Should I sell my New York coop

Question

Hi All,

My husband and I are conflicted and need some investment advice. We currently own a coop on the upper west side in new york with a liberal sublet policy. We are renting it out to tenants whose lease expires in about 3 months. We now live on the west coast. Because we lived in it for more than 2 years we have until August 2018 to sell it and avoid capital gains tax. It currently is cashflow neutral (if you do not include the assessments we've paid). With assessments its cashflow negative. We are considering putting it on the market now and taking those proceeds (we anticipate a 50% return on investment) to buy a multifamily in California. Should we sell or continue to rent it out?

Thanks in advance,

Sherry

Scott Schreiber · Answer

Hi Sherry,

I'll try to help with your question, as I am both an interested investor-hopeful who has done a lot of research, a real estate attorney in NYC, and a resident of the UWS of NYC. That being said, I'm sure there are many others on the boards who can provide a lot more insight.

Let me also preface by saying nothing contained herein should be construed as legal advice. I do not represent you, nor are you my client (sorry, I have to say that). Also, everyone has to make the decisions that work best for them, but here are some things to consider when making your decision:

1. Are you renting it at, below, or above market? If below, and you could raise it to market, what would your cash flow look like?

2. Could you do any improvements that would allow you to rent it out for more?

3. When you say liberal sublet policy, what do you mean? Also, keep in mind that a new Board could take charge of the building and get rid of the liberal sublet policy. I have no idea whether that's a likely event, but just something for you to keep in mind.

4. I'm not a tax expert, so I don't know about the capital gains tax issue (though I'd be happy to try to put you in touch with someone who would know, although that would likely cost you). However, do you know about 1031 exchanges? If not, the general idea is, if you sell an "investment" property and buy another investment property with the proceeds, you don't pay tax on the proceeds. So even if you don't sell by August 2018, you could still avoid paying tax on the sale via a 1031 exchange (if it's still around by then). As I said, this isn't legal advice, though.

5. For the amount you're expecting on getting, what can you get in California?

6. What's your "why"? Why are you investing? Cash flow now? Appreciation later?

7.When considering your ROI in selling your co-op, also keep in mind that in NYC, you, as seller, will likely have to pay NYC and NYS transfer tax (buyer would likely pay "Mansion Tax" if the sale price is $1M, but everything is negotiable).

8. In addition to transfer taxes, your co-op may also institute a flip tax, either on the buyer, the seller, or both. Something else to keep in mind in your sale.

9. Depending on how much equity you have in the property, and assuming you could raise the rent to help your cash-flow problem, might be worth considering a cash-out refinance and taking that money to invest in a MF in California, if that's your ultimate goal. My philosophy is to never sell anything.

I don't mean to solicit on the forums, but if you'd like to discuss more, I can provide you with my phone number and work email. Just send me a PM and I'd be happy to help more in any way I can.

Good luck!

EDIT: A few of the other answers were given while I was typing this out, so please excuse any repeat information.

Sherry G. · Answer

Hi Sam,

Thank you for your input. It is tricky which is what makes it so difficult deciding! Please see my responses below in brackets.

Best,

Sherry

I think the most important question is what are you interested in doing? [If we sold it, we would be interested in buying a multifamily that has both cash flow and appreciation potential.]

Has the hassle of keeping the property become too much for you? [It hasn't really been a hassle. We rented out a month before we left the city and those tenants renewed. This August will be the first time we would be renting it out cross-country. The issues that did come up, we were able to get our maintenance company/super to handle or we handled directly with the the tenants. ]

Is it too difficult for you to manage it from the West Coast? [See above.]

If you are cash-flowing negative though, then you should really ask yourself how you are benefitting by keeping the property. You would be better off with the money sitting in a bank account than paying to keep the property. [So far the only benefit is we've see appreciation and someone is essentially paying our mortgage. The most conservative estimate we've received from a broker is a 20% price increase (50% cash on cash ROI) from what we bought it for less than 4 years ago. That said the building does not have a good reserve so we have to factor in that any repairs will be paid for via assessments.]

In terms of the market, now is definitely a very strong sellers market. You will be able to command a higher price now with more offers and options than in the past. That doesn't mean that you will not be in a similar position in the future. [Do you see any softening of the new york market as compared to last year? How about the rental market?]

