Why Are More Millionaires Renting?

Millionaires and Billionaires!

All I know is that in my San Francisco one bedroom apartment that I do monthly rentals, the monthly rents I’m getting now are the highest they have been in the last 5 years, and I have very little vacancy. One guest moves out and another moves in in less than a week, all paying >$5000 per month for a very modest one bedroom in a good part of San Francisco but definitely not premium and I don’t include parking. Only a year ago I was struggling to get $4k per month. My property manager tells me many of the guests are in AI and tech. They don’t want to buy but they have the means to pay alot in rent. New York City is also experiencing sky high rents. I suspect part of the reason is that many companies are cracking down on back to work/office for employees. As a home owner and real estate investor for over 20 years, I definitely understand the appeal of renting. Paying property taxes, condo fees, assessments, repairs, maintenance gets tiresome. You have alot of cash locked in a relatively illiquid asset. Dealing with tenants can be stressful. And you can get and move pretty much whenever you want. I don’t think it’s strange at all that many millionaires prefer to rent.

Turbo, What cap rate do you get on San Fran 1 bed room factoring in all expenses including periodic expenses (bathroom/kitchen every 30 years etc) to keep your expenses in the same condition?

I wonder how many own something somewhere else and rent.

MTH, That could have a meaningful impact on numbers in the articles. Many people moved their families post covid for WFH. But with RTO, they need a place in NYC stay.

I never calculated or estimated cap rate simply because I actually use the condo as well…when I purchased it was not envisioned as a pure investment, I would do monthly rentals and use the apartment in the winter when I want to escape NYC winters. Also I paid cash…not because I wanted to but because I couldn’t get a mortgage. But at the time I purchased in 2022, I already had a condo in LA that I could use as a winter home. But having lived in the Bay Area for over 10 years, I could not believe how low condo prices had sunk and I was very confident the property value would go up by at least 10% in a couple years. Fast forward to now, I think if I sold, I would barely break even. Condo prices in SF have moved mostly sideways, I think the appreciation in my condo has been negligible. On the bright side, I have used the condo for the past two winters and I do enjoy it and the 4 months I’m in San Francisco for the winter. And now rents are really good so I’m generating excellent rental income. If I had to do it again I would not have bought, I already had the California winter home in LA and I’m sure if I invested all that cash in the stock market I would be much better off. But I don’t dwell on it, I’ve always done pretty well with real estate and this one may not go done as one my better investments but one has to move forward…and on the bright side, I’m not losing money with the rental income I get now

The Millionaire today is different from Millionaire 2019. Compared to 2019, the Millionaire of today is definitely poor and feel less finally secure.

NYC has about 385K millionaire households as of 2025, while this NYT article talked about the 5.6K households are doing renting, that is less than 2% of 385K, not interesting data to look at. In other words, 98% of millionaires still prefer ownership.

Woodside… I’ve learned that the meaning of “millionaire” has shifted over the years in the popular imagination. It used to always mean people whose net worth was $1M+. Now it sometimes means people whose income is $1M+. Shoddy journalism means it’s not clarified as “million dollar earners”, not even in the text (and of course not the title).

In any case, going back to the original source on this:

https://www.rentcafe.com/blog/rental-market/market-snapshots/millionaire-renters-trends/

>> Between 2019 and 2023, the number of renter households with an income of $1 million or more grew from 4,500 to 13,700.

>> One in 11 Millionaires Is Now a Renter From One in 13 in 2019

I can’t wait for the day when “billionaire” starts meaning people whose income is $1B+.

NYC had 35K tax residents with $1M+ incomes in 2022, so the 5.6K renters is a meaningful percentage:

https://ibo.nyc.ny.us/RevenueSpending/2022pitdata.xlsx

In 2019, it was 30K such residents:

https://www.ibo.nyc.ny.us/RevenueSpending/december2019pitdata.xlsx

So the purported increase from 2.2K renters in 2019 to 5.6K in 2023 seems material.

>Woodside… I’ve learned that the meaning of “millionaire” has shifted over the years in the popular imagination. It used to always mean people whose net worth was $1M+. Now it sometimes means people whose income is $1M+.

Not realizing "millionaire" means for the income, not the net worth. Thanks for the clarification.

Then there's 401k 'millionaires', pretax.

Today NYT replaced the word “millionaire” with “ earning $1 million or more”, LOL. not sure if NYT is following streeteasy discussion

Today NYT replaced the word “millionaire” with “ earning $1 million or more”, LOL. not sure if NYT is following streeteasy discussion

You bring up a good point nada that I've thought about often when I read these posts that describe people as 'millionaires.' If we're talking income, that's something substantial. If we're talking net worth, less so. Especially if you're including your primary residence.

@woodsidenyc they are probably reacting to many of the reader comments that pointed this out...

Nada, Thank you for the clarification. I am guessing something to do with interest rates going up. And people giving up on price increases in Manhattan real estate.

Thoughts?

That’s my sense of it as well. I certainly see high-rent-price apts trading much more quickly than they used to. And high-sales-price much more slowly. I think the “hot money” crowd — those who chase whatever performed well over the past decade and is now overpriced (by whatever fundamental metric) — has moved on from NYC RE since several years ago. That started before the 2022 increase in rates. And the 2022 rates increases (which was a form of the “hot money” effect in its own right) doused any remaining embers.

Has there been a cultural shift in ownership vs renting? I don’t get all that much a sense for it. But people do seem to have found religion after 20 years of sideways in thinking “buying makes no financial sense”. I’ve certainly had conversations with acquaintances of that form. The funny thing is that I’ve moved past it; I don’t really care about the financial aspect that much anymore. But I know I’m gonna get bored after a few years, and I don’t care to be stuck expending mental energy trying to sell a white elephant for years. Would I feel differently if rates were half and prices were half? Sure, then I wouldn’t worry about being stuck with a white elephant. But rates being half wouldn’t really do it alone, because I never thought ZIRP was long-term sustainable.

