petty but....

Tha's what you have for me? "Leverage wins"? You call me a douchebag because I say "I don't want to get into it", yet your reply to my reply is two lines? Seriously? Could you at least show me a chart of national real estate prices from 1982 to now? When I'm at my desk tomorrow I'm sure I could pick a fund that's been around since 1982 that would kick your ass. Van Kampen's Comstock fund has been around far longer than that.

I understand your reply to a tax sheltered account, but if we're comparing ways to grow wealth, why wouldn't you choose a bunch of preferreds and bond funds that pay monthly dividends and reinvest for decades. Put it in a roth and take tax free income for life. Can we take a show of hands here and see who would rather dicker over the temp in a tenants apartment over zero time watching your portfolio? I'm not saying you can't do both (everybody needs a hobby) but I don't plan on spending my retirement taking people to housing court.

Can't put real money to work in a Roth. You're missing the point. You can't lever in stocks like real estate. If you can be patient enough to buy a good cap rate the wealth generation potential is much greater.

Incorrect. You can do a roth conversion. You can convert any time you want. You don't need leverage, just time to reinvest dividends and watch it appreciate. My coworker has over $7Million in his that he trades like a madman, but we're not talking about him.

What we're supposed to be talking about is cold hard facts. I'll have mine in the morning. When can we see yours?

Ok facts. What would do? Assuming you could pick bottoms you'd make more buying real estate with 5 to 1 leverage from 1992 to 2002 than stocks from 1987 to 1999 do you agree? I don't want to argue a realistic levered case if you don't accept the premise. You can't lever stock 5 or 10 to 1. Therefore even if unlevered stock returns are better you struggle to keep up.

FYI, you can buy real estate in an IRA.

"You will pay gain on your sale price minus cost plus accumulated depreciatio, correct?" Not necessarily - you can 1031 into another property and defer taxes even longer. Then your kids can inherit it and avoid taxes (unless they change the tax rules).

positivecarry - in real estate I can buy a building and put in zero cash (OPM). Then I can get 25% of the profits. My cash on cash is infinite. My only risk is my reputation. I realize that you're comparing investing $100K in stocks vs real estate. So imagine that as the sponsor I put in $100K then raise $900K. (Common for a sponsor to put in 10% of total capital.) I can get more than 30% of the profits for my $100k and my cash on cash returns can be well over 30% even if the deal IRR is only 15%.

I thought we were talking about 1982? What property? Where's the link? Chart? And are you factoring in buying a lawnmower? What about the gas? The $ you have to spend on bags for the leaves? Homeowners insurance? I'm not even bringing up the crazy idea of redoing the place every 10 years. All the $ you piss away...It's a joke....

If you were buying in 1960, your house in the suburbs would cost around $26k. Now, it's worth, what? $400k? $500k?

Right. But what did I put down on that 25k house? Hint: less than 25k.

Do you realize the stock market was the same at the 82 trough as the 60s peak?

Rhino,
Even if you put $2600 down, you still have to pay the rest, with interest. If banks didn't make $ off of you, they wouldn't do it. Why pay some bank like a chump for 30 years when you could be adding that to your portfolio?

Jazzman,
Let's hope the days of people buying buildings with zero down is gone forever. It nearly crashed the frickin world last year. And yes, I understand there is a chance to make money, but again, if I have to deal with someone calling 311 87 times, I would rather be anally raped.

Are we going to mention the fact that quality stocks like GE increase dividends for 30 straight dividends, while there is no shortage of shit that you have to spend money on to run your "investment"? I'm not cherry picking stocks, just providing an example how my income rises like rent, yet all the income can be tax free a la roth.

30 straight years

30 straight years

positive - "Let's hope the days of people buying buildings with zero down is gone forever." It was very uncommon for even the biggest boys to get much better than 80% LTV on multifamily buildings in NYC. There are notable exceptions of course.
One thing that continues to benefit our city greatly is that generally speaking the underwriting in NYC was much better than the rest of the country. Because of the RS factor many national lenders stay away from NYC and the ones who will lend here were relatively conservative. In fact, it was pretty common to only get a max of 50% LTV south of 96th even in 2007.
So all of this crap about "predatory equity" is just that, crap. Private equity is how real estate is bought in our country and the multi-family environment is much worse outside of NYC. So to see Schumer stop the sale of properties because he doesn't "want it to end up in the hands of predatory equity" disgusts me. It's so transparent that what he really is saying is - I want these foreclosed buildings to go to people who donate to my campaign. It's pretty disgusting that he would stop an auction of foreclosed properties so he could try and ensure that his campaign donors get the buildings in an off market (non arms length) transaction. It reminds me of China.

