Accidental Landlord - negative cashflow?

Question

Hey all,

Due to a change in circumstances, and a poorly (unfortunately) timed purchase of a condo. I'm going to need to rent out my condo.

For some detail - the unit is worth less than what I paid, and I have a pretty large mortgage on it. The logic is that money is cheap to borrow, and my cash can do more for me if not tied up in the property - but equally, it's in a market that's been hit by Covid a little, and as such I'd rather hold.

The challenge is that it's a relatively expensive place - and I will be negatively cashflowing around $750-1000 per month / not including any turn over on the property / repairs that would be needed in future.

The question:

As someone who has never been a landlord (yet) - is the tax benefit of owning a condo (with property taxes / mortgage interest etc.) going to make it feel better - I'm not counting on it being a hugely appreciating asset - but being based just outside of Manhattan, I am confident for long-term growth.

When does a negative cashflow make sense? What other things do I need to consider prior to renting? How do people go about renting a single unit typically?

Basically - I am a complete novice (not originally from the US) and I have no idea how to rent a place here, so I'd love as much advice as possible please.

Thanks in advance

Katie Phillips · Answer

@Laurence Fru How many bedrooms does the condo have? Could you create an extra room? If you have to keep the condo, I would try to rent out each bedroom individually. This will create more monthly cashflow, so hopefully your total is not so negative. I understand your logic of losing 50k now or later, but unless your other residence is free, you could sell now, lose 50K, but use the left over money to buy your other place. Otherwise, you will lose 50K and have to pay for another place to live.

Max Vishnev · Answer

Hi Laurence, sounds like you're in a tricky position.  As a very active Realtor in Jersey City (I work with a lot of first-time investors/house-hackers), I would be happy to chat with you offline about your rent vs. sell options.  But I would generally agree with Joe's statements and would just add that an important rule in real estate is that you should never bank on appreciation.

Yes, real estate values generally go up over time due to inflation, but depending on when you bought it and where in the market cycle that was (as well as how good or bad of a deal you got at the time), you could be "under water" for a while.  So one way to think about it is to apply the economic concept of sunk cost.  Putting aside the past, what is the best path forward?  In other words, selling at a loss today shouldn't prevent you from selling it, because if you keep it, it sounds like you're guaranteed to bleed money every year.  I would estimate your annual loss and calculate your ROI (in your case, negative ROI).  Then, I would ask yourself:  If I were to sell and take the loss, how would that:

a.  Benefit you from a tax perspective (the loss may offset other income and reduce your tax burden for 2021)

b.  Can I reinvest the proceeds in a way that generates positive returns?  What could those returns be?  Could be an index fund or maybe another investment property with positive expected CF rather than negative.

Then there are the non-financial aspects to consider.  Namely, do you want to be a long-distance landlord?

Feel free to reach out via DM.  The condo market is definitely heating up here.

Paul Choi · Answer

One of the only times negative cash flow may work is if there is appreciation going on - forced, market or both.  Since you have don't have that, best to sell, cut losses and move on.  Not only is it setting you free financially, but also mentally.  Clears the head to plan your next move.

Would Airbnb work? Not familiar with the NJ market..

Christene Martin · Answer

Hi Laurence, I have been in JC for about 14 years and also have a rental in Hoboken and Guttenberg. I would be happy to chat with you and get some ideas going, dissect a few exit strategies... it might not be as bad as you think. I have had luck renting out the 2 places I mentioned, and when I first purchased my primary residence (a condo) I had a roomie for many years.

KP Rajan · Answer

Katie makes a great point - if things get back to some kind of normalcy that we are used to, your place - especially if close to the trains or ferry - can be a good source for airbnb (assuming your condo allows it) or renting a portion.

I am in Jersey City btw. Been here now for nearly 14 years.  So, if you want to catch up one of these days, will be happy to.

Laurence Fru · Answer

Thanks Joe, if I were to sell now, I would drop circa $30-50k depending on what it sells for - not just in value, but in what I pay out of pocket at this point with the high mortgage and drop in value plus closing fees etc. (as you can tell, when I say I bought the wrong place at the wrong time... I really didn’t make the best investment here - bought with my heart, not my head).

My logic was - either I lose that now, or I lose it over 3-5 years in NCF

In this situation - would you still say sell?

It may very well not recover the value it dropped, but there’s due to location, I feel confident it will pick back up over the next 5-10 years.

In an ideal world - I would stay living here, but life situations change, so will be living elsewhere for 2 years.

Thanks again for the input.

Joe Villeneuve · Answer

A man goes to the DR's office and when the DR asks him what's wrong, the man says it hurts when he raises his arm.  The Dr then says, "Don't raise your arm".

Sell your property and take the temporary loss, move forward with any cash you can get out, and stop the bleeding.  Not only is negative CF a bad ideas...always...but that's a huge negative CF number.  If you're losing $10k per year in CF, and remember, that's a double hit to you since you're now paying for things in this condo that the tenant should be paying for, and the money you are using is coming out of your pocket.  That also means that for every dollar of NCF, you are increasing the cost of the condo.

Sell, sell and .....SELL.

Laurence Fru · Answer

I should add - it’s in Jersey City.

Accidental Landlord - negative cashflow?

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