>> not sure if NYT is following streeteasy discussion

LOL — good catch in revisiting the article!

So I did rent vs buy for call it 3x median prices properties in several cities where the top 2-3% by income will likely live. NYC cap rates seems to be on par with others vs historical much lower.

I think Manhattan non ultra-luxury valuations seems to be largely in the fair range in terms of buy vs rent (no earning on 25% down) if mortages rates are down 25-50bps from here or rent go up another 3-5%.

What do you mean by “fair range”? As far as I can tell, cap rates are 3-4% in NYC against 30yr mortgages in the 6-7% range. I agree that NYC cap rates have increased, and cap rates elsewhere have decreased. I don’t know the details on elsewhere, but I trust your assessment on it. I look at those number and generally think, “Great — now they are equally crappy everywhere rather than being extra-crappy in NYC versus decent elsewhere.” I guess that’s progress for NYC, but perhaps a Phyrric victory to the extent one cares about making homeownership more accessible.

Let us call it $2-3mm price in NYC. 30y rate 6% published. With relationiship discount, having your salary transferred etc one may get 5.50-5.75. Then I am not counting 25% for people who want to do typical buy vs rent (not investment purposes. Call 25% down partial inflation protection, freedom not to move; potential price gains etc for typical buyer). It knock off mortgage to 4.25-4.50 range. Plus potentially some tax break. Let us put 25bps for that. Low 4%. That is why in my opinion, buy vs rent is get is getting closer for NYC. Pure Investment purposes, still makes no sense beside rent and/or price appreciation view.

https://www.bankofamerica.com/mortgage/jumbo-loans/

Ultra-luxury cap rate is still well below 2.5% from what I can tell.

1 Bed rooms are crazy hot. Look at this building. Basic doorman entry luxury with single paned windows in a desirable location.

https://streeteasy.com/building/the-hilary-gardens/21f?utm_campaign=rental_listing&utm_medium=share&utm_source=web&lstt=HcbzyInATPHWomEzmeH8ZD5-Kw6sHJ1kmZmcySkZEvNGw0cXL7ClriHW6TKI2tmcvEikOb7I8Tpl1EVs

Based on recent sales comps, for my one bedroom in Hell’s Kitchen I bought in 2022, i would estimate the price has gone down about 5%, but if I actually sold, with transaction costs, I’d lose more. Rents in my building have gone in the opposite direction by a greater margin. Based on rental comps, I could easily rent my unit for 15% more than what I initially rented it for in 2022 (we initially purchased to rent it out for 18 months then moved in). In fact, the recent rental comps in my building are a little ridiculous. It’s a nice building with nice amenities in a decent neighborhood but it is by no means a luxury building in any sense of the word, and I like Hells Kitchen, but it’s not a premier neighborhood that people are dying to live in. Still, in 2025, I would not purchase this condo or similar for investment purposes. I just think NYC is too tough a place to make any money with regards to real estate investment. Many other cities are much tougher now too, but still I think NYC is the worst. On renting vs buying for living, I can see both sides of the argument. I think $4000 a month is crazy to pay in rent. On the other hand, $750k is also insane for a tiny one bedroom. I know my partner would hate me to say this, but if I had to do it all over again, I’d definitely buy a really nice condo in Jersey city and buy another Porsche 911 with all the money I saved!

>> That is why in my opinion, buy vs rent is get is getting closer for NYC.

I don’t really see it that way. On the positive side of the ledger, you have a 3.5% cap rate plus inflationary increases at 2.5%, so +6%. On the negative side, ~1% transaction costs and a similar amount in upkeep. Call it -2%, for a net benefit of 4% on a cash purchase. Lever it 4x with 5.5% money, you’re getting 0% return on your money (including expected appreciation).

I don’t know anything about people bankrolled by mommy & daddy, but as a young professional trying to make your way towards some semblance of financial independence, you don’t have much money but you do have time on your side. Between school, grad school, paying off debt, and squirreling away diligently, you’re probably in your 30’s by the time you have that proverbial first $500K or $750K or $1M saved up. If your mentality is that 0% return on capital is OK so long as it’s in service of personal consumption, you’re going to have a tough road ahead towards financial independence. Not only are you taking uncompensated risk in the equity stake once you purchase, but you also need to give up opportunities to take compensated risk as you’re saving up the nest egg.

You also have to consider that for whatever reason, people have a strong tendency to look in the rear view mirror. Simple vanilla investment in the S&P has turned $1 into $7.8 over the past 20 years. Or $1M into $7.8M. Meanwhile, NYC RE has turned a $1M down payment into $1M at best, to say nothing of being in a position where the default is to throw good money after bad in the form of principal payments.

You come from an era where: “Yeah, the fundamentals suck, but homeownership is important — and look at how well it’s done relative to everything else!” The version of you who is 20 years younger is more like: “Yeah, the fundamentals suck, and homeownership is overrated — and look how appalling it’s done relative to everything else!”

Right or wrong, the zeitgeist right now is that you can make 10%/yr until the cows come home by simply buying S&P. That’s the conservative view. And the speculative view is that if people can make 10%/yr with the braindead approach, then surely *I* can do even better than that.

In Manhattan, That has been the case with Manhattan more or less. But in the rest of country, housing has been on fire. And 90% of more than $1mm income in NYC still own. BK gentrifying areas have seen very good increases.

The version of you who is 20 years younger is more like: “Yeah, the fundamentals suck, and homeownership is overrated — and look how appalling it’s done relative to everything else!”

Nada, It is good way to look at it by inflation adjustment.

For a sample of properties, I get 3.5% cap rate (moderately sized - call it 1000-1200 sq ft 2 bed with proportional increase for more beds, not high end, and ultra luxury) after upkeep allowance. So 5% net benefit of cash purchase post 2.5% inflation increase (deducted 1% for transaction cost) which is pretty generous.