Now, this is what I consider the tricky part, considering the fact that you are in a sellers market now means that if you are looking to put that money into another property, you will be paying more than if you waited for a buyers market to come around. The option of selling now and waiting to buy might be a solid option except you will not be able to do a 1031 exchange, which may not be a problem since you have lived in the property for 2 years. Depending on where you live though, you very well may be able to find a property that will be cash flowing positive for you, which should be one of your goals. [Exactly, If we sell before August 2018, we will not need to rely on a 1031. The socal market is very hot right now and we keep looking at multifamilies, but so far its been hard to find ones that cashflow postive and also hard to find any that have more appreciation potential given how expensive the market is right now. We could sell now and wait patiently for prices to soften, but who knows if that will happen.]

Also, have you been looking in your local market at what your options are there? [See above.]

Scott Schreiber · Answer

1.  We are renting it at market and that covers the mortgage and maintenance. We had an assessment in place for about a year to cover major rennovations to the building which have resulted in appreciation.

Exactly....the problematic assessments. That being the case, you're relying on appreciation. There are no guarantees, but on the UWS of Manhattan, there's a pretty good chance that the value will keep going up.

2. We could do improvements, but I am not sure whether the increase in rent would justify it. Our neighbor gut rennovated her unit and she rents her place out for the same amount we rent ours.

In that case, I think it's safe to say your cash flow problems aren't going to be fixed any time soon.

3. Liberal sublet policy meaning we can rent out the place for as long as we like without restriction as long as its not a short term rental i.e. airbnb. This is unlikely to change as the sponsor owner % is high.

Has the sponsor been selling any shares lately? Without knowing the exact details of your specific co-op, I'll just say that you never know when a sponsor might want to sell some, most, all of their shares. Connected with my hatred of assessments as they pertain to investment properties is my belief that no matter what, you're putting your investment into someone else's hands when you own a co-op or condo.

5. Depending on the area, instead of owning one coop we could buy anywhere from a duplex to a fourplex in California if we invested all of the money from the sale.

I'm partial to spreading your costs and risk among as many potential tenants as possible. Therefore, if you could get a fourplex in California with higher cash flow, that would be my vote. Not only would you have more control, but one vacancy isn't 100% of your income gone.

6. We don't need the cash flow now but ideally we would like a place that cashflows and appreciates. One thing thats attractive about owning a property in California is that we are not obligated to pay maintenance to a coop which eats from the cashflow, however, that said we realize there will be maintenance expenses associated with owning any property.

While there will be maintenance costs, they'll be a lot more under your control, and, as I said above, you can distribute them among more tenants. Again, though, if you're playing the appreciation game, I'm the wrong one to ask. I can make guesses about what the markets are going to do, but others are far more qualified than I am. I don't think NYC is going anywhere, but you just never know.

8. Coop does not have a flip tax.

For now.

9. Can you elaborate on your philosophy of never selling. Would you sell to buy something bigger? We could do a cash-out finance in a few years to buy another MF

I guess I mis-spoke when I said never sell. I just mean that there are far too many instances I've heard of where people sold because they thought their property was going to be worth less later than it is now, and they ended up missing out on a lot of money. If you hold anything long enough, the odds are that it's going to increase in value (I know, this goes against my entire non-appreciation advice). I would sell to buy something bigger if there was no way I could do both. If you could find a value-add property in California, BRRRR, and buy another property, etc., I think that's an excellent strategy, as do many on this forum.

Again, anything I can do to help, please let me know! Or if you'd like to talk privately, my offer is still open.

Sherry G. · Answer

Joe, that's great. We have one duplex here 2 miles north of downtown la. We purchased it in the beginning of 2016. We live in one and rent out the other and so far the cashflow is good. We definitely overpaid a bit for the property (it was flip) so haven't been as luckily re appreciation as of yet. Assuming the downtown boom continues then I am hopeful re cashflow and appreciation. We are having the same difficulty finding multi-families that will cashflow well and feel like everything is topped out as far as appreciation. It's part of what makes selling nyc such a difficult decision.

Sherry G. · Answer

Hi Michael,

Yes, the fees are so high and what worries us is if we can't do a 1031 properly in the future we will be stuck paying at least 40-50k in capital gains taxes if we were to sell for the same price we would sell today! We are leaning towards using a broker, which is especially crazy since I have a ny broker's license (I got it through being an attorney), but given that I live in LA it will be hard for me to arrange an open house and showings. I thought about asking to split the commission with whatever broker we use, but am hesitant because if we use a broker, I want them to be fully committed to our listing and not prioritize another listing where they will make more.

Joe J. · Answer

@Sherry G. I have one 2-unit rental in Orange County that I bought back in 2012.  I got lucky and have experienced great rental and price appreciation since then.  The SoCal market seems challenged to me if you're looking to do a buy/hold off of the MLS.  Seems darn near impossible to find anything close to cash flow positive properties in LA/OC county.  Most rentals I see are at the 0.5% rule (mthly gross rents = 0.5% of purchase price).  So unless you're able to get a great deal and get instant equity, I just don't see a compelling reason to buy here right now unless you're banking on appreciation.  That may happen, but it seems a bit risky for me.  That said, who knows what the market will do in the next 5 years.  Inventory is extremely low and it is still a sellers market in most parts of socal.  Interest rates still remain low and rental rates are still high, so relative affordability is decent and the alternative to buying a primary residence would be renting and rental rates are pretty high as well.

I feel pretty comfortable that prices will be higher in 10-15 years.  I just don't know about the next couple years.  I personally just don't want to take on negative cash flow off the bat unless there is a more compelling case for appreciation.

I'm very much a small/new investor but feel free to send me a message if you wanted to discuss anything else or have questions.  Best of luck!

Michael S. · Answer

Sherry - also thinking something similar, but I keep getting stuck on those transaction fees, they're so high!  Would you list with a full-service broker?

Sherry G. · Answer

Hi Joe,

We do not have any capital gains as of yet. Do you own properties in socal? What do you think about the market now?

Thanks,

Sherry

Sherry G. · Answer

Hi Scott,

Thank you so much for taking out the time to type your response. I've answered your questions in brackets. From the overall sound of it, it looks like you would not sell. Is that correct?

1. Are you renting it at, below, or above market? If below, and you could raise it to market, what would your cash flow look like? [ We are renting it at market and that covers the mortgage and maintenance. We had an assessment in place for about a year to cover major rennovations to the building which have resulted in appreciation.]

2. Could you do any improvements that would allow you to rent it out for more? [We could do improvements, but I am not sure whether the increase in rent would justify it. Our neighbor gut rennovated her unit and she rents her place out for the same amount we rent ours.]

3. When you say liberal sublet policy, what do you mean? Also, keep in mind that a new Board could take charge of the building and get rid of the liberal sublet policy. I have no idea whether that's a likely event, but just something for you to keep in mind. [Liberal sublet policy meaning we can rent out the place for as long as we like without restriction as long as its not a short term rental i.e. airbnb. This is unlikely to change as the sponsor owner % is high.]

4. I'm not a tax expert, so I don't know about the capital gains tax issue (though I'd be happy to try to put you in touch with someone who would know, although that would likely cost you). However, do you know about 1031 exchanges? If not, the general idea is, if you sell an "investment" property and buy another investment property with the proceeds, you don't pay tax on the proceeds. So even if you don't sell by August 2018, you could still avoid paying tax on the sale via a 1031 exchange (if it's still around by then). As I said, this isn't legal advice, though. [I am aware of 1031 exchanges and if we decided to keep the place would either not sell it or would try to do a 1031 to defer the tax payments.]

5. For the amount you're expecting on getting, what can you get in California? [Depending on the area, instead of owning one coop we could buy anywhere from a duplex to a fourplex in California if we invested all of the money from the sale.]

6. What's your "why"? Why are you investing? Cash flow now? Appreciation later? [We don't need the cash flow now but ideally we would like a place that cashflows and appreciates. One thing thats attractive about owning a property in California is that we are not obligated to pay maintenance to a coop which eats from the cashflow, however, that said we realize there will be maintenance expenses associated with owning any property.]

7.When considering your ROI in selling your co-op, also keep in mind that in NYC, you, as seller, will likely have to pay NYC and NYS transfer tax (buyer would likely pay "Mansion Tax" if the sale price is $1M, but everything is negotiable). [Yes, we have factored that tax into our calculation.]

8. In addition to transfer taxes, your co-op may also institute a flip tax, either on the buyer, the seller, or both. Something else to keep in mind in your sale. [Coop does not have a flip tax.]

9. Depending on how much equity you have in the property, and assuming you could raise the rent to help your cash-flow problem, might be worth considering a cash-out refinance and taking that money to invest in a MF in California, if that's your ultimate goal. My philosophy is to never sell anything. [Can you elaborate on your philosophy of never selling. Would you sell to buy something bigger? We could do a cash-out finance in a few years to buy another MF]

I don't mean to solicit on the forums, but if you'd like to discuss more, I can provide you with my phone number and work email. Just send me a PM and I'd be happy to help more in any way I can.

Good luck!

EDIT: A few of the other answers were given while I was typing this out, so please excuse any repeat information.

Joe J. · Answer

@Sherry G.

I would sell if you had a significant amount of capital gains.  You're cash flow is neutral and you're moving farther away.  If you are saving a significant amount from the tax free capital gains, I would sell and rebuy to reset your basis on another rental property.  Just my two cents.

Should I sell my New York coop

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