Rental loss of $2,600/mo: Sell or keep?

[bradfancisco]

We (49M/44F/Ontario, Canada) have 2 rental properties having a combined rental loss of $2,600/month for a year now, and a little less than that the previous year. The property values declined by $200K in the past 2 years but has since stabilized. We are renewing next year. Here are the numbers:

Income Statement (Monthly)
----------------------------------
Pty | Expenses |    Rent |    Loss
----------------------------------
1   |   $3,754 |  $1,770 | -$1,984
2   |   $3,405 |  $2,800 |   -$605
Sum |   $7,159 |  $4,570 | -$2,589
----------------------------------

Balance Sheet
---------------------------------
Pty |   Value | Mortgage | Equity
---------------------------------
1   |   $665K |    $463K |  $202K
2   |   $523K |    $434K |   $89K
Sum | $1,188K |    $897K |  $291K
---------------------------------

We are assuming that our new term will be very similar next year with 26 more years of amortization. We have been happy with our quality of life having $15K/mo income, WFH, no more dependents, great tenants, but a break even rental statement would be preferable. We continue to invest in ETF's and make extra payments towards our home to be mortgage-free and be semi-retired in about 10 years.

It wasn't always this way. We had rental profits of $400/mo until 12 months ago when our mortgage renewed at a higher interest rate. After 6 years of no rent increases, we raised the rent to the allowable maximum on Property 1 by 1.2% in 2022, and 2.5% in 2023, yet it is still $1,000 below market rate. Property 2 is at market rate. What would you do?

[Bartlebooth]

I'm curious what you would recommend to someone else in a similar situation.

[SunnyDays]

Why would you want to keep either rental?  Even if both broke even, you would still be working for free to continue owning them.
Does the 15K per month include the money you lose on these properties?
Your mistake was not raising the rent for 6 years when you could have, but even if you had, you would still lose money every month, based on your property #2 figures.
So unless you have some other reason for keeping either property, I would sell them both and invest the equity.  IF you can find someone willing to buy them.

[Paper Chaser]

You've lost six figures in equity, and over $30k dollars/year in negative rent already. How much would you have to gain to reverse those losses and just break even? How long would that take, and how much would it potentially cost to carry that long? The only way that I see this working out for you is if there's a massive gain in appreciation for some reason. Personally, that seems pretty unlikely to me, but I'm not dialed in to the Canadian real estate market. If you could only squeak by with historically low interest rates, then what are you hoping to see happen?

[bradfancisco]

Thank you so much for the responses. We were planning on keeping them for at least 10 years and thought that period of time is enough to break even. Here are things we considered for keeping the properties:

• Mortgage payments are high through our 'B' lender. If we qualify through an 'A' lender next year, interest will drop by at least 1%.
• Property value will rise when interest rates come down, and for being in the most populous province with high immigration and low housing supply.
• As the mortgage is paid down and rents increase, the properties will cash flow, eventually.
• The principal is still being paid down which grows equity.
• Our personal income taxes are being reduced by tax-deductions from the rental expenses.
• The mortgage balance becomes worth less due to inflation.

Property 2, bought in 2022, is down by $180K (rounded off to $200K) but Property 1, bought in 2016, is up by $310K. Sometimes, we look at it as if we are paying $2,600/mo to reserve 2 houses for our kids and grandkids. However, the responses have given us a reality check and reconsider if it is worth the risk of the carrying cost outpacing equity growth after 10 years.

[Freedomin5]

As rental properties, no they don’t make sense. But if you’re just holding them for capital gains, then maybe? The question is, would you make more money if you had invested the money you’re putting into these properties elsewhere? We are not talking about the entire property value, but the money you put in for the downpayment and for covering the gap each month.

[Metalcat]

Real estate investing in Canada is a super complicated creature right now because the heavy hand of government is heavily involved and will continue to be for a long time. They have competing agendas of keeping inflation down, keeping housing costs down, but also encouraging housing development. Threading that needle is going to be a BITCH and policy will likely cause serious chaos for individuals for a long time.

You can't bank on any reasonable market force trajectory because policy will be actively shaping market forces for a long time.

