How much should a 700K apartment rent for?

I'd say around $2300-$2500. If you use the cap rate equation [property value = annual rent/(mortgage rate - long term growth), $2300 is the monthly rent for a place worth around $700k. I assumed 6% mortgage rate and long term growth of 2%.

There is NO WAY IN HELL 700k apt goes for $2300-2500. You are quoting a SUPER DUPER OVER PRICED apt at 700k, which in reality is worth about 400k.
One of my apt is about 590-610k and its monthly rental is $3200/month. My CC/RE tax is $420/month.

so you are saying a 600K apartment goes for $3200? so a 700K apartment would go for $4200?

should the mortgage plus the maintenance = what it rents for?

no -- people pay twice as much to own as the rental market -- which is why it is a renter's market...

"no -- people pay twice as much to own as the rental market -- which is why it is a renter's market..."

You got that right. I am interested to know if this is also a one-bedroom or a two-bedroom. It would be hard-pressed to get $4200 for a one-bedrooom.

In the current market....Figure the rent is 1/16th-1/18th of the price...based on the historically overpriced purchase market we have in front of us. I bet you could rent it for $3300-3600. This also jives with pricing for a large one-bed.

Right, $4200 is too high for a junior four.

Here's one that just rented for $2,650.

Really? My general sense is that a $700k one bed coop in this market is a pretty high end ish one bed that would command more than $2600. Figure $700/ft, it would have to be about 1000 sqft to command $700k. Theres a 1000 sqft one bed in my building they want like $4600. They may have to accept less. Its between 5th and Mad but I would figure most nice areas they'd want high $3000s. Sure there are two-beds for $3500 but they are 800 sqft two beds often times.

"should the mortgage plus the maintenance = what it rents for?"
No, remember you will deduct the interest at tax time. Interest is substantial in the beginning of a mortgage and it will cover your maintenance fee.

Yes it should in a normal market. This market hasn't been normal for at least six years. Before that, the idea of pre-tax equivalence (or even advantage) was normal for a buyer to assume.

Rhino, a friend of mine just rented at the croydon on 86st between 5th and madison. A 850 sq. ft one bedroom for $2800. Prewar building just renovated. Out of curiosity she also looked at a two bedroom 1200 sq. ft for $4700 in the building.

This 700k apt is not worth its price. When I said my apt is about 590k-610k I am being reasonable in this market. Sure, I can inflate the price of my apt (800k) along with thousands of other listings, but the bottom line is psf and amentities.
At 700k, it better be a damn big 1BD with alot of amentities.

soontobeowner
"so you are saying a 600K apartment goes for $3200? so a 700K apartment would go for $4200?"

You got it the other way around. 600k apt goes for give or take few of $3200. The apt you are looking at is not worth 700k. Probably around 400-500k. So the rent should go for $2800

what i was really trying to understand is how rents relate to sale price.

How they relate to prices, if the prices are genuine....rents are 16-18x prices. This is historically expensive in terms of prices.

do you mean a years rent times between 16 to 18 would equal the sales price?

Yes, so I was guessing if this is an apartment that would truly fetch $700k in this market, it is probably a $3200-$3600 rental. Basically = a high end large one bed approx 1000 sqft. Now if you tell me its not close to 1000 sqft, then I would doubt it really is a $700k apartment in this market.

Unless its a condo....Is it a condo? The asking prices on condos are higher.

rhino86 nailed it.
annual rent x 16-18times = reasonable price of the apt.

Current price, not reasonable...in my view.

yes i meant the current sale price (not list price) of the apt.

thank you, that is exactly what i was looking for.

rhino's rent is correct, if the apartment would actually sell for $700k. His opinion that this is unreasonably high is way off, but $3200-$3600 range is accurate.

Apparently I am not entitled to my opinion that prices are high relative to rents. You are such an unmitigated piece of shit, LICC.

http://www.urbandigs.com/2009/05/contracts_continuing_to_be_sig.html

Soontobeowner, direct your attention to the graph titled "Trends of Manhattan Property Prices and Rents". LICC has a lot of trouble with that graph. Maybe you will have a better time with it.

Typical LICC...when confronted with data, slinks away for a while. Interest rates were not high in 2002. From 2002 to 2008, prices doubled and rents went up 30%....yet ratio remains normal. Shithead.

LICC - show us your numbers to prove it.

His current numbers are irrelevant. The data shows prices have risen far more than rents in over any reference period, to unseen heights, where they basically remain, as rents have fallen nearly as much as prices.