5.5% mortage adjusted for some tax benefit. 5.25%. That is why I say it is close.
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I don’t really see it that way. On the positive side of the ledger, you have a 3.5% cap rate plus inflationary increases at 2.5%, so +6%. On the negative side, ~1% transaction costs and a similar amount in upkeep. Call it -2%, for a net benefit of 4% on a cash purchase. Lever it 4x with 5.5% money, you’re getting 0% return on your money (including expected appreciation).

On the upkeep allowance of 1%, it is valid for suburban homes. However, assessments (which I factor into my cap rate) in NYC take care of a large portion of upkeep let the unit owners just worry about cosmetic / appliance repairs / updates inside their apartments without changing the layout (call it 25-30bps per year).

This is type of rental for which buy vs rent gets close. $11k rent. Market price for a similar coop would be $1.6mm with $3500 maintenance and $1000 in assessments insurance upkeep etc, but Woodside may have better opinion on that.

https://streeteasy.com/building/165-east-66th-by-stonehenge/11d?utm_campaign=rental_listing&utm_medium=share&utm_source=web&lstt=p3DOsA3q7d0Qc9ndtY-5i4Ar2yWybIXXUdeN3BIxDxWO_7glmN8ooLvTNIFqIISblKi8SxYNd0Q-jCq_

Similar will be lower with coop price at $1.9mm as the apartment seems to need some work (flooring etc).

https://streeteasy.com/building/185-east-85th-street/7ba?utm_campaign=rental_listing&utm_medium=share&utm_source=web&lstt=77ZUhGAB4--aqNfIiNMzXBqw6f1bMpPx6P3Acr_2HK4G8Xja5h8TbE6F5sFRL1EPd6MVSLrpd9GUs9na

inonada and 300_mercer are focusing too much on their own housing segment and the individual property.

If we zoom out to the whole city or each borough using streeteasy rent index . With no respite of the rent increasing, the picture is not pretty for the people who want to stay in the city for the long term.

https://i.postimg.cc/FH5B5kbq/rent-index.png

rent vs buy situation will be always be building and apartment dependent. With the rent keeps increasing, it's just going to pull more people into buying to live. Not sure how the Fed's interest rate is going to impact mortgage rate (it can go up/down depending whether the inflation is going to stay down) , if the mortgage rate does also go lower as Trump wishes , this will pull even more people into buy.

When the total monthly payment of owning is about the same as the rent (with 20% down and 30 year fixed mortgage), it's no brainer for the person who wants to stay long term to buy to live in. This is probably the turning point when the sale market is going to take off.

Woodside, No. Nada is still in 2 cap category with ultra-luxury and he actually enjoys a change in where he lives. I am a little higher price range and cap rate there is 3% ish (condo sub 3 and coop 3+) and Nada knows my category precisely.

This is a simple model more people and I would use (principal pay down embedded in mortgage payments makes up for assessments, periodic upkeep, transaction costs and insurance etc) but Nada's model is far more precise but complex due to inflation add-on.
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When the total monthly payment of owning is about the same as the rent (with 20% down and 30 year fixed mortgage), it's no brainer for the person who wants to stay long term to buy to live in. This is probably the turning point when the sale market is going to take off.

By the way I looked at 2/2 Post war coops vs rental on UES. Buy vs rent are in line as long price is below $1300 per sq ft. Luxurious post-wars with high-ceilings are lower cap. And cap rate compression continue the higher you go in price per sq ft and size per bedroom.

Clarification as previous post may be read as higher price ranges than Nada's. I already own a coop loft space.
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I am a little higher price range ** than $2mm; call it $3-4mm ** and cap rate there is 3% ish (condo sub 3 and coop 3+) and Nada knows my category precisely.

> Woodside, No. Nada is still in 2 cap category with ultra-luxury and he actually enjoys a change in where he lives.

It seems for Nada's ultra-luxury house segment, the cap rate will never reach the mortgage rate so it never make economically sense to buy using a simple math or his more complicated math unless the buyer is betting that the house price is going up or the buyer is emotionally attached to a specific apartment/building.

Indeed. In fact, almost in all markets in the USA, cap rates are much lower for top 0.1% of properties by price vs median priced properties. That is why institutional single family owners intending to rent invest in median priced homes. The smaller the better.

Nada, What gives?

Here is a high end property. Pushing almost 4.7 cap.

Call it can rent for $60k after furnishing discounts etc. $720k per year. Annual $70k taxes and $70k upkeep, insurance, reno, super on call etc. $580k per year.

https://streeteasy.com/building/13-leroy-street-new_york/house?utm_campaign=rental_listing&utm_medium=share&utm_source=web&lstt=Z2BYjr9FcfFRXes7UyE_5068X_nweIEVj7YsCBls6hrKje-jEXBelGQBisnTzQxSUBYjtSdtSYtrJjkM

Sold for $12.25mm.
https://streeteasy.com/building/13-leroy-street-new_york/single-family-town-house?utm_campaign=sale_listing&utm_medium=share&utm_source=web&lstt=ueDbirvk0UIox8CwDrUuN1i74Zgw3JDMKm4rbEqp-eEd-jRgiOYHMr3AFEmwYcX-hIrlhhrRNViHky5x

I'm a millionaire renter. And owner in Nowhere. So I can vote with my feet when NY elects a communist as mayor and benefit from universal rent control. As soon as crazy Dems took over, NY real estate stopped appreciating. It has a long way to fall.

300,

The reason I put upkeep etc. at 1% and not 0.3% is the following. I’ve never run into an apt in the category you’re talking about that wasn’t renovated in some shape or form once every 30 years. Often once every 20 years, and in some silly cases 10 years or even 3 years. But let’s go with 30 years. Take the 0.7% difference between our numbers, multiply by 30, you get 21%. A renovation to the tune of 21% * $3M = $600K once every 30 years is kinda how it amortizes.

Zooming out, the big picture is that if you’re nickel & diming the numbers to make it work in the optimistic case, then you’re going to be on a tough road to achieving and maintaining wealth. With my numbers, the 25% down payment earns 0%. With yours, it earns 3-4%. That’s a totally inappropriate rate of return from a financial perspective!

I think you get this, that’s why you say buying doesn’t make sense for an investor. Only for homeowners willing to forgoe their financial opportunities because that’s how it’s “always” been. Where “always” is defined by a 20 year period… because people have difficulty understanding the ebbs and flows of generational trends.

>> If we zoom out to the whole city or each borough using streeteasy rent index . With no respite of the rent increasing, the picture is not pretty for the people who want to stay in the city for the long term.

You just put up a graph that showed a 68% increase in rents across all of NYC (per their data) over the last 18.5 years. That’s 2.8%/yr. This is called “inflation”, and 2.8%/yr is a totally expected amount (CPI ran at 2.55% over the same period). Inflation is a feature of the modern monetary system, not a bug. It is of course subject to abuse, and one should plan accordingly, but the past 20 years is an example of a period where it went as it was supposed to go.

>> Nada is still in 2 cap category with ultra-luxury and he actually enjoys a change in where he lives.

Why are you casting aspersions, 300? I have been 1.x% for more than a decade now. There was that one year where I *gasp* strayed into the 2’s — dare I say touching 3%! But that’s OK, the LLs were good people. And I had to make things cosmically right as payback for the COVID-era rents where I was flirting with breaking the mythical sub-1% barrier.

>> It seems for Nada's ultra-luxury house segment, the cap rate will never reach the mortgage rate so it never make economically sense to buy using a simple math or his more complicated math unless the buyer is betting that the house price is going up or the buyer is emotionally attached to a specific apartment/building.

At the lower end of the ultra-luxury segment, there was a time where you’d see investors with expectations of appreciation. But after 20 years of unrequited love, there just isn’t as much of that anymore. Mostly, it’s what fills the higher end of the segment, which I’d summarize as the “I don’t care” segment. They have the money, they have the means, they want what they want, and they don’t care. Sometimes the “don’t care” ethos makes total sense to an outside observer with my sensibilities, sometimes it doesn’t.

Ha. Indeed. I think you have made very good deals. What is your current cap rate estimate of your old Flatiron apartment?

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Why are you casting aspersions, 300? I have been 1.x% for more than a decade now.

Comments on 13 Leroy?

On reno cost:
Let us use this as an example. 35 year old building sold with low-end finishes. Most apartments will need updates every 30 years. Flooring, bathroom and kitchen. No moving the walls. But no electrical or plumbing changes if you keep fixture location where it is.

I would think people will upgrade the original finishes to current apartment market price. Each bathroom retiling and replacement fixtures will be 50k (without using dornbracht etc; just Delta, Hansgrohe or Kohler etc). Kitchen will be 75k with stock good quality cabinets and good luxury appliances. Flooring will be $35k (it doesn't need leveling). Add in $50k for basic architect, demo, insurance, permits etc. $260k. Painting $15k with no skim coating etc. Throw in another $75k as one always finds some other stuff to do as in replace those wall AC units, light fixtures / switches, doors, update closets, or get wolf/sub-zero - basically luxury upgrades which significantly improve the apartment in line with the current market price. $350k. Could an individual do cheaper - surely at $250k but $350k is more realistic. If you renovate estate condition pre-war, it would far more due to layout changes, electrical, fully plumbing replacement, central ac etc.

10% every 30 years at current property and reno prices. 33bps per year (vs my 25-30bps estimates). Throw in reno brain damage allowance and carry or using a higher end contractor. 50bps. This is with upgrading the apartment but in line with the market price. Typical rental builing doesn't get this kind of reno.

https://streeteasy.com/building/zeckendorf-towers/p27a?utm_campaign=sale_listing&utm_medium=share&utm_source=web&lstt=mFTamn7La-Y2O1auYlx-sGX4t_Dgm4e9QI9qXkylY1gkvFTolm5RUYuy7mGnlX2vLPCZfHXa8MMQLqAf

>> What is your current cap rate estimate of your old Flatiron apartment?

I know the current tenant and roughly what he pays (the ask was listed). It’s something like 10% more than the rent I was paying… 10 years ago. Price is down 10-20%, unabated taxes+cc up perhaps 50%. All-in, its cap rate is probably 2%.

But comparable units have rented higher, perhaps as high as 3% on the cap rate with a degree of vacancy. The owner of that unit is more interested in good, easy long-term tenants than trying to squeeze another 1% in cap rate.

On 13 Leroy, not sure what to make of it. The 2021 purchase at $12.25M was clearly a good price. Prior trade was $13.8M in 2008. That sort of downward movement was a bit unusual for Manhattan, to say nothing of the West Village.

I can see it as having gone for $70K in 2023 off the $80K ask. But that was obviously a pretty short-term tenant since it’s listed again after 1.5 years. This type of situation often points to a tenant who has a specific, short-duration need. E.g., “I’m renovating my own place, want something specific, and don’t mind if I pay too much — it’s just a year.” But the owner got excited by the last tenant, and it’s clearly having trouble getting any traction at the $100K ask. It’s a nice townhouse, but at $100K, there’s just a different class of RE available.

FWIW, I do think if you bide your time for a good deal (like the buyers of 13 Leroy), you can get 3-4% cap rates on ultra-luxury these days. The “don’t care” owners eventually tire of the apt sitting and just want to be done with it, because the mental energy is not worth the money. You just need to wait and be there for when they do.

3-4% on ultra-luxury? Will appreciate some examples.

13 Leroy is one example. Even if you call it $50K/mo net after taxes, upkeep, etc., and $15M on price, that’s 4%. Or $20M on price => 3%.

Another example is the PH in my old building. Look at the price it finally went for. 3.25% cap rate, no problem.

Another is my immediately prior home. At current asking price and the rent I was paying, gross rent yield would be 4.7%. And something like 3.4% effective cap rate, I’d guess. It was furnished, so maybe it’d be a bit lower cap rate accounting for that, but OTOH I am guessing you’d have no problem knocking another 10% off the asking price — despite all the cuts so far.

Thank you. 13 Leroy indeed is 4% ish cap rate. And current $100k ask is just short term furnished rental. Long term being closer to 60k.

PH price cut in your building WOW. More than 50% off original ask. And finishes were top end.

And more than a 50% cut from owner's cost basis from a decade ago (once you include construction costs, as sale price reflected a white box delivery). A rounding error for the owner, of course, money-wise. But 2.5 years of mental space dealing with the BS of selling the place.

That's the thing. Certain things that have "always" been can easily stop being. "Ultra-lux cap rates are 1.x% because enough rich buyers are willing to pay whatever"... until there no longer aren't. It's like the belief that 3-4% cap rates have "always" just been the way it is in Manhattan. Except they haven't. I'm sure 30yrs can tell anecdotal stories, but the closest thing to data I can offer is this chart from Miller Samuel that shows median rent to median price. That's obviously not the same thing as cap rate, but you can see it floating around 4% for the past 20 years. But it ranged 8-12% during the 90's and averaged 10%:

https://millersamuel.com/?charts=manhattan-rental-yield-using-median-sales-and-median-rental-price

As a simple model, return on equity with 25% down (assuming inflationary increases in price, etc.):

cap_rate + 3 * (cap_rate - mortgage_rate)

If we grant a 1% discount off what Freddie/Fannie publishes for 30yr mortgage rates, right now it's 4% + 3 * (4% - 5.5%) = -0.5%. You're squinting and saying maybe it's 3% or 4% or whatever higher. -0.5%, +2.5%, +3.5% -- who cares? That is horrible ROE and not a winning formula for a young person who has scraped together a little money and is trying to use their greatest asset -- time -- to compound their wealth.

If you look back at the 90's, it was 10% + 3 * (10% - 7.5%) = +17.5%. That is a winning formula. I'm sure people thought Manhattan RE was scary, a dog that "always" underperforms, etc. back in the day. But a little common sense and a willingness to buck the prevailing "wisdom" tells you that 17.5% ROE gives a crap-ton of margin of safety.

Nada, Sorry, I don't understand. How is the inflation factored in? I am looking for multi-family cap rate spread over 10y rate which is from NCREIF and goes back to 80s. Changes in spread over time are probably a close proxy for Condo/Coop. Similar to the data in link below but only for multi-family. Interest Rates and Cap Rates section.

https://www.northmarq.com/insights/research/main-ingredient-interest-rates-and-commercial-real-estate
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cap_rate + 3 * (cap_rate - mortgage_rate)

Sorry, I should have been more clear. It’s really:

net_rate = cap_rate + inflation_rate - transaction_cost_rate - insurance_upkeep_reno_rate

And:

ROE = net_rate + 3 * (net_rate - mortgage_rate)

Since the 1990’s, inflation_rate has been 2.5%. I put transaction at 1% and the rest at 1%. So net_rate is cap_rate + 0.5%. If we take cap_rate as 3.5% now, that makes net_rate 4%. Which is what happens to match median_rate (what the Miller Samuel chart shows) right now, and as far as I can remember, the past ~20 years. So I’m just using median_rate as a proxy to net_rate.

Got it. One can calculate the net rate to their liking which is really "Real Cap Rate" and then a spread to mortgage rate. The above is indeed commonly used formula by multi-family investors for initial gut check supplemented by NPV analysis. And all of the buyers think they can increase the rents by more than what the previous owner was able to do. Some are successful.

On "net rate" calc
I also tend to pad the monthlies by annual cash slows - insurance cost, regular upkeep, and assessments (essentially building structure maintenance) - when calculating cap rate.
But you are just using 1% per year lumpsum for that. For example: $3mm apartment. $30k per year. $4k insurance. 3-5k regular upkeep including dishwasher replacement, minor refresh, plumber, AC cleaning repairs etc. $6-8k building assessments. $15k for every 30 year reno allowance. That will indeed total 1%. For rental, one paid a broker in the past every 2-3 years but that is history even before the new law.

Yep. Rental fees are indeed present. I’d say 5% rent-to-price * 12% / 3 years => 0.2% or so. Pretty de minimis big picture. The main point is that net_rate spent an entire decade 6% higher than where it has been since the housing bubble, against a mortgage_rate that was only 1% higher. Not only were your equity dollars earning 6% more, but each turn of leverage was earning (or not losing) 5% more. Inflation turned out similar to what we’ve been having the past 20 years, but to the extent expectations in the 1990’s were higher (not sure if they were), that’s only add to the difference.

So "Net Cap Rate" =
gross cap rate (montlies ex principal payments/price)
- 2% (1.5%) for transaction, upkeep, assessement, insurance, mortgage tax etc in the long run. Push that down to 1.5% for longer term holds or recent/smaller renovation estimate.
+ 2.5% inflation.

4 gross cap property will be 4.5%-5% post inflation benefit as per above. So cash purchases get 4.5%-5% at $3mm or below low end mostly tax free due to $250k/$500k capital gains deductions. 6.5-7.5% taxable equivalent.

Mortgage rates tax benefit 40bps. $3mm puchase, 30% marginal income tax bracket, $750k principal deduction allowed. 30% * $750k/$3mm = 7.5%. 5.5% mortgage rate. 41bps benefit.

5.1% effective mortgage rate. $2mm property a little lower effective mortgage rate.