We can *kind of* predict what *this* government might do, but *this* government could also very easily get swapped out for a very, very different government.

You can reasonably expect that you property value will go up because there is a critical housing shortage and I'm assuming you're in a growing area of Ontario, and no one expects development to keep up with demand any time soon.

But without 30 year mortgages, you have no idea what that means for your actual expenses.

This is tough because so many people have and will make a ton of money speculating on real estate investments in Canada that are cash flow negative, so this is a VERY common investment strategy here. But it doesn't sound like it was the investment strategy you were aiming for.

So yeah, if you looked at these properties today, would you buy them under these conditions??? Would you engage in cash-flow negative, speculative real estate investing during a housing crisis, but also the most unpredictable housing policy conditions the country has ever seen??

Some people would, and many have. But would you?

[Car Jack]

There's a simple but useful check.  Take the value of each property.  Multiply by 1%.  If you're getting that in rent as a minimum, you're on the fence and could rent or sell.  Below 1%, sell.  You're like half or less.  Sell.

For those saying "You can't get 1%", when I went back to grad school on my company's dime, we went to look for a place to live.  I quickly found that rentals were all 5% or more of the value of the houses.  Some were for sale with an option to rent.  So yah, you can get over 1% and if you can't where you are, then don't rent.  Get an online quote for an SPIA.  Someone over on Bogleheads did this and found he could make more in monthly SPIA payments than he could get in rent.  He sold and bought the SPIA.  He doesn't have to do complicated tax returns, deal with renters or pay extra for mortgage and insurance anymore.

And while we were away in grad school, we rented our house back home and yes, I got over 1% for that and I knew nothing of the 1% rule back then.

[GilesMM]

If you love the properties and don’t mind them costing you every month by all means keep them. Otherwise…

[Jon Bon]

op·por·tu·ni·ty cost

noun ECONOMICS

the loss of potential gain from other alternatives when one alternative is chosen.

"idle cash balances represent an opportunity cost in terms of lost interest"

[eddy20]

I'm in California so a vastly different market, so my mind set is CA based you have to make your decision on your area. But, rental property is a business so being in business to loose money makes ZERO sense. Now if your appreciation is more then the monthly loss maybe that's your business model. In other words trading negative cash flow for appreciation may make sense in your particular market. But for me personally the risk of bad tenants, repairs and maintenance and negative cash flow; I would list the property for sale this afternoon.

[Metalcat]

I'm in California so a vastly different market, so my mind set is CA based you have to make your decision on your area. But, rental property is a business so being in business to loose money makes ZERO sense. Now if your appreciation is more then the monthly loss maybe that's your business model. In other words trading negative cash flow for appreciation may make sense in your particular market. But for me personally the risk of bad tenants, repairs and maintenance and negative cash flow; I would list the property for sale this afternoon.

Yeah, A LOT of real estate investors in Ontario made just ridiculous amounts of money on appreciation in the past few decades.

The pre-build condo investors pretty universally built their business models on expecting negative cash flow.

Had DH and I been able to handle the negative cash flow (at least a few thousand/months) of a pre-build investment he had gotten into before we got together and did not understand, we would have made at least a half million dollars in just a handful of years.

And we absolutely would have considered it had I not been dealing with health issues and the imminent loss of my larger income.

But running cash flow negative for a number of years is a very common business model, so there's really nothing wrong with that, it's just a matter of whether you want to be a primarily speculative investor or not.

As I said in my post, it's a wonky time to be a speculative property investor because the Canadian government will likely be fiddling actively with housing values for many years to come.

It's hard to play the speculative game when you can't reasonably predict how the deck will be stacked moving forward.

I personally own an investment property in Canada, but it's cash flow positive, and in a region that is experiencing explosive population growth and infrastructure development related to clean energy transition. But also is an area that is already dense and structurally difficult to expand due to natural water borders.

It will be very, very hard for any policy to overcome the upward pressure of that housing market.

So whether OP can predict a reasonable gain depends on how robust the local market factors are relative to the policy factors that can and will continue to come into play.

It's a very, very tricky time to predict housing market forces in Canada. Shit is likely to get weird for a lot of areas.