PC - you fail to acknowledge that my business model includes huge amounts of leverage - for 10% I can get 30%+ of all of the profits - plus my downside risk is only my investment as my loans are non-recourse. As the sponsor of these deals I will get a better return on my cash than I would if I were a successful money manager and managed my own account.

BUT your point of not being willing to go through the brain damage is very very valid. It's a great barrier to entry that will help ensure that my competition remains less sophisticated.

Jazzman, there's a thing they call that thing where you get 30% of the profits but only put up 10% of the capital. It's called "work", and it's different from investment.

Jazzman,

I understand the part about leverage. You had said before that you don't put any money down (other people's money). I had two points:

1. Expenses over time eat away at your profit.

2. It's not worth all the hassle to make some money.

Is this a full time job? I have no idea how many buildings you have.

inonada - agreed - lots of work -

pc - it's full time work - expenses over time eat at profits only if expenses go up faster than my revenues - perhaps it's not worth the hassle - time will tell how much I make and how long I have to deal with the tenants directly (eventually I'll have enough layers of management that I won't deal with them directly.

Back to point. No one said this isn't more active than stock investing. The issue was what's the best way to get rich. Leverage makes real estate a more effective way to get rich than stock investing. You can start with much less money and become rich. No one said being a landlord wasn't a job. That said stock selection is also a job and can also be frustrating. The problem with the outlook for multlifam investing is the mortgage market is already developed. A big reason for appreciation over the last 30 years was that there was
no mortgage market and then one developed. Back when you needed 30 percent down and a sellers note. That same transfrmation in accessibility can't happen twice. Nor can manhattan go from cess
pool to desirable twice.

Let's take the example I used yesterday. Van Kampen's Comstock fund. It has a 41 year track record of averaging 10.51% up until close of business yesterday. If you bought $10k of Comstock, and added $1k a year, you would have $1,228,149.97

Now, my family purchased a house in a nice town in Northern NJ in 1960 for $26k. It's current value (which of course is tough to value in this economy, but let's be optomistic) is around $500k.

When you factor in the interest paid on the mortgage, the money spent mowing the lawn, replacing the boiler and of course property taxes what do you think your gain is?

Being 2009, with most of NYC cleaned up frm the 1970's and the crack problem of 1990, asking for appreciation more than inflation is being a bit delusional, yes?

Is picking Comstock unfair because of "survivor bias"? Maybe, but even the indexes have a high single digit return over decades. If we were starting today with $5k in a roth, and adding $5k each year for 40, that brings us back $2.6 Million, which can then come out tax free. There is no way real estate will provide that return. You would have to be the luckiest bitch in the world, buying a place in Bushwick and seeing it turn into a oasis of art and commerce, and that just isn't happening. The article I'm about to post is pretty good evidence of long term returns.

You need to add in rent dividends and use leverage. Stop wasting my time.

March 5, 2006

Amsterdam House

This Very, Very Old House

By RUSSELL SHORTO

In 1625, a carpenter named Pieter Fransz built a house on the outskirts of Amsterdam. He was young, ambitious and lucky enough to belong to one of history's greatest generations: his life spanned the course of his country's golden age, when tiny Holland became an empire and Amsterdam grew into Europe's wealthiest city. Fransz walked the streets with Rembrandt; he saw a forest of masts grow in the harbor, as ships returned from the East Indies laden with pepper and nutmeg, a sack of which could make a man wealthy for life. He and his family prospered along with the city; 17 years after building his house, he was rich enough to buy the one next door, into which his daughter and her husband moved. In 1683 he was still listed as the owner of both properties. Happiness isn't registered in municipal archives, but the image of this one not terribly consequential human life that remains on the palimpsest of time speaks of contentment: a man who has lived beyond the normal life span of his era, surrounded by family, financially successful.

Most of us leave no lasting traces that recall our stay on the planet, but through accident and fate, Fransz left something that has endured the centuries. His house — an elegant redbrick step-gable, its facade ornamented with sandstone bands and wooden cross-framed windows, a building that has more of the Renaissance than the Baroque about it — still stands. Napoleon and Hitler conquered Amsterdam in their separate centuries; later, postmodern architects and the sex and soft-drug industries made their marks. Pieter Fransz's house withstood all.

The Dutch have always been meticulous recordkeepers, so it is possible to follow this house, and others nearby it on Amsterdam's famous Herengracht, or Gentlemen's Canal, as they make their way through the centuries: to watch the succession of doctors, diamond cutters, confectioners, merchants and politicians move in and out, to glimpse the births and deaths, to watch careers and families unfold. More to the point, it's possible to follow the successive property transactions in this area of Amsterdam from the time it was developed to the present.

