Hurricane Sandy affected our finances in a big way. Fortunately, my home, family and I are all fine. Though we were out power for 4 days, I know a few friends and family still without power. As of this writing, approximately 120,000 households on Long Island are without power. We were able to survive with the poor-man’s generator I had professionally installed in our mini-van.
The devastation I am referring to is my rental property. I have a rental property in Long Beach, NY. As you can see from the pictures, the inside of my apartment was completely destroyed. It is a condo a block away from the beach and on the first floor. It appears it was a lovely mix of sewage up to five feet in my unit. Unfortunately, I didn’t have any flood insurance for the contents of the property. Now before you go off and state I’m a dolt for not having any floor insurance, let me give some history of the area.
You Didn’t Have Flood Insurance?!??
The building itself does have flood insurance, but that only covers the structure (which includes my unit’s walls) and common areas. I’ve owned the apartment for over 12 years, and I have never seen anything like this. In fact, the New York, New Jersey, and to a lesser degree Connecticut, hasn’t seen anything like this in my lifetime. The last time Long Beach was flooded to this degree wasn’t last year’s Hurricane Irene, nor was it the 1980’s Gloria. The last time the area experienced any flooding of this magnitude was from the 1938 hurricane. So this could be one of those “100 year floods”, or it could be a new trend for the area.
So it appears I’ll be responsible to repair all the damage inside my unit. As with any investment, I took a risk and unfortunately won the unlucky lottery. It sucks big time, but that’s the way life sometimes works. Sometimes life isn’t fair. If I were to mention to you one of my biggest investment mistakes, this probably would be number one. So lesson learned if this is ultimately the result. To put somewhat of a positive spin, there are also other experiences I’ll gain from this situation.
My mortgage company did require flood insurance, and I did submit the flood insurance for the building. Either that satisfied their requirements for coverage, or they didn’t bother to read the policy. Yes, I am at fault as well for not knowing the coverage for the building itself. Unfortunately, with a condominium who is or isn’t responsible can be more complicated than owning a single family home.
Obviously it’s easy to be Monday morning quarterback and state I should have had flood insurance on the unit. I just never expected this to occur (like most people in this area) nor did I research what exactly was or wasn’t covered.
This wasn’t the first time I’ve experience tragedy in relation to this apartment. I went to contract for this apartment on 9/11. After leaving my lawyer’s office, I heard about the second plane hitting the twin towers and thought about the mistake I just made. I was already nervous about buying the property as I never did such a thing before. I was thinking the economy will go into a tailspin, the real estate market would crash, and my property would be worth nothing. Fortunately this was not the case, and I became more rational weeks later.
I also came out from the housing bubble with flying colors. Since I bought the unit in 2001, I had a lot of equity in the property and also never took money out. So even though prices decreased 15-20% in the Long Beach area, my property was still doing ok. It was cash flow positive and had a decent amount of net worth. The cash flow was never great, but it was OK for the size of the property.
Visiting the Horror
I went last Saturday to visit the property for the first time after the storm. My tenant came with me as well. I’ve never experienced a property loss before, and witnessing the horror of what my tenant felt was just awful. While the loss for me was very painful, it’s just money – it’s just an investment property.
As much as I liked the area and the property, I never lived there. For my tenant, on the other hand, it was the place she called home for 8 years. She lost pretty much everything and is now homeless. What a life changing experience. One week you have an apartment, and the next week you have nothing. She also did not have floor insurance for her possessions.
I almost feel guilty for accepting her as a tenant. I feel horrible for her experience, as if I’m somehow responsible for it. I wouldn’t wish this experience on my worst enemy, and it is one of the unexpected issues with this type of investment. Rationally I know I wasn’t responsible, but that is how I feel about the situation.
I Was Already Looking to Sell
Now that Sandy came storming in, I’m not sure what to do next. The ironic fact – I was actively looking to trade up via the 1031 rule. The reasons were:
- I’ve owned the property for over 11 years and felt it was maxed out with its property gains.
- Since it’s a condo, I’m somewhat limited with property improvements to increase the rental rate.
- I felt I had enough experience with this property, and I am ready to go for more complex rental properties.
Basically I was ready to move on but hadn’t found a suitable property in the Long Island area. Prices in New York, while they have fallen, still aren’t so cheap compared to the rental rate ratio.
So a new property in the Long Island area meant either I would have a negative cash flow (which I would never ever do) or need to invest a lot of cash into the property. More of your own money in real estate decreases your cash on cash return. This also puts more risk on the landlord.
There are many risks in being a landlord, notwithstanding hurricanes. These risks factor into the decision of buying a rental property. After all, renters get all of the rights, and comparatively landlords have much less. So I’m not even sure I will buy another property in the New York area as the risks seem still too high to the reward. I’ve eliminated buying an out of state property even though areas like Atlanta have some great real estate deals. It isn’t worth the headaches, and I would rely on a management company.
After this horrible experience, it doesn’t mean I disliked owning my apartment. I actually quite enjoyed being a landlord. I laugh at individuals who are concerned about getting a 3AM phone call about some clogged toilet. They’ve obviously never owned a property before and have no idea what the real risks are. In reality that’s the least of your concerns and really isn’t a big deal if it does occur.
What Are My Options?
So the big question now is what to do with my rental property. I’m looking at taking this big lemon and making it into lemonade. These are the possible options:
- Clean up the mold, mess and sell the property stripped – Create a blank slate and allow the new owner to do all of the work. Typically this means I’ll find a flipper who would buy the property, and that means they are looking for a good deal. With the amount of equity in the property I would still come out ahead, though at the biggest loss compared to my other options. However, the risk is the lowest, and it requires the least amount of capital.
- After renovation, flip the property – This is a possible option, though I suspect it would sell significantly lower than what it was worth prior to the hurricane. The biggest risk I see is, would anyone buy the property. I have enough money to pay for this option, but obviously it would be painful to do. The kitchen was redone 9 years ago, so it was still somewhat new. The bathroom was in dire need of an upgrade, so that was no loss. Replacing the electric might be one of the biggest expenses.
- After the renovation, find a tenant for year round living. – I wonder if renters would be interested in coming back to the area? Especially for a unit that was flooded. I suspect my profit margin would be lower for a number of reasons (higher common charges, higher insurance rates, lower rental rate, etc.) It more than likely would put me into a negative monthly cash flow.
- Create it into a fully furnished summer rental – This was one of the reasons why I bought the property. Long Beach not only has strong year-round rental market, but a very strong summer rental market. This is especially true for properties right next to the beach. Typically summer rentals pay for the entire year of expenses. Unless the economy is in the tank, I think a summer rental would be easier than a year-round tenant. They have less commitment to the property and are just around for the summer.
- Convert to Section 8 housing – Turn the property into a section 8 rental. I would consider this option as my last resort. While I’m not crazy about this idea, if all else fails, this is a viable option. Long Beach has a long diluted history. In the 1960-70’s it wasn’t such a nice area. Till this day, Long Beach today still has a decent amount of section 8 housing.
Readers: What would you do? Do you have any suggestions about handling this situation? Do you have any recommendations?