Sale at 40 East 88th Street #6F - Study in cap rates & inefficient pricing

Of course maintenance is a factor - maintenance in a co-op is in lieu of taxes and other factors that figure into (albeit implicitly) the 15x ratio. So do interest rates. It's just a rule of thumb - 15x being the upper limit.

I agree with you - at $1.1 million, the place is worth it.

50% below the original asking price!

What kind of self serving nonsense is this?
Here's my favorite crap from the two posts above "maintenance figure into (albeit implicitly) the 15x ratio" What kind of hockus pockus is that ?

What kind of hocus pocus is hockus pockus?

Maintenance 'figures' into 15x rent but only if it is 'average' maintenance. When it does not figure in is when two apartments, like this one and the 2 bed in 10 East 85th have an $800/mo difference in maintenance. That is why I am partial to cap rate. It also provides quick comparison to mortgage rate, or competitive bond use of cash.

We had this discussion before - how do you figure maintenance into cap rates?

Multipliers are "averages," Rhino, so I don't know what your point is.

My point Steve is that price to rent fails when comparing two apartments that are comparable other than maintenance, such as 10 E 85 and 40 E 88. Are you really asking how I figure maintenance into cap rates? As I understand, the cap rate of a coop for comparison/valuation purposes is equivalent rent minus maintenance divided by purchase price. In this case, 40 E 88 is a decent cap rate of 4.5% at ask. At $1.1mm it would be 5%. By contrast, assuming the same $6k, 10 E 85 would be 3.8%. Thus, simple price to rent yields (no pun) the same price to rent of 17x, falling short of usefulness.

I got to tell you Rhino this some interesting stuff. I trying to wrap my mind around comps with this exact notion in hand.

Rhino, maintenance is not the same for all co-ops - they are all balloon mortgages, some with amortization, others without, and the term usually varies from 5 to 15 years. They include insurance and property taxes (usually); some include ground lease payments, others (BPC) payments in lieu of property tax. A blanket statement on maintenance, therefore, is not possible.

Nonetheless, maintenance is a fixed expense that can't be ignored: the higher it is, the lower the price of the apartment. Therefore, an apartment with higher maintenance will also have a higher cap rate:

$5,000 / $100,000 = 5%
$5,000 / $150,000 = 3.3%

Your claim, then, based on the formula you use, is that a high maintenance increases your return because the cap rate is higher. That makes no sense.

To clarify: "they are all balloon mortgages" for maintenance payments that include underlying mortgages. Some do not.

and a low current maintenance does not guarantee the same in the future. a lower maintenance in a poorly run building without sufficient reserves is worse than a higher maintenance in a fiscally sound building.

stevejhx is there a chance you can please email me privately at noah + at sigh + urbandigs + dot com? need to ask you something

Jeez Steve, isnt it obvious if I am advocating for 40 E 88 over 10 E 85 that I am doing the opposite...I am saying the cap rate on 40 E is much higher, therefore it is much more attractive. And I am just using the comparison as a reminder than price to rent is a weak metric when maintenance varies so much. I am also saying that 40 E is getting pretty close to reasonable. No guarantees that maintenances stay put....but I find high begets higher as a sign of a bad financial mgmt of the building.

rhino, when i do buy v. rent comparisons i always include maintenance. and when i do comps on a price per square footage basis i try to increase or decrease by some factor if maintenance is low or high.

Cap rate is basically rent vs. buy...simplified as an all cash transaction and the result is a comparison to an alternative use of cash. I dont think something that doesnt make sense all cash, should be made to make sense through the use of leverage...this is why I think cap rate is sufficent.

rhino, i get it. another fun exercise is to try to figure out what something would have traded for in 2000 psf, adjust for inflation to today's psf price, and see how it compares.

i saw one unit priced at 2007 sales price. almost exactly two years later, same price but maintenance has gone from $1500 to $2000. interest rates aren't that much better for the unit. so now the unit is more expensive, not less, no?

Its much more expensive. Rent is lower. Maintenance is higher. Alternative investments are cheaper. Interest rates may be same but loan is harder to get.

"I am also saying that 40 E is getting pretty close to reasonable."

Agreed.

On the other matters, I think cap rate has its usefulness, as do price-to-rent ratios, as does owners' equivalent rent, as do other indicators. I would never advocate using any of them individually, nor making them the sole determinants of whether to buy or rent.

Manhattan cap rates still suck.

That's why I don't invest in Manhattan.

{Manhattan real estate agent.}

Steve, I guess I dont see how cap rate doesnt have everything over price to rent. Yes, Fluter they do still suck...but expected returns kinda suck on everything right now. My point here was to note two apartments, where one is much more attractive than the other. As well, it was to note a 4.5% cap rate in a prime neighborhood in a market that is still asking at 3.5% cap rate as a whole.

PS: Broker told me 40 E 88th fell thru due to a coop board rejection.

Rhino, because most people use financing, and it is a measure designed for investment properties whose economics are different. But I don't want to get involved with you again on the difference between an "investment" - which has a yield - and a "capitalized expense" - which does not.

Which difference you deny is huge, yet it is. You are comparing apples to turtles with the cap rate; the price-to-rent ratio compares apples to apples.

You are right steve. Problem is only you care about the accounting.

No, Rhino - I don't only care about the accounting. It's the accounting, economics, AND finance that I care about, all simultaneously. I also care about the human, emotional element. But I try to look at it rationally - using an asset allocation model there is, in fact, little difference between an investment and a capitalized expense. In economics and accounting, however, there is.

My absolute favorite way of looking at the transaction is the real-life, if I financed this the way most people do, could I make money or break even renting it out to an unrelated third party. That is, deducting everything but the principal amortization. If the answer is YES, then it makes financial sense.

That is, to me, the fairest way of looking it it, and it compensates for the weaknesses of cap rates and multipliers, looking at it instead as a business venture under real business conditions: borrowed working capital, in this case.

I care about all that too, except for the accouting semantics.

Surprised to see you call debt financing working capital.

Stand by the idea that debt can't make a bad idea good. No need to use financing in th analysis. Muddles it.

rhino, i use 0% down when i do my comparisons. what would be the total monthly cost without a down payment. crude, but i'm comfortable with the compromise.

Accounting is not "semantics."

Working capital is often financed with debt. I don't know what your problem with that is - working capital lines of credit are very, very common.

Debt does not "muddle" anything - you can't treat it as if it doesn't exist. First, it's intrinsic to most co-op maintenance. Second, debt limits affect co-op prices (50% down co-ops go for a lower price than 20% down co-ops, on average). Third, you need to make the payments.

Again - cap rates are useful, for investment property obtaining a yield. But owner-occupied residential real estate is not generally (except by you) considered an investment. And no, I don't want to go into that fight again.

Rhino86: There is NO SUCH THING as a cap rate for a co-op. You have to understand that even in the case of a true sponsor unit, a cap rate for a co-op will always be a philosophical discussion rather than a real one. If this apartment were a condo, it would probably be asking about 20x multiple of rent if not more. And the carrying costs would probably be higher.

We should not look at this as a cap rate issue but a simple rent vs own. Here are my numbers:

At $1,100,000 (assuming you can get it) x 6.5% (cost of money + opportunity cost of down payment) = $72,000 per year + Maintenance @ $15,000 per year =

Ownership Cost: $87,000 per year

Rental Cost: $72,000 per year (based on $6,000)

In other words, price needs to come down to under $1M.

or rent has to go up by about $1200 per month. If anything rent is still trending down so I don't see that happening.

Cap rates are ALWAYS philosophical discussions.

Steve you brought it up so stuff it. Don't act above what you resurrected. No one cares but you. A cap expense should expire. Real estate doesn't. You admit you don't understand bonds. That alone disqaulfies you from debating what an investment is with me. You do not have the training to argue finance with me.

If you knew anything about finance you'd know a cap rate is just a restatement of a multiple.

What multiple - NOI? So what? The point is there is no NOI here - it is a co-op so an investor can't really rent it out. But I do agree this is not as bad as most apartments, the price vs comparable rent scenario is almost there.

What is it about using rent to calc value ranges that you dont understand LR? Its a frame of reference. You can value a stock on discounted cash flow, but that doesnt mean the company is going to pay out all the cash in dividends. Get a clue.

"Real estate doesn't."

But it does - it's depreciated.

Of course that's just an accounting concept, isn't it?

Right, it is. You make my point.

Depreciation of real estate is reflected in reality? Ha. You need to replace it in 30 years? Your arguments are a joke on this. No one cares. Real people need to decide what to do with real dollars. And in 30 years they will leave their beach house to their kids. Chances are it will not have disintegrated per the accounting. PEOPLE don't even use accounting.

Steve, honestly follow your own original statement and zip it.

You do get very nasty when people disagree with you, Rhino.

Yes real estate is depreciated; when you sell it that depreciation is recaptured if it has a residual value. That residual value may, in fact, be greater than the purchase price. It may not. Look at Long Island City's warehouses - little value there.

Accounting is designed to mirror the economic reality of a transaction. It is not designed to allocate assets. However, the allocation of assets is subject to the rules of accounting. Put your finance guy next to your accounting guy, and the accounting guy will win almost every time. Because the accounting is what matters.

Rather than wait for your response, Steve, I've decided to block you. I never asked for accounting advice. What my Wharton professors didn't teach me about accounting, I learned on the job as an equity analyst. I have made a decent living evaluating investments. I believe my way of applying valuation metrics to real estate is sound. I wish you had followed your own advice. Good day.

OK - but in the world of stocks you have PE's for different industries. High Tech Growth Stocks carry high PE's but Banks have lower PE's.

the point is co-ops are valued with different metrics than investment properties. Simply put you can't value a co-op based on cap rate.

Yes I can. I can do whatever I want. I can view it as buying it and renting it to myself and compare it to owning bonds and renting. I have my money in short term bonds earning around 5% taxable. Maybe I would consider buying 40 East 88th Street cash at a 5% cap rate.

Your narrow mind is boring me.

Rhino86 - just noticed that 3F, for sale from 4/09 at $1.25, has already entered contract. Would that have been just the thing to entice you to buy? (Actually, in looking at the floorplans for 6F vs. 3F I think 6F has screwed up by carving a dining area out of what was the Master BR, leaving the now 2nd BR with no closet.

Could go down to $1.1M

Truth of it is...the crisis changed my view of living here and locking in private school after 5th grade for this bambino. My 'cap rate' is probably higher than 5%. I'd want to feel confident that I could sell the place for more in 8 years or so if I decided to. I dont think 5% represents that confidence.

Rhino 86: I agree, 6% is probably more astute for a co-op in that location, if you HAD to use the cap rate method. 5% for condos. We are still from from these numbers.

"I can do whatever I want."

Nanny, nanny, boo-boo!

"I can view it as buying it and renting it to myself and compare it to owning bonds and renting."

Except, 1) you normally use leverage to buy and rent to yourself; and 2) unlike bonds, you NEED a place to live. The problem with your analysis is you're comparing a current expense (rent) to current income (bonds). If you rent, there is no investment required - it's an expense, pure and simple. If you buy a place to live in, you are capitalizing that expense and amortizing over the time you live there.

Whereas if you buy a bond or a stock, you get income from it.

I still don't see what's so hard about the distinction.

My understanding is that major Manhattan multifamily "investors" are now looking for 7% cap rates. (It would be higher as with offices except that borrowing costs are lower for apartment buildings.)