In itself, this isn't exceptional: other European cities have land registers that date to the Middle Ages. What makes Pieter Fransz's neighborhood unique — and uniquely interesting to some economists who are studying today's global real-estate boom and wondering whether the bubble that has been expanding for the past decade and more is in the process of bursting — is what real-estate experts call a constant quality index. Cities change over time; neighborhoods fall out of favor, and new ones come into vogue. Comparing property values in Greenwich Village a century ago with those of today might be interesting as part of a study of a changing neighborhood — the transformation of a low-rent, working-class community into a tony and sophisticated enclave — but not as a way of understanding how real-estate value changes over time.

From the time the Herengracht was developed in the early 17th century, however, it has been Amsterdam's prime real estate, the place where power brokers — 17th-century merchants dealing in spices and slaves or 21st-century bankers and international consultants — have chosen to base themselves. Looking at real-estate transactions over four centuries on this canal on which Pieter Fransz built his home gives a quality constant of unparalleled duration.

This is what attracted Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, to study the Herengracht in the 1990's. Eichholtz's work — the so-called Herengracht index — has become a touchstone in recent discussions about real-estate prices. He began with a sense of frustration. "If you look at most research on real-estate markets," he said, "papers will typically say they are taking 'a long-run look,' and then they go back 20 years. I wasn't impressed with that. I thought you had to go back further to get a really good picture of what a housing market performs like."

Eichholtz's study of the Herengracht came to international attention when the Yale economist Robert J. Shiller relied on it in the second edition of his best-selling book "Irrational Exuberance," which was published in 2005. After the first edition came out in 2000, Shiller became famous for predicting, correctly, that the stock market's explosive rise was about to end. The book's title — a phrase made famous by the former Federal Reserve Board chairman Alan Greenspan — referred to Shiller's argument that the market's rise of the 1990's was based more on herd mentality than on common sense.

In the new edition, Shiller applies the same thinking to global real-estate prices and argues that the phenomenal increases of recent years — especially in places like New York, San Francisco, Sydney, London and Paris, but also more broadly — amount to another instance of irrational exuberance. Taking the long-range view, he says, led him to conclude that real-estate prices are destined to fall. "The data just are not there to support the idea that housing prices will continue to soar out of sight," he said.

Not everyone agrees with Shiller's irrational-exuberance thesis. "I just don't see it that way," said Richard Peach, a vice president at the Federal Reserve Bank of New York and an author of a study in 2005 that concluded that the sharp rise in home prices is in line with economic conditions — that it indicates not a skewed vision of reality but a strong economy. In fact, Peach says, in the past 20 years family buying power has grown faster than housing prices. "We sometimes wonder why home prices haven't increased much more, given the tremendous increase in the size of mortgage the average family can finance," he said.

Like-minded experts include Christopher Mayer of Columbia University and Joseph Gyourko and Todd Sinai of the Wharton School, who focus on what they call "superstar cities," places so desirable that they not only are not headed for a correction but they also can sustain "ever-increasing" prices compared with less-sought-after cities.

What such optimists are missing, Shiller says, is a long historical perspective. "The fundamentals that they cite in support of their reassuring assessments are surprisingly weak at explaining historical prices," he writes in a recent paper. Reading the data as an economist leads Shiller to conclude that the market will go south. In addition, he says that studying the erratic but rhythmic rising and falling of prices over time — in other words, acting more like a historian than an economist — reinforces this conclusion. "Looking at the Herengracht data is very instructive," he said to me, "because you can see 50-year intervals of growth, then it turns around. That's more realistic than the superstar-cities argument."

Piet Eichholtz says he doesn't think the long-term data alone necessarily suggest that a collapse is coming. But at the same time, like Shiller, he is skeptical of those who claim that property values can continue to increase ad infinitum. "Some people say economies in the past were very volatile and didn't have safeguards that we have now, so we aren't likely to experience any major crises that will causes prices to crash," he said. "I'm doubtful." Looking through the history of the Herengracht, he says, you can see similarly rosy assessments made over and over, which are then quashed by circumstances.

Eichholtz's Herengracht index turns on one of the basic questions of the discipline of history: how applicable is the past to the present? What can a study of one small part of the world centuries ago say about actions in a 21st-century global economy? Or, put another way, just how special are we today?

The Herengracht index begins with one of history's great building booms. In the 1620's, the Dutch Republic was in the first stage of its rise to global power. The Dutch had become the middlemen of commerce between European nations and had a monopoly on trade with Japan and the East Indies. The world's first major stock exchange came into being around this time in Amsterdam, and the Dutch developed or perfected the commodities and futures markets. With money pouring in and the population doubling in 20 years, the city leaders finally broke an old taboo against building outside the medieval city walls and authorized one of the earliest and most far-reaching urban-planning schemes in history. They mapped out three concentric canals that would arc around the city and divided the land along them into housing lots. It was a massive undertaking that would more than double the size of the city and involved diverting the river, digging miles of canals, driving tens of thousands of piles dