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Q&A: My condo is cash flow negative, should I sell it?

On this episode, Andrew la Fleur answers a question from a podcast listener who says their property taxes just doubled and this killed their cash flow, making them go into the negative each month. He wonders if he should sell his property and invest in something else. Listen to hear Andrew’s advice to this condo investor.

Click Here for Episode Transcript

Andrew : A listener of the podcast called me this week and said that his investment unit in Liberty Village and his property tax has just doubled killing his cash flow. He’s wondering if he should be selling his unit and getting into something else. Find out what I told him on this week’s episode.
Speaker 2: Welcome to the True Condos Podcast, with Andrew la Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.
Andrew : Hi and welcome back to the show. Apologies in advance for my strange or rough sounding voice, but I managed to get a last minute ticket to the Jays game last night. Of course, they won the wildcard game, depending on when you’re listening to this. October 2016, the Jays had a huge game last night and they won that game. It was absolutely crazy and phenomenal. It’s a great night. As you can imagine, a lot of screaming was involved, and yelling, and cheering, and such as it is, my voice took a bit of a beating, but I’m feeling great. Felling good. Go Jays go.
As I said in the intro, I had a gentleman call me this week and their situation is they have a one bedroom townhouse condo, condo townhouse unit in Liberty Village. They purchased it approximately one year ago for $285,000, and they’re renting it for $1,580 per month, and they just got their tax assessment notice and he just got his tax assessment notice and he says that his taxes are doubling, roughly doubling, from about 140 a month, working it out to about 268 a month.
He said that this pretty much kills his cash flow. He said he had around a hundred bucks a month, give or take, cash flow. Now, he … If this is coming into play, then he will basically have no cash flow, or maybe a little bit slightly negative cash flow. He’s wondering, because of that, maybe he should be selling this condo and getting into something else.
I’ll tell you what I told him in the moment and it maybe is something, of course, useful for you, and that’s the whole point of this podcast and everything that we do at True Condos is to give you valuable, useful, actionable information and advice for your condo investments.
Before I do that, just a general comment that this really illustrates, and the reason why I always recommend condo investors by pre-construction condos. You may have seen videos or heard me talk about this in the past. One of the core pieces of advice we always give is when it comes to condos, you always want to invest in pre-construction.
This gentleman purchased this condo not with us, but with somebody else presumably, which is fine, and he’s reaching out to us for advice, which is great. We love to give advice and help whenever we can. He purchased the condo last year in the resale market, and this illustrates the point very … In a salient way that getting cash flow in the resale condo market is very hard. We get people asking us all the time, “Hey Andrew, I’m interested in investing in condos and I’m thinking getting something resale. I want to get something right away and start renting it out right away.” Which you think would make sense, get cash flow now as supposed to cash flow later.
The issue is … One of the issues is there’s many factors that go into it. We won’t get into all of them here today, but it does illustrate the point that it is very hard to find positive cash flowing rental properties in the resale market today. One of the primary reasons for that is the price that you pay for that resale unit today is significantly more than the price that the person you’re buying it from paid for that unit if they bought it pre-construction.
Yes, if you … Let’s say, this example, he bought it for 285, but the guy he bought it from bought it for, say, 200. The guy he bought it from is getting great cash flow at $200,000 with the mortgage on that. If you’re coming in and buying it at 285, then it becomes a lot more difficult to get positive cash flow on that same unit.
That is just the first point to talk about before I get into what I advised this person. The other points to get into before is when it comes to assessed values and property taxes, and this is something I told him, is sometimes you get sticker shock when you those assessments that come in on your property taxes every four or five years or so. Those assessed values are phased in overtime.
You see that top line, say your condo’s worth … I don’t know. Let’s say it was assessed at 200,000 and you get this property tax assessment that comes in, it says your condo is worth 300,000. You say, “Whoa! That’s going up 50%.” Take a closer look, and it’s just the way these forms are done. It’s a little bit confusing, but they are … It’s phased in over five year period. It’s going to be valued at … Assessed at 300,000 five years from now. It’s generally how these forms are written and how it looks on paper. That is not something that’s happening right overnight today. They’re saying, “Your value is this. We’re going to phase it in over the next few years.”
Of course, you can fight your assessed value as well. You can protest it, and you might be successful in getting it lowered if you have a good case to make there. We won’t get into that on this episode, again.
Okay. Let’s get to my answer to his question. Should he sell or should he not sell? We might surprise you or might not, but I gave him my opinion, that was no, he should not sell. In fact, I said it’s actually a really bad time to sell right now. That maybe counter-intuitive to a lot of people listening. Wait a minute? Isn’t the market red hot? Isn’t … Everything is moving and everything is great with the real estate market? Isn’t this a great time to sell?” You might be getting fliers at your door if you live in a house or a condo, you’re getting fliers all the time from a million real estate agents telling you, “The market is amazing. It’s a great time to sell.” Here I am telling you it’s a horrible time to sell. Why am I saying that?
Quite simply because why would you sell an asset that is appreciating at a very fast pace right now? Why would you get rid of something that is putting money into your pocket, so to speak, that it’s building your net worth every single month at a phenomenal rate? Where are you going to put your money into something else that’s going to beat that?
Take a moment and think about that if you haven’t already. If you do have a property you’re thinking about selling, consider that idea that this is actually a horrible time to sell. If you want to sell your property, sell them in a flat market. Sell them in a down market. Selling them in a market that’s going up, up, up … I’ve seen so many people make that mistake this year. Getting out way too early, selling, leaving so much money on the table. Selling six months, a year ago and leaving thousands and thousands of dollars on the table and not reinvesting the money in many cases into something else.
If you’re in the market already, how do you grow wealth in the long term is another key thing that we always teach is you grow your wealth long term in real estate by holding on to property. Hold on to property for long periods of time. If you’re buying and selling, flipping, flipping, flipping, moving in and out, in and out. Yeah, you might make a decent income, but if you want to grow wealth, if you want to build wealth, if you want to see your net worth expand exponentially, then you got to give it time.
You have to be in the market and you have to have more properties in the market, more rental properties. Growing your portfolio overtime and holding those properties for as long as possible. That’s how the rich get rich, and that’s how the wealthy are where they are, is because they’re not flipping properties. They’re sitting on property. They’re holding properties. They’re paying for themselves. They’re holding properties for the long term.
A bit of a rant there, a bit of a sidetrack there. Let me get back on track here. What did I advice this gentleman? I told him, yes, generally, it’s not a good time to sell. It’s really a bad time to get out of the market if you have something like that. If you bought it a year ago, it’s probably worth a lot more than you paid for it now.
The other thing is just do some basic math, is what I talked to him. Do some basic math on what you’d be giving up if you do sell. Let’s do some assumptions. Let’s say you’re like this guy, you’ve got a property that is, let’s say, negative $100 a month on cash flow. Negative $100 a month on cash flow. Not a good situation. Not something I would ever advice, but it’s a reality that we sometimes we find ourselves in due to situations outside of our control. Maybe maintenance fees could jump up. It could be some special assessment.
Maybe, for some reason, rental rates drop in your building because … I don’t know. Sometimes weird happens next door or something. Suddenly demand drops, or maybe the government, in this case, assesses your property and your property taxes go way up. Something happens outside your control, which sometimes occurs, and you’re sitting in a negative $100 a month cash flow, for example.
He’s one year into a five year mortgage. Let’s base this example on a five year assumption. If he holds it for five years. Rides out his five year mortgage. He’s one year into it. If his net, say, just stays the same. Make an assumption, rents aren’t going up or anything over this five year period, which is not a good assumption to make, but we’ll do it anyways. Negative $100 a month for 48 months. That’s about $4,800, call it 5 grand. $5,000 negative cash flow over the next four years. Ouch! He’s thinking, “Man! $5,000 negative cash flow.”
What else is happening with this property? Like I said, property appraises are appreciating. They’re appreciating at probably in the core downtown condo market, probably around 68% right now on average. Let’s be conservative. Let’s not get down to, say, 4%. Let’s assume that property values are and will continue over the next four years to appreciate at 4%, his unit.
