Investment Property

In this economy and RE market you are looking to spend $800,000 on RE solely as an investment and have no idea where, why, what or how? Are you out of your mind? Do you have a qualified investment advisor or are you just making this up as you go along?

Khadija, buying an investment property is an excellent idea. I don't know how old you are but the younger the better. Why not buy studio/one with tenant in place already. They are all over Manhattan. Just get to know a few n-hoods and you will know if you are getting a good rent. Be prepared for condos only and at least 20% down. If it's your first then might run into some roadblocks. Don't give up. Watch your cashflow and have emergency cash available. Good Luck.

"Khadija, buying an investment property is an excellent idea."

You're right, steveF, it is - under certain conditions. For instance, you need to be able to break even from the get-go. I dare you to find even ONE apartment in Manhattan where that's the case. It may be the case in the outer boroughs, but not in Manhattan.

Also, you have to be willing to lose your entire investment if property prices continue to fall, as they will. If you are leveraged, you could lose your entire down payment and more. You also need to be able to pay all expenses out of pocket for at least a year in case you can't rent the place.

Meet all those conditions, and BINGO! What a freakin' investment!

My only advice is to hire a management company. It's worth the small % if you have no idea what you are doing, and have your own job/life

stevejhx,
#1 everything you speculate about(above) can just as easily go the other way.

#2 how is it that countless people have made small fortunes in manhattan real estate? How is that the case? Why can't I or Khadija do the same? Manhattan has been through banckruptcy, stock market crashes, 9-11/WTC '93, late 80s-early 90s conversion/new construction mania, soaring mid 70s and 80s crime rates. Those who invested through it all are now incredibly wealthy. Why not you?

"If" you can find a property with a cap rate in the area of 8%, it could be worth considering.

I doubt you'll find that in NYC. You will find it, though, in many other parts of the country.

Your entry price (and the resulting cap rate) are critical - as well as your expectations for future increases in NOI.

"#1 everything you speculate about(above) can just as easily go the other way."

Okay - find me an apartment in Manhattan that you think you can make money on from Day 1 using standard business accounting and comparable rents from nybits.com.

Can't be done.

#2 - Sometimes it can be done. Show us one of the properties you have in mind. Because until #1 is true, #2 can't be.

"Okay - find me an apartment in Manhattan that you think you can make money on from Day 1 using standard business accounting and comparable rents from nybits.com.

Can't be done."

1) I agree it's quite rare these days, but there are needles in haystacks (and no, I don't have the time or inclination to look for them right now, but in my experience, people who talk in absolutes are way more wrong than right).

2) How much is nybits paying you?

1) Until you can find, there's no use discussing.

2) Nothing.

couldn't it be done if he pays all or close to all cash for the property, espceially if the condo has a tax abatement and low maintenance? certainly the real estate market is still falling, but the pace has slowed

"couldn't it be done if he pays all or close to all cash for the property, espceially if the condo has a tax abatement and low maintenance?"

You could do anything, but in cases like that you have to include the opportunity cost of investing your money elsewhere.

true, but you could say that about any investment - what would you consider to be, in this current market, to a worthwhile return on an investment?

great thread..keep it going..i will get bsck to you,stevejhx

If you look hard you might find an apt you can rent and still break even (although it would be hard, since rents are falling). But why do that when you could just as easily buy stocks or bonds at much better values or buy an apt in another part of the country (Las Vegas, SoCal) where prices appear to be bottoming out?

jnnj - use the cap rate (as in rhino), and you would need a cap rate in excess of the mortgage rate if you don't want to include finance charges.

If you want to do it on a cash-flow basis including finance charges, take monthly rent x 11 (to account for vacancies) and subtract from it all costs involved except for principal repayment (interest, taxes, maintenance, etc.) and, as it is a long-term asset, assume 30-year fixed financing 80/20 mortgage (which accounts for the depreciation expense of the building less the land).

In either case the result should be approximately the same.

true, it would be hard if you financed a significant portion, but you can more than break even if you buy all or close to all cash, and if you are able to purchase a lower priced condo with low maintenace and a tax abatement

wouldn't buying in another part of the country would add unecessary management costs - and if you buy local, you can actually make sure your investment is being taken care of

Use the cap rate if it makes you happy - it takes out the financing.

Don't expect positive cash flow on a manhattan apt investment.
And this is probably not the decade to bank on a property appreciating too much.
Positive cap rate in NYC? haven't seen one yet.

Let's do a poor example analysis;

800K. Let's say you put 20% down (good luck finding a bank that doesn't want 50%) that means 160K which leaves you with mortgaging 640K.
A 30 year 5 percent int mortgage will cost you @ $3434 per month.
Size; Given the grossly broad average that apartments are closing at today ($1000 per ft) you can expect to get around an 800 sq ft apt.
Which gives you another very broad and general average figure for maintenance and tax of ($1 per foot per month) $800 per month.

That's your monthly nut of $4,234 stripped and bare, without insurance, surprises, empty months, etc.

Now rent. If your fortunate to get someone at todays average of what? $42 per foot? (And that figure does not count the 1 or 2 months free rent being slung around like govt cheese which affects your yearly rental income by -8% for each month given)
$42 times 800 sq ft = $33,600 divided by 12 months is $2800 income per month.

So your paying $4234 per month while receiving $2800 per month.

Who needs tax deductions when your not making any money! :)

steveF - don't you owe us an answer?

I find it funny that in 2009 there are still people talking about real estate as an "investment"...That is sooo 2006 and most of us are still witnessing today how good of an investment it has proven to be!

I'm still taking heat from saying that owner-occupied residential real estate is not an "investment"; it is a capitalized expense. But steveF and petrzitz and licc and juicyjuice can think whatever they want. All the others on this board who thought as they have have had the dignity to stop posting (rather than admitting the error of their ways).

This is insightful except seems to be some history back and forth, but anyway, can you explain what this means: residential real estate is a capitalized expense. Thx

Sure: you buy property as a place to live in. Accepted economic theory holds these things to be true:

1) Goods are valued at their output value, not their input value.
2) The output value of purchasing property and renting property to live in is the same: a place to live.
3) Therefore, it should cost the same to rent and to buy.

However, in the short-term markets are imperfect. There are times when it's cheaper to buy and times when it's cheaper to rent. So when it's cheaper to buy you buy; when it's cheaper to rent, you rent.

When you buy, what are you doing? You are taking on a debt in lieu of a future stream of rent payment. You're basically renting to yourself (another accepted economic principle), so that asset (the home) you pay off instead of rent.

There are a number of different ways to calculate this, but they all give about the same answer:

a) cap rate - what your return on investment would be without financing charges.
b) cash-flow with financing term equal to the depreciation rate (which is an 80/20 30-year mortgage).

I prefer the latter, because it's concrete. If you are in effect renting to yourself, you should break even on a cash-flow basis using business accounting methods. Meaning that your monthly cash outlays (mortgage interest, property taxes, common charges, etc.) should be less than your rent to be making a wise decision. LICC and others will say, "BUT THE TAX BENEFIT!" but as you see, under this method you deduct ALL taxes and interest before earnings. The only thing not deductible is the principal.

You must also include about 15% transaction charges.

If you do this you will see that prices still have very far to go to equal rents. The reason why this is so important is rents are 100% correlated to incomes; property prices are not. Rents show you what people can afford; property prices show you what they want. Not the same thing. Rents are constrained by 40x monthly rent = income. If you do this calculation, using average long-term interest rates, you will see that that amount comes out to about 30% PITI.

It all fits together neatly.

Original Poster, please listen to kylewest and truthskr10.

I know a young investor who bought a very large apartment in Tribeca that is in negative cash flow (aka bleeding money). She's got about a year left to figure out what to do before she runs out of money to live on. Latest thing to hit her is a $100,000 bill for foundation repair work.

If you want to avoid losing buckets of money, you have really got to analyze your goals, your financing (if any, there are pros and cons to financing these things or paying cash) and do your homework or get somebody to do it for you when it comes to location.

truthskr10's analysis looks reasonable to me, but I'm wondering if one bought two studios for $400K each instead, if the numbers look any better? I dunno, maybe not. I was briefly interested in Bed-Sty, investing for cash flow and long-term appreciation, but I got spooked by NYC's tenant-favorable laws--it's too hard around here to evict holdover/deadbeat tenants.

A quick and dirty way rule is that you should get $8000 rent per month on an $800,000 property (1%) I'm getting double that on one of my investments in upstate New York.

Please do be careful out there....and don't forget, 5-10% vacancy should be built-in or the rent is too low.

{Manhattan real estate agent}

I have also been looking to buy, either 2 one bedrooms or 1 two bedroom apartment around $2mil in prime Soho/Tribeca/West Village, all cash. Any suggestions on what to look for? Is it possible to find something with 8% cap rate?? Most of the properties that I'm looking at have cap rate of 4% -- very disappointing. Although rental income is a plus, future appreciation is also very important for us. I appreciate all suggestions. Thanks.

On a slightly unrelated note, do you guys think Tribeca will be the next Soho? Or is it safer to invest in Soho or West Village? We are foreign buyers so do not know the city that well, other than UES.

Where's steveF: he promised to get back to us?