which way to lose money?? :(

Question

Hi BPers,

I have a condo in NYC, and I have been lucky that my tenants of 6 years have been paying throughout last year. But no surprise, they want to move out when their lease comes up this year in June.

my building has very large amount of fee to be paid to get new tenants (~$5000) and requires two year lease, but other than that, it's a very well maintained building and people love it. It has appreciated well before the pandemic hits.

I have large amount of capital being locked down in that unit, and with it's being rented at a reasonable rate, I have some cash flow, but not great. However, now there is new housing protection and tenant law in NYC, it gives the tenants so much power and gives me so little leverage. As of now, some landlords are paying all fees + one month broker fee just to get the apt rented, if that's the case, I would be bleeding cash.

On the other hand, it's not the best time to sell it either. the Manhattan RE has taken a big hit during the pandemic and has not yet rebounded. Though I love that building and staff, and was hoping to use it for personal use after retirement, I would sell it if it makes more sense. I am also wary of the direction of NYC, it's not the city I used to love years ago.....

So should I just try to find another tenant (and bleed cash) till the market rebounds to sell it, or what would you do?

Thanks all!

Joanne

Joe Villeneuve · Answer

Sell. You're not losing money just because the property value decreases. Your money is the only money you can lose. The profit you gained from appreciation is someone else's money that you were given control over. Your money is only the money you personally (cash) have put into this project. When you have negative cash flow, that's your money being used (spent and lost) that is making up the difference.Sell...and move forward.

Jay Hinrichs · Answer

if you can take profit maybe thats the best course of action today.. lock in your gains.. you can always buy something else.

Joe Villeneuve · Answer

What you just stated, is the reason why I say you should never use Stock Market techniques for analysis when analyzing REI. When you do, you miss out on so many of the advantages REI has to offer that the SM doesn't.

Joanne Tsai · Answer

@Joe Villeneuve @Mike McCarthyI think what I meant to say is that Manhattan typically has a track record of appreciation. and understandably, people frown upon "speculating" on appreciation without cashflow. It's similar in the stock market when people purchase Amazon shares when the company wasn't profitable for the longest time and hasn't paid dividends like other dividend stock. People purchase it simply because they believe in the brand and the future growth of the company. And of course, investors with payout mindset wouldn't necessarily own these type of companies. Again, thanks for your inputs!

Joe Villeneuve · Answer

Stock in investing and REI have very little if anything important in common. What you treat REI like the Stock Market, you will lose. You value/asset is your cash...not the property. The property is the temporary resting place for your assets. If you were to move your cash from one location/property to another, the cash value remains the same, but the true value increases since you can invest it in a property that's 5 times the cash value. When equity increases in a property thru appreciation and tenants paying the principal down for you, that's free money to you, but it increases your equity at a 1 to 1 ratio of cash value to true value. When you remove that equity by selling it, you allow it goes back to that 1 to 5 value.

Mike McCarthy · Answer

@Joanne Tsai whether it’s stocks or the RE market, you shouldn’t bet on the future. Sure there are all these reasons it might go up - but also these reasons it might go down. At that point, your gambling, not investing. If you can sell at a reasonable (based on what you put in) profit, and see better potential gains elsewhere, you should sell. That’s why most RE investors don’t purchase based on appreciation. Sure property values SHOULD increase, but you need to focus on cash flow, mortgage pay-down, improvements, etc. things YOU can control. When Warren Buffet said that, my guess is that he was talking about potential opportunity during downturns. Not just buying something because lots of others are selling.

Joanne Tsai · Answer

thanks all. @Joe Villeneuve @Carl C.while I do agree with what you said, but is this REI so different from investing in stocks? I just always remember what Warren Buffet said, when everyone is selling, a smart investor is buying (not exact words). I am sure someone is taking advantage of the downturn of NYC. I hate to be one who shorts (and maybe at the bottom)!

Carl C. · Answer

As a Manhattan resident, I would say sell now and take the gains you receive and put it into an investment somewhere else. This is not the market for small time landlords anymore.