Leverage still in a hole. Need another appx 25-50bps lower financing rate to breakeven on financing.
Big gains from cap rate compression starting early/mid 90s are gone.

Or 4.5% gross cap rate to breakeven on financing for coops / condos under $3mm.

Or take a little more risk and do 7/1 at current 5% post relationship discounts etc.

Manhattan coop/condo market seems to be 4% gross cap except may be at the lower end where it is a bit higher.

Or look elsewhere if wealth creation is amongst your goals?

I’d argue that if you’re considering the financials as we are doing here, as opposed to writing the check whatever the price, then the financials evidently matter to you. And if they matter, IMO, then do it right. Squeezing the numbers and then tacking on additional term risk on financing to eek out a 4% ROE on 4x levered RE isn’t a winning formula IMO. It wasn’t in 2005 (whose 20-year outcome we no know), and it still isn’t in 2025 (whose 20-year outcome is TBD).

As Buffett is fond of saying, there are no called strikes, and you don’t have to swing at any of the pitches. That’s generally the viewpoint on even good pitches, to say nothing of the bad pitches that have been thrown by NYC RE for 20 years running.

6.5-7.5% taxable equivalent expected nominal (calcs above) is actually a little higher than I expected as return on Manhattan real estate. Last 20 years certainly lower than that. Of couse, people expect 8-10% in stock market.

IMO “taxable equivalent” is a bit of a canard. After-tax is all that matters. In a cash purchase, the 4.5%-5.0% becomes 4.0-4.5% after cap gains. 10-20 years of compounding at 2.5% exceeds the $500K exemption.

The tax drag on stocks is not as large as you may be thinking either for long-term investing. Since Jan 2005, SPY has returned 10.6%/yr, or 8.0x your money. Dividend tax drag dropped it to 10.0%, or 7.2x your money assuming the highest NYC tax bracket. If you were to exit now, it’d be 7.8% or 5x your money. But you have the flexibility to (say) move to FL before selling — 8.6% or 5.9x your money. And if you roll the money out slowly, the cap gains drops to 15% and the NIIT goes away, so 9.0% or 6.0x your money. Or you can roll the dice on another 20 years, which makes the tax drag even lower (acknowledging that returns for the next 20 years might not be looking as good).

Nada. As primary residence, you are not paying taxes on rental yield as cash flow is in form of usage. Just paying taxes on inflation less transaction cost/upkeep etc.

Upkeeep excluding stuff deemed routine maintenace by tax code. Assessments are typically deductible as they are considered cap-ex by tax code.

BTW, one thing clearly in favor of SPX is survival bias and diversification which an individual apartment will never offer.

FWIW, I am generally wary of counting on unlevered ROE when the capital structure is upside down.

To understand what I mean, the current unlevered ROE you’re quoting at 4.5-5%/yr (which I think is more like 4%) relies on 2.5%/yr appreciation. But that’s “improperly” below the ~5.5% payable on mortgages, regardless of whether or not you use a mortgage. Maybe that upside down situation holds for ~20 years, but I wouldn’t wager my financial future on it if I were a young person. Once an irrational fever of momentum breaks, it usually doesn’t come back — because those irrational momentum spirits depend on irrational momentum spirits in the recent past. You kinda need a return to rationality first, for the rational buyers to form support, because momentum is in the wrong direction. At least that’s been my reading of such situations throughout human history.

On how this has played out in Manhattan, looking back 20 years, I think the calc we ran would have been 2.5-3% unlevered return against a similar mortgage rate as today. That 2.5-3% didn’t actually realize, because prices were flat instead of up 2.5%. So they didn’t even get paid much, if anything, on an unlevered basis.

I’m fairly confident this isn’t what’s actually going on in the heads of all those people not buying these days. Rather, they look and say “Manhattan prices haven’t gone up for 20 years so they won’t go up”. They might be right about the conclusion but for the wrong reasons. Instead, they’re probably looking at the rear view mirror 20 years thinking SPY goes up 11%/yr, QQQ up 15%/yr, etc. So their momentum attention is elsewhere.

You giving away you trade secret for free!!
-------------------------------------------------------
Once an irrational fever of momentum breaks, it usually doesn’t come back — because those irrational momentum spirits depend on irrational momentum spirits in the recent past. You kinda need a return to rationality first, for the rational buyers to form support, because momentum is in the wrong direction. At least that’s been my reading of such situations throughout human history.

So much math! But most people don't do (don't know how to do) any math on rent vs buy, they just buy when they can afford a down payment and have some confidence in the desired location.

>>acknowledging that returns for the next 20 years might not be looking as good

What is the right benchmark return going forward?
Comparing to ~10% stock market returns in the past 20 years, Manhattan RE does not look so good. But here I see 5.2% projected for US equities: https://www.blackrock.com/ca/institutional/en/insights/charts/capital-market-assumptions relative to which a 4% cap rate is not crazy...

As a side note, Direct Lending really stands out in that chart. Wondering what the source of alpha is and how sustainable? Also, how do I get in on this? :-)

Blackrock projects 5.6% return for US Real Estate. That's not necessarily Manhattan RE, but it is a higher number than the projected US Equities return!

>> You giving away you trade secret for free!!

Yeah, I’m pretty sure I’m just regurgitating public knowledge that’s been out there since forever. Start a conversation with ChatGPT about this book (which I’ve of course never read!) to see what I mean:

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

>> As a side note, Direct Lending really stands out in that chart.

I take the BlakcRock chart with a dose of skepticism when it comes to the top lines. Ever notice how the top ones also all happen to be the high-fee ones? My anecdotal understanding of private equity (projected 12.4%) these days is that institutional investors are balking at kicking in more cash. That removes fuel for funds to sell to each other at increasing marks, so now they’re drumming up the retail channels. And the 8.5% for hedge funds is quite something compared to the 4.3% they’ve done as a whole over the past 25 years according to indices that track such things.