On his unit, roughly $300,000. That’s roughly $1,000 a month. His property is appreciating $1,000 a month. His net worth is increasing approximately $1,000 per month. $1,000 per month, times 48 months, four years, that’s about $48,000. $48,000. If you were to sell now, in a sense, because you don’t want to lose $4,800, you’d be giving up $48,000 over the next four years. When you think about it like that, “Wow!” It should hopefully start to become clear that the different dimensions of real estate investing and how they come into play.
The other thing is somebody else is paying his mortgage. The tenant is paying his mortgage. If you do the math, which I did for, I say, roughly on his mortgage, he’s at about 2.7% fixed mortgage for the next four years, you’re looking at roughly $27,000 in principal pay down courtesy of the tenant. You’ve outsourced your debt, which you do when you buy investment real estate. You outsource your debt. Somebody else pays it for you and somebody else build equity for you. $48,000 in appreciation, conservatively over the next four years. $27,000 in mortgage pay down over the next four years. You’re looking at about $75,000 increase in this gentleman’s net worth if he just does not [inaudible 00:14:00] sits on that property, continues to rent it out, rides out his five year mortgage term. $75,000 versus $5,000 in negative cash flow.
Again, this is a very simplified dumb down version of the math and doesn’t consider a lot of other factors, but it does illustrate the point very clearly that, again, there’s many dimensions to real estate investing. If you’re only thinking about the cash flow, you are missing a lot of the other dimensions. You’re not seeing the whole picture. You’re not seeing … Taking into consideration how wealth is generation. I’m not saying that this gentleman is that case and he hasn’t thought about these other things. He certainly has, but sometimes it just takes seeing it, written down on paper or listening to this podcast and hearing it spoken to you for it to sink in and for you to see what’s really happening here.
He’d be giving up a lot, obviously, and that’s the main reason why not to sell. Other than that, we talked about things like mortgage penalties. If you’re in a fixed mortgage, and a lot of people, this is something a lot of people, especially first time investors are not … They’re certainly not thinking about it top of mind. Mortgage penalties can be an absolute killer, especially obviously if you’re in a fixed mortgage. If you’re on a variable mortgage, which is why I always recommend, and I’ve written articles about this and I always go variable, and you should too.
If you’re in variable mortgage, it’s really not a big deal at all. Mortgage penalties is just three months interest payments in more cases with variable mortgages. If you’re in a fixed mortgage, your … Especially, like this gentleman. He’s only one year into a five year fixed mortgage. The amount of interest that he still is contracted to the bank to pay is huge. It’s probably between … Again, I haven’t done the math on that one. It’s in the tens of thousands.
That’s obviously … If you’re selling and breaking your mortgage and if you have to pay that penalty, that makes it very simple. Very simple decision to make in most cases that you wouldn’t do that because the penalty would be very, very severe. You’d be taking a huge loss just to avoid a small monthly cash flow deficit. That’s the other thing to consider as well.
There you have it, that’s my advice that I gave to this gentleman with the Liberty Village condo, townhouse that he was thinking about selling. Again, my advice was don’t sell. Hold on to it. Of course, I told him, I love to help you sell it. If you do decide you want to sell it, I’m happy to do that. That’s what I do for a living, is I help people buy and sell properties and that’s how I get paid.
As I often tell many people who contact me about selling their condos is something I have been known to do is talking people out of selling their property rather than telling them they should sell and taking commission for that. Again, it goes back to what I believe and what I do personally is holding properties for the long term and growing your wealth through property accumulation as supposed to property flipping.
Okay. That is a wrap for today’s episode. I hope you found this useful, and I hope you found it educational. If you did, I hope that you share it with somebody that you know. Somebody it might apply directly to or somebody who’s just interested in getting into real estate or condo investing. Go ahead and share this podcast with them, and I’d much appreciate it.
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Go ahead and subscribe. Subscribing is the best way to get the content fastest and to listen to it whenever you want, wherever you want, at whatever speed you want. Okay. That’s enough for me today. We’ll talk to you soon. Have a great week, and go Jays go.
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