Should You Sell Your NYC Condo or Convert to a Rental Property?

If you’re like most homeowners in NYC, you may have originally purchased a condo to live in as your primary residence. But after a few years, you might need to upgrade to a larger apartment, change neighborhoods or simply leave New York City.

When this happens, what do you do with your existing condo? Do you sell it and wash your hands of it completely, incurring closing costs and possible capital gains taxes? Or, do you convert it to a rental property and become a landlord?

The answer isn’t always obvious. There are several advantages and disadvantages to both selling and renting which we’ll discuss in this article.

Do you really want to be a landlord in NYC?

Are you prepared for uncertainty?

Is now a good time to sell?

How much are seller closing costs?

How can you benefit from depreciation?

Have you considered capital gains taxes?

Will you ever want to move back in?

The main benefit of selling is that you don’t have to be a landlord. Being a landlord can be time consuming and stressful. Moreover, NYC in particular isn’t known as being an especially landlord friendly environment.

In fact, landlords in NYC have been on the defensive ever since the Housing Stability and Tenant Protection Act was passed in 2019.

This legislation severely weakened the position of landlords in NYC, making it much harder to evict tenants and capping security deposits, among other changes.

COVID-19 further worsened the plight of landlords throughout the city as a result of eviction moratoriums, court backlogs and general uncertainty.

While much of this will go away over time, the pandemic has shown what will happen to landlords every time another health (or economic) crisis materializes.

According to recent studies, renters in NYC owe between $1 to $2 billion in unpaid rent since the start of the pandemic. In short, being a landlord is not for the faint of heart.

While most tenants are pretty respectful and pay the rent, there’s always a remote risk of a catastrophic scenario such as having to evict your tenant or being sued for harassment. If you’re busy with your career and family, you might not want to have to worry about these types of adverse outcomes and the huge time and out-of-pocket costs associated with sorting them out.

As a landlord, you’ll be responsible for dealing with maintenance issues which will inevitably arise from time to time. What if there’s a leak coming from the ceiling? Or what if an appliance breaks? What if something like this happens while you’re on vacation?

You’ll need to deal with all of these problems personally, and quite frankly, some homeowners don’t have time for this. If you’re very busy, it might make sense to sell and perhaps reinvest the proceeds into stocks or some other more passive type of investment.

It’s always possible to hire a property manager, but fees can be high and small time property managers aren’t known for offering the highest quality service.

Outside of typical maintenance, there’s always a remote possibility that your unit or building could suffer from a flood, fire, incur structural damage or be impacted by some other type of costly and catastrophic disaster.

While insurance covers you for most serious black swan events, these sorts of issues require a tremendous amount of time to manage.

Think about how many hours you’ll need to spend dealing with your insurance company, the claims adjustor and contractors, etc.

In addition, holding onto your condo means you are responsible for any building assessments for ordinary repairs and capital improvements over the years. These types of large outlays are not covered by homeowners insurance.

One primary advantage of selling is that you can capitalize on a strong market and ‘book your profit’ so to speak. Things happen, like COVID-19.

Sellers who got out before the pandemic were obviously better off than those who hadn’t got around to selling yet.

Of course, we think things will recover, but for certain types of properties it might take years for sale prices to fully rebound.

That being said, it might be better to hold onto your condo if you don’t have any specific use identified for the sale proceeds. Prices always go up over the very long term.

The primary downside of selling is that you’ll be on the hook for closing costs. Condo seller closing costs in NYC are 8% to 10%, so this will take a huge chunk out of your sale proceeds.

Selling also means you’ll miss out on any future price appreciation. And in our opinion, it’s hard to beat NYC real estate in terms of long term growth compared to other real estate markets nationally.

However, if you intend on investing your sale proceeds in the stock market, it’s possible that may provide the same or higher return over time compared to holding onto your condo, especially factoring in risks like vacancy, repairs, etcetera.

The primary advantage of being a landlord is taking advantage of depreciation. As a landlord, you can deduct your purchase price plus capital improvements over 27.5 years.

For example, if you paid $1,000,000 for your apartment, the annual deduction is worth over $36,000 per year.

This can be deducted from rental profits in addition to all other expenses, such as taxes, common charges, mortgage interest, repairs, etc.

So at the end of the day, you’ll probably have little or no tax liability for your rental income. And in certain instances, you may have a loss which can be partly or fully deducted against your active income, depending on your specific tax situation.

Another advantage of converting to a rental property is that you’ll avoid paying seller closing costs. You’ll also avoid incurring any immediate capital gains tax liability.

If you’ve only owned your condo for a few years, it’s unlikely that you’ll have any serious capital gains exposure. For starters, prices might not have appreciated enough to cover your buyer & seller closing costs in addition to your original purchase price.

Moreover, you may be eligible to exclude up to $250k of the gain from capital gains taxes as a single filer or up to $500k if you are married filing jointly if you are selling your main home. You can also defer the payment of capital gains taxes through a 1031 Exchange for qualifying investment properties.

Furthermore and with the exception of the recent pandemic, rents in NYC tend to go up consistently over time.

The combined effect of rising rents and your mortgage paying itself off over time will ultimately give you a fully equitized asset with healthy cash flow at some point during your retirement years.

This long-term benefit might be enough to justify holding onto your condo and becoming a landlord instead of selling today.

It’s important to think long term before selling your condo in NYC. Is there any chance that you might want or need to move back into the apartment sometime in the future? If your career has taken you away from NYC, what are the chances you’ll be back in the city?

Selling your apartment only to buy again in a few years is very costly due to combined buyer & seller closing costs which can add up to 10% to 14%. If there’s a chance you might return to NYC, it probably makes sense to rent out your condo and see how things play out instead of selling.