Krolik,

In my calcs above 4.5/5% post tax is what you are getting on an expected basis below $3mm with 10year hold. HIgher end is likely lower due to tax benefit cap and lower cap rates.

Expected basis equities would be last 12 months earnings yield from P/E ratio plus inflation plus (nominal earnings growth - inflation). Less whatever taxes you apply. 3.2% plus 2.5% inflation. 5.7%. But earnings have grown more than inflation. What do you put in for that on expected basis? 2% above inflation? 7.7%. less whatever taxes you need to pay.

https://www.multpl.com/s-p-500-earnings-yield
--------------------------
So "Net Cap Rate" =
gross cap rate (montlies ex principal payments/price)
- 2% (1.5%) for transaction, upkeep, assessement, insurance, mortgage tax etc in the long run. Push that down to 1.5% for longer term holds or recent/smaller renovation estimate.
+ 2.5% inflation.

4 gross cap property will be 4.5%-5% post inflation benefit as per above. So cash purchases get 4.5%-5% at $3mm or below low end mostly tax free due to $250k/$500k capital gains deductions. 6.5-7.5% taxable equivalent.

Mortgage rates tax benefit 40bps. $3mm puchase, 30% marginal income tax bracket, $750k principal deduction allowed. 30% * $750k/$3mm = 7.5%. 5.5% mortgage rate. 41bps benefit.

5.1% effective mortgage rate. $2mm property a little lower effective mortgage rate.

Leverage still in a hole. Need another appx 25-50bps lower financing rate to breakeven on financing.
Big gains from cap rate compression starting early/mid 90s are gone.

Nada, That private equity game seems to be over for now. Trade with each other and mark-up.

you get what you pay for ;-) why would investors balk at kicking in more cash into the top performing investment product? :-)

but seriously, the assumption that direct lending (assume they mean the same thing as private credit) will deliver higher returns than equities (and much higher than bonds and credit on the bottom of the chart) is an interesting one. Would love to know the rationale.

>> What do you put in for that on expected basis? 2% above inflation? 7.7%.

Sure, that’s a decent assumption. I like to start with Shiller PE10 (39 right now), flip that into a yield (2.5%), and tack on 20% to account (3%) for the fact that it is a 10-year look back. Then, tack on inflation (2.5%) and GDP growth (2%). That gets to 7.5%. I am guessing that’s what the Blackrock-like models do as a starting point. But then they haircut that to 5% or whatever because the risk premium is so compressed. E.g., Shiller PE10 is at its second highest ever, a good 2% below 30yr yields, etc. Such compressed premia have rarely (never?) held historically. Same story as my concern about apparent returns on cash being lower than returns on debt in NYC RE meaning apparent returns on cash might not materialize.

Those millionaires need to start hiring this woman to offload their properties on the Gulf Coast of Florida.

StatmentSearch.pdf https://share.google/4zIWUmrdspne8ggDY

Wrong link!

https://www.instagram.com/reel/DJ4WbgbAe6o/

What's interesting about the above? This is not satire. This is an actual real estate agent who has also been written up in the New York times, and in Jonathan Miller's blog. She uses humor and sarcasm as a marketing device, to separate herself from the rest of the pack on the Gulf Coast of Florida.

Funny world we live in, Keith!

Here’s a fun read for everyone:

https://www.reddit.com/r/fatFIRE/comments/1nieaqx/our_journey_from_0_to_eight_figures/

The guy had his shares of up and downs over the years and can certainly tell a good story. But I couldn’t figure out whether this was a hypothetical he was musing, or a sign of the times:

>> I calculate our average annual returns for the past decade, ever since we moved to a lower-cost-of-living country. It's 13%. I build a spreadsheet and project our annual spending increases, our taxes and reinvestment rate for the next 40 years at 13%. The math highlights a path towards $100m. Then $200m. Then $500m.

Very interesting read indeed! I was particularly intrigued by his move to dividend stocks. I've recently gone down that rabbit hole a bit, looking at high yield, covered call ETFs, closed in funds. Trying to understand the risk to get those 8 to 10% returns.

I'm not sure if his math is mathing! Considering his ups and downs, and not sure how his portfolio went down 75%? And then with what sounds like a non-partner law firm job how he was able to get up to 10 million even with compounding and some good stock market picks? But if he did pull this off, good on him!

I think he was focused on dividend stocks for safety and so he could pay the bills in an “obvious” way. But he now thinks that was probably a mistake, and that he should have just invested everything in tech stocks:

https://www.reddit.com/r/fatFIRE/comments/1nieaqx/comment/nek0vgm

In terms of the math mathing, he was pulling out 4%/yr via dividends once he retired in 2010:

https://www.reddit.com/r/fatFIRE/comments/1nieaqx/comment/nek00v9

He says his 2015-2025 returns were 13%/yr, but the asset increase from $4M to $10.8M works out to 10%/yr, which means he’s been pulling out 3%/yr on average.

In terms of his ups & downs, he says he was at $4M in 2005 and $4M still in 2015. Perhaps adding 4%/yr in the first 5 years before retiring and subtracting 4%/yr in the second 5 years? So one decade at ~0%, a second decade at 13%. Obvious conclusion is to make some projections at 13%/yr for the next 40 years!

In terms of his portfolio being down 75%, I can totally believe it. SP was down 64% peak (Oct 2007) to trough (Mar 2009). So sure, his basket of stocks down 75% peak-to-trough (a good measure for spinning a good yarn!) seems totally plausible.

In terms of accumulating $10.8M, that’s just how compounding works. He had $4M in 2005. Had he put it in SPY instead of his basket, and not withdrawn, it would have been $32.8M today. With 3%/yr withdrawals as he had been doing on average, it’d have become $17.6M. He underperformed the market materially — what I calculate to be 6.5%/yr over 20 years versus 10.7%/yr — withdrew some of it and still came out OK. This is what I mean by younings not giving up their greatest asset of time.

In terms of accumulating $4M in the first place…

Note his purchase of the Tribeca apt in the mid 1990’s at $200K (using inheritance from murdered parents) back when cap rates were 10%. And his rotating of the proceeds from a burgeoning housing bubble — $800K — into a depressed stock market circa 2002. That’s good for $1.3M by 2005.

As a lawyer paying no rent and not otherwise spending (90 hour work week), I can see him grinding & saving & investing $10K/mo 1995-2005. That would be good for another $1.7M.

That adds up to $3M, which is spitting distance from $4M. This all is speculation, of course, and the actual history was probably different. Just illustrating of how something like $4M is plausible.

This guy was definitely a grinder! I wish the vanguard 10-year Outlook was a little bit rosier. I've done a good job of accumulating money over the last 10 years, with the help of the mighty S&P. Now I would like to enjoy some of it, with less focus on growth and more on preservation.

Currently 50% in fixed short-term government bonds. The other 50% in international XUS and 50% in S&P. And of course as you know a chunk of money in an annuity that coupled with social security in 6 years will cover all my basic living expenses. Like the subject above, I bought at the very bottom of the Florida market, and am now sitting on a boatload of equity with no mortgage.

I was looking at stepping away from real estate, however, I have now taken on a partner who is younger than I am and wants build on what we already have established. So look out for a new brand image with a website designed by folks that worked on Apple and Chrome stuff. The business model will remain the same, with a focus on transparency, reduced listing commissions and of course commission rebates which is what started it all off.

Keith

Sorry that sounds confusing. I meant to say the balance split 50/50 between international and sp.

>1 Bed rooms are crazy hot. Look at this building. Basic doorman entry luxury with single paned windows in a desirable location.

300 Mercer Street #21F
Truly garbage.
Tolerate for a year because of location, maybe two to avoid moving.

> including periodic expenses (bathroom/kitchen every 30 years etc)

Imagine having a bathroom last updated in 1996!

>You come from an era where: “Yeah, the fundamentals suck, but homeownership is important — and look at how well it’s done relative to everything else!” The version of you who is 20 years younger is more like: “Yeah, the fundamentals suck, and homeownership is overrated — and look how appalling it’s done relative to everything else!”

You can not possibly believe you will be living in your apartment that you bought 20 years ago in Manhattan. You can not.

>Right or wrong, the zeitgeist right now is that you can make 10%/yr until the cows come home by simply buying S&P. That’s the conservative view. And the speculative view is that if people can make 10%/yr with the braindead approach, then surely *I* can do even better than that.

Nobody should plan on 10% in stocks as a guarantee. Stop peddling this

No sure any one above is peddling the 10% return on equities going forward. Nada is just talking about historical returns on equities.

Somebody got triggered, I guess.

Funny thing is that 10%/yr for S&P isn’t my expected case these days (though it’s certainly possible, as is 0%), to say nothing of “guaranteed”. But I see it a lot out there. For example, here’s an earnest question and lively debate on how we’re going to get to 12.7%/yr over the next 15 years on a staid Bogleheads reddit:

https://www.reddit.com/r/Bogleheads/comments/1nkaix8/how_is_there_enough_money_for_the_stock_market_to/

That’s what I mean by the zeitgeist having moved on from Manhattan RE, which is no longer viewed as a path toward wealth creation. Show me one thread where the discussion is like the one above.

We should create one for Manhattan RE on this forum. Interestingly, Austin RE is down 25% from 2022 peak when every one thought Austin is the Silicon Valley next frontier.

---------------------------------------------
Show me one thread where the discussion is like the one above.

> here’s an earnest question and lively debate on how we’re going to get to 12.7%/yr over the next 15 years on a staid Bogleheads reddit:
https://www.reddit.com/r/Bogleheads/comments/1nkaix8/how_is_there_enough_money_for_the_stock_market_to/

I just dig into this reddit thread. It is quite interesting. The S&P 500 PE of 30 is historically high, it seems that the current stock price is unsustainable unless AI will be able to deliver. This probably goes to indicate another crash, but the question is always about when and how big the next crash is going to be.

For myself, I have doing 50% into stock and 50% into cash for the new money for the past three years and will for all future years until retirement, building enough cash pile big enough to sustain the stock crash.

Yeah, it's an interesting read -- as are many of the threads on the subreddit. You just gotta filter past the never-ending stream of uninteresting ones (e.g., "I'm 22M and new to this. Please look at my portfolio of 6 overlapping ETFs with $300-$700 in them each and tell me if I'm doing this right... because even though I'm now a devoted Boglehead, I can't be bothered to read any of the FAQs that cover this ad naseum").

There are pearls of wisdom in there for sure, but much is lost to the cacophany of the crowd. Such as this, which says where the gains from the past ~14 years have been coming from:

https://www.reddit.com/r/Bogleheads/comments/1nkaix8/comment/ney6654

Of note is the ~2x from P/E ratio expansion in SP.

Longer view of SPX P/E. And several other similar measures.

https://www.multpl.com/s-p-500-pe-ratio

The version that uses inflation-adjusted earnings from the past 10 years:

https://www.multpl.com/shiller-pe

And the same internationally (with a shorter history):

https://indices.cib.barclays/IM/21/en/indices/static/historic-cape.app

@inonada Misleading handle - we should be paying you an hourly rate for financial consulting.

Thanks, MTH.

On the topic of the thread, here’s another example. This listing for sale had no buyers in ~10 months:

https://streeteasy.com/building/56-leonard/47w

https://streeteasy.com/building/56-leonard/sale/1775826

But it went into contract in ~10 days after it was listed for rent:

https://streeteasy.com/building/56-leonard/rental/4809301

At the sale asking price, it’s a 2.5% cap rate. I had to guess, I’d put market price at $15M… which would be a 3.0% cap rate.