I have inherited a $1 million rental property in Queens, NYC, and after reviewing its historical cash flow, I’m either facing significant issues or I simply don’t grasp how real estate operates.
Key details of my situation include:
- The property is fully paid off and is held in a trust.
- Last year’s rent was $36,000, yielding only a 3.6% gross return.
- Annually, property taxes and insurance costs me $9,000 (0.91%).
- Maintenance averages about $12,600 each year (1.26%).
- Additional management costs, including legal and accounting fees, average $1,000 yearly (0.1%).
- I can’t manage this property myself due to time constraints, and hiring a management firm will cost around 10% of the rent collected, which is about $3,600 annually (0.36%).
After all these deductions, my annual net income, before taxes, stands at $9,800, resulting in a mere 0.98% profit. Post-tax income drops to 0.64%, only about $530 monthly. This seems surprisingly low given the lack of a mortgage—what happens if I had one? How do others turn a profit through real estate?
While I recognize property appreciation contributes significantly to its value (particularly in NYC), I am frustrated by the current cash flow situation. If I were to finance the property with a mortgage (with 20% down), the likely 5% interest would only exacerbate my losses. Even with a more promising 5% gross rent and an optimistic 4% interest rate, I’d still face a negative cash flow if taxes and maintenance are factored in.
Originally, I viewed real estate as a means of diversifying my portfolio for better returns than traditional investments. However, the figures suggest otherwise, particularly compared to investing in the S&P 500. Given I’m primarily invested in stocks, this property seems to provide little benefit. What critical aspects of real estate investment am I overlooking? If leveraging with a mortgage leads to consistent losses while hoping for market appreciation seems quite risky.
Edit: I appreciate all the feedback! Here are two significant insights:
- Rental Rates Are Low. Rent might be lower than expected; ideally, it should be around 5%. Even with that, if a mortgage existed, cash flow would still be negative after expenses are calculated.
- Scaling in Real Estate is Essential. It appears that to profit in real estate, one typically needs to operate on a larger scale. I am now contemplating if maintaining this property is worth it given the opportunity costs.