The rough numbers: based on a $560k mortgage, the after-tax monthly payment cost would be in the $2500 range. Assume an after-tax maintenance cost in the $1000 range. A person's monthly out-of-pocket after tax cost to own is approximately $3500, give or take a few hundred based on rates, individual tax situations and actual maintenance costs.

How is that chart rhino?

How is that chart? You tell me. How can prices double while rents go up 30% and the ratio remain normal? You are a waste of time.

So LICC ignores opp costs and transaction costs. Kinda anticlimactic. We knew this, Steve. His core deficiency is that he thinks the numbers have always worked out this way....that this way of calculating is the normal relationship.

So rhino ignores price appreciation and increases in rental costs. We all knew this. His core deficiency is that he doesn't have a chart to look at where he can make up a conclusion on the historical relationship based on limited factors.

I guess I'll have to live with being in agreement with Noah on price to rent relationships being out of whack here, along with 30_yrs and others with a sense of history. I can live with it.

ARE YOU PEOPLE KIDDING ME?
There is no way to answer the question with the facts given. The rental market determines the price, not the other way around.

ba-294 seems to have the only investment insight here. Take his example.

((3200-420)=2780*12))= $33,360/$600,000 = 5.56% CAP RATE.

Where:
3200 is monthly rent
420 is monthly expenses**
$2,780 is Monthly Net Operating Income (NOI)
$33,360 is annual NOI
$600,000 is price

**First this assumes that there is no vacancy/bad debt/repairs/mgt fees etc. Second, ba-294 clearly owns a tax abated property (cc/re tax = $420) because I know of no such investment where this is possible without a tax abatement. In actuallity the cap rate is lower as there are always other expenses and the residual effect of the tax abatement expiration should keep downward pressure on the cap rate.

Anyway, point is that the Manhattan condo market typically trades for about a 4.5% cap rate in the last decade, but during the last 2 years, we saw abnormally low cap rates. I would say that Ba-294 owns what is a rarity in this market, or is correctly pricing his/her apartment.

But what you have to keep in mind is that the cap rates have fluctuated between - or even 0% (take for example some apartments currently on the market in BPC where you can't cover the expenses with rent) to 7-8% (during periods of the 1990's it was possible to make these kinds of returns). So know the current cap rate. I would say today it is about 3-4% but on it's way back up to 7-8%.

licc, you know that you have to pay tax on the rent, too...? why are you tax-effecting the interest but not the rent? looks to me like you compare the rent to the interest+maintenance on a pretax basis, and then take that pretax rtn on your equity to other taxable investments available to you.

also note that you may not be able to write off the loss so you have a bit of negative tax convexity in this deal.

Settle down, he asked for a guess and he gave price as given. He did not ask for the price.

LICC - another person saying cap rates are low. Another way of saying prices relative to rent are unusually high.

Settle down, he asked for a guess and he gave price as given. He did not ask for the price.

Rhino 86: But that is the whole point. 1+1 = 2, not 3. If you follow the theory of cap rates (intrinsic value of owning rather than renting) and you assume that the $700,000 figure is accurate, then you need one of the other two pieces to complete the puzzle assuming you know what the current cap rate is. Otherwise the answer is it rents for however much people are willing to pay and it sells for however much people are willing to pay. Simply put.

So my answer is:

assuming cc/tax of $15,000,
$3,875 (which derives a 4.5% cap)

He asked because he didn't have the other piece. I did the same thing you did, except I used 16-18x rent to back into it. Also, I think your cap rate is ambitious. This market is trading 3-4%, not 4-5%.

Yes and the historic rent-to-price ratio is 12x annual rent = price. If rent is $3,000 a month, the purchase price would be $432,000.

That is actually higher than what you would have to pay for it to break even renting it out to an unrelated third party, as you'd have to include cc's and taxes, or maintenance.

Yes, LICC forgets transaction costs of around 15% added to the purchase price, and the opportunity cost subtracted out of the rent. That, of course, changes the entire equation.

Rents do determine property prices - lr is correct.

I would take a 30% increase in rent any day over a 30% fall in the price of a property, which is leveraged.

Let's take LICC's (ridiculous) example: lose 30% of a $700,000 apartment = $210,000 (excluding the fact that you're paying a mortgage that is worth more than the place you live in). Increase $3,500 rent by 30% = $4,550. That is increased rent of $1,050 a month.

All things being equal, it would take 200 months, or almost 17 years, of rent increased by 30% to offset a property decline of 30%.

That's why in this market LICC's "property appreciation / increase in rents" is such an asinine comment.

