estate is to have a nice place to live and to raise one's family. Presumably that was the reason you bought your condo in the first place. And now that it's become a bit cramped, you're trading up for some more elbow room. This makes perfect sense to me.

Which investment is better?

So the only reason to hold onto the condo at this point is for investment reasons. Which means the questions for you and your husband comes down to this: which is the better investment for your circumstances: the condo or stocks?

Let's admit up front that we have no way of knowing which of the two will do better in the future. Both real estate and stocks have credible records of providing solid long-term returns, although stocks clearly have more short-term setbacks. But, truth is, each could turn out to be a terrific investment or a lousy one.

But even if I gave them both roughly equal chances of delivering the same return, I'd still go with stocks. Why? Well, for one thing, since you own your townhouse, you've already got exposure to the real estate market. Even if house prices stagnate or fall in the meantime, as long as they continue to go up over the long term (which I expect they will), the value of your house will rise and you'll participate in real estate's gains.

In all likelihood, the equity you have in your home already represents a significant percentage of your net worth. And that percentage is likely to rise in the future as you pay down the mortgage and as house values climb.

At this point at least, it seems to me you don't really need more real estate. Which is why I think your husband's strategy of taking some of your real estate profits and using them to build a stock portfolio makes sense. This way, you're not depending on the performance of one type of investment. You're hedging your bets by owning both types of assets.

Diversify your assets even further

Actually, I'd make one change in your husband's plan: rather than simply dumping all the money into stocks, I recommend that you and your hubby create a diversified portfolio that consists of different types of stocks -- large, small, value and growth shares -- as well as different types of bonds -- short-term, intermediate-term, government issues and corporates. [For advice on how to do that, click here.)

By spreading your money around this way, you can at least temper some of the ups and downs of the market.

And unless you and your husband really know your way around the stock and bond markets, I also suggest that you build this portfolio through mutual funds or ETFs, rather than individual stocks and bonds. For more information on funds and ETFs, check out our Mutual Fund section and our ETF Center.

After you've had your stock and bond portfolio up and running for a while, you could consider adding some investment real estate -- as opposed to the house or houses you live in -- to your holdings.

The main reason to do that is to get the diversification benefits of real estate. Since real estate values don't always move in synch with the stock market, adding some to your portfolio can reduce the fluctuations in the overall value of your portfolio.

Even then, I'd be more likely to invest in real estate securities, such as REITs or real estate funds, rather than bricks and mortar, since securities are just a lot easier to buy and sell and require less attention. And I'd also limit that investment real estate to, no more than 15 percent or so of my total investment portfolio, which is enough to get real estate's diversification benefits.

So that's my take. Now it's up to you two to fight it out, er, I mean discuss it calmly and rationally until you come to a consensus. Good luck.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."  Top of page


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