Ravi Punia - REALTOR®

Fraser Valley Specialist


Selling Negative Cash Flow Properties

In the recent boom years of the local real estate market here in Metro Vancouver and the Fraser Valley, many people leveraged themselves into investment properties.  More often than not, the preferred investment real estate for most investors seemed to be condos.  Enabled by easy credit standards and access to mortgages, many investors were unfortunately price indiscriminate in their buying and the purchase prices they were willing to pay.  Indeed, there were a high percentage of investors that were enduring zero or negative cash flow returns on their investment. 

For many, the thinking was that real estate (including condos) only go up in price and therefore annual capital appreciation in value would supercede any negative monthly carrying costs.  Recency bias, as it's known in economics, led many amateur investors to believe that the many years of consecutive (and often easy) price gains would continue on in perpetuity.  The law of economic gravity was ignored, sadly.  That is to say, that rental ncome, affordability and cash flow all matter with respect to investment real estate.  You can only bleed money for so long, before something goes wrong.

Some recent investors in Metro Vancouver rental real estate now find themselves in a precarious financial situation due to the Covid-19 pandemic.  A lot of renters are unable to make rental payments, even partial ones, due to job loss and financial hardship. Those investors who were riding the AirBNB short-term rental wave have seen that business evaporate, seemingly overnight.  It's questionable whether AirBNB will be a viable source of rental income even after the pandemic passes, as consumer psychology related to the sharing economy may be permanently impaired, due to concerns around health and hygiene.  It may be the case that we see rental units that were solely dedicated to AirBNB rentals surge onto the rental market, as traditional long-term rentals.  This trend, if it unfolds, may put downward pressure on rents as a result.  And so this has brought some owners of rental real estate, who suffer from negative cash flow, to a critical juncture in their investment journey.

Should one hang onto negative cash flow rental real estate in Metro Vancouver and the Fraser Valley, in the hopes that rising annual property prices will continue to rise beyond the aggregate monthly cash flow losses being incurred each year?  The answer really depends on whether such investor believes that the trend will be towards ever rising prices in the near to medium term.  While nobody has a crystal ball, I'm skeptical of such a scenario.  Rather, I believe that there will be a lid on meaningful price gains on real estate in the Vancouver area while the labour market and business environment remains damaged and under pressure.  Surely, high unemployment, precarious employment situations, failing or teetering businesses don't inspire consumer confidence to make large purchases, let alone make the biggest one of most people's lives, investment real estate.

Specifically related to condos in Metro Vancouver, the headlines about rapidly rising insurance premiums on many strata buildings has (for now) been overshadowed by all the Covid-19 news these days.  But that insurance crisis is still unfolding in many stratas, and will probably be another downward source of price pressure on some condo units, in specific buildings.  But this will be a blog topic for another day...

If you find yourself in the unfortunate situation of carrying negative cash flow real estate that is causing you financial stress, you could consider selling sooner than later.  If you believe, as I do, that there may be a looming uptick in negative cash-flowing investment property listings coming to market, you may want to consider getting ahead of this curve, while there is relatively less competition to sell.  Disposing of excess real estate may be helpful to some investors looking to repair their personal balance sheets and improve their monthly cash flow situation.

Please contact me today if you'd like to explore your options for selling any investment real estate that no longer fits your financial goals or budget.  

*This blog communication is not intended to cause or induce breach of an existing agency agreement.  Views are my own and do not reflect those of any organizations that I may be associated with.

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