"Rents do determine property prices - lr is correct."

This guy did not ask for a judgment on whether or not the market for property values is inflated or not. He asked what we think a property selling for $700k today commands in rent.

So steve has to assume a 30% decline in price to justify his analysis. Sad.

"So steve has to assume a 30% decline in price to justify his analysis. Sad."

No, I didn't assume anything. Even the bigwigs - including Dolly Lenz herself - have said that real estate is down 30% from the peak.

But if you were to THINK about it LICC - rather than just CRITICIZE it without any analysis - you will see that any increase rent / decrease price percentage applied will give you the same result if the percentages are the same. Oh the joys of leverage.

And the facts remain - apply 15% transaction costs to purchase price and subtract the opportunity cost from the rent, and your numbers do not add up.

Rhino, a property selling today for $700,000 commands a rent of about 50% of the owner's net carrying costs. We have seen that time and again.

I didn't go that far... I generally see transactions happening in the neighborhood of (still high) 16-18x rent ratios.... Which generally comes to like 4% cap rate. That's the guess that I gave soontobeowner.

LICC is certifiable.

oops. Here's the link, but no doorman.
http://www.streeteasy.com/nyc/rental/517440-coop-225-east-76th-street-upper-east-side-new-york

Rhino, we all know that real estate is vastly overprice still regardless of the basis used. Only LICC is left insisting on ridiculous things - he's been abandoned by every last supporter he ever had, including Juicy.

IR10021,
yes you got it right.
I own a tax abated property and the rent that I am getting is from 2007, expiring in early 2010.
In current rental market, it would yield around $2800.

Generally what I've seen is that the annual rental rate minus the annual owner monthly charges is one twentieth to one twenty-fifth of the price. Now, in the current market, on the rental side, if you are the owner, I would strongly recommend listing as no-fee (that is, you pay the broker fee) and potentially offering a month free rent which would offset an empty month that it sits on the market. Also, in the current market, where clearing sale prices are coming down, often at reasonable chops for owners looking to move their property, you might see the ratio be on the lower end (one twentieth) of what I said above.

One more thing, if this is a co-op, I would be on the cheaper side on things at this price range because there is a hassle of applying, paying co-op fees, interviewing, waiting, etc. that will limit your universe of renters or just add hassle to the process and so frankly it is you that'll need to compensate for it, potentially offering another month free on a two year (or twenty six month) lease.

Since interset rate is so low these days, I am thinking to purchase a few 1 bedroom apartments to generate rental income. No mortgage is necessary. Is it better to purchase 1 bedrooms at about 700K or at about 1 million each? What would the monthly rental be for each in this economy? Future appreciation is also important. Please help, thanks!

lol

We got us a live one here.

steve's analysis requires the inclusion of opportunity costs (which are not out-of-pocket costs) but refuses to incorporate price appreciation or rent increases. That is just disingenuous.

Ideally, $700K apartments wouldn't rent. People should own their own place. There shouldn't be landlords. An ownership society, where everyone owns and lives within their means (so no ARMs or other false short-term incentives like the Northside Piers) would ultimately be the best for all, except for short-term transitory circumstances.

so where do I sign up for this free 700k CASH, so that I can buy one tomorrow?

Poster thanks for clarifying that you are a loon.

Ideally, people wouldn't dream of paying $700k for apartments they could rent for less than $3000 a month. Ideally.

Either Peninsula is a very clever humorist or a foreign buyer with a ton of cash and a low hurdle rate for cash on cash return.

"Is it better to purchase 1 bedrooms at about 700K or at about 1 million each? " Is this real? I guess its a conceptually legitimate questions. Yields could vary slightly, in theory.

IR10021: In calculating the cap rate/NOI should mortgage interest be taken into account and if so should that be before or after the tax savings ?

"steve's analysis requires the inclusion of opportunity costs (which are not out-of-pocket costs) but refuses to incorporate price appreciation or rent increases. That is just disingenuous."

Opportunity costs are just as "out-of-pocket" as tax benefits, my small-minded friend. Actually, they're into pocket, as you watch your balance grow.

I did include rent increases equal to price depreciation, above. Your response was "So steve has to assume a 30% decline in price to justify his analysis. Sad."

Guess you didn't read today's paper.

Let's educate steve again, he really needs it:

What Does Out-Of-Pocket Expenses Mean?
An expense incurred and paid for by an individual for personal use, or relating to one's employment or business. This can also relate to ongoing costs of operating a fixed asset, such as a car or a home.

Some out-of-pocket expenses may be reimbursed by an employer or other group if the expense is incurred directly on their behalf. In addition, some out-of-pocket expense categories can be deducted from one's personal income taxes.

Common examples of out-of-pocket expenses include gasoline for a car, taking a business client to lunch and certain medical payments such as prescription costs. Income tax deductions are often available for expenses related to education, healthcare, home upkeep and charitable donations. While tax deductions don't represent a direct reimbursement, there is an ancillary benefit to paying what is typically something that must be paid anyway.

Hi I'm Rhino86, I haven't said anything new in the past two months (real estate is too expensive) but I have cursed a lot.

I've come to the conclusion that steve just has trouble understanding concepts. He may be good at some things but conceptual thinking is not one of them.

The comparison of rental costs to ownership costs is a current day analysis. However, steve insists on distorting it to factor in future projections. He then assumes negative future projections to get to the conclusion that he likes. This thread is about comparing the rental cost and ownership cost of an apartment that TODAY is worth $700,000. This should be only one factor in a person's decision whether or not to buy an apartment to live in or to rent. A person should also consider other factors relating to expected future price appreciation, rent appreciation and opportunity cost.

I haven't been predicting a bull real estate market on these boards. When someone asked last year, I said I expected Manhattan prices to fall 15-20%. But I have been consistently pointing out the myriad flaws in steve's analysis and predictions, and I have disagreed with those predicting 50-70% declines in NYC.

In calculating the cap rate/NOI should mortgage interest be taken into account and if so should that be before or after the tax savings ?

Neeta: NO - Cap rates are a way of comparing apples to apples based on the current income stream after expenses. Essentially it is the only good way I know to properly value apartments. That is because, if person A buys apartment X with a mortgage and has great credit, and person B buys apartment X with a subprime loan and has horribly credit and horrible terms, and person C buys it all cash, the fact is none of these scenarios affect the property's price.

As has been explained time and again on these boards, a property's intrinsic value to the market =

((The Rent One would Otherwise Pay to Live there - The Property's Expenses) / (The Prevailing Market Cap Rate / 100))

What you might be thinkikng of is Cash on Cash, or ROI, which does employ the debt service but that is not a valuation method.

LICCComment: The problem with your reasoning that we are in a bull market is that cap rates are going up, not down. Meaning the price an investor is willing to buy an apartment at is over 5% today in Manhattan. Homebuyers are paying between 3.5% and 4.5% Cap Rates. These numbers are way up from 18 months ago. Now how can the purchasers achieve higher cap rates, when expenses (RE/CC/Labor/Materials etc) are climbing, and the Rental Market is Softening?? Only one way, by lowering the price. Manhattan has some of the lowest cap rates in the nation due to the overwhelming demand to invest here. But don't be fooled, there is also a dowside to it.

I haven't reasoned that we are in a bull market.

LICC, you are AMAZING!

"The comparison of rental costs to ownership costs is a current day analysis."

Then, in the same paragraph: "A person should also consider other factors relating to expected future price appreciation, rent appreciation and opportunity cost."

Hmmm.

"However, steve insists on distorting it to factor in future projections."

Anyone who doesn't take the short-term prospect of losing hundreds of thousands of dollars on a property is a fool.

Oh. Did I just say that?!

sorry LICC, you are correct and I am misread.

I think 50-70% declines are not coming on a whole but if 25-30% are already here to stay, it makes you wonder what kind of discounts the investors are getting?

LICC, how hard is it to admit that in the past, you didn't need to apply tax benefits and ignore opportunity costs just to get a monthly payment equal to rent? If I show you a graph that coop prices were up 100% since 2002 and rents were up 30%, that should ring a bell. And 2002 was not depressed, it was 10 years off the bottom. None of your analysis is wrong, per se. You just don't appreciate that historically owners enjoyed after-tax monthly costs much lower than renters, yes from day one, yes before consideration of appreciation. Its just how it was, before 2004 or so. In order for your reasoning to be right, you should be arguing that permanent changes in the market took place in 2002-2004, such that owners should never again expect the benefits they enjoyed...basically at most all times prior. Sure, 1988-89 may have had similar math as today...but that's what made it such an awful entry.

LR - do investors ever look at cap rates on a tax-effected basis? I passed on a property that (due to very special circumstances) would have given me a cap rate of about 3.9% but the rental profits would be 100% tax free from a tax accounting point of view.

"When someone asked last year, I said I expected Manhattan prices to fall 15-20%."

So how come you weren't advising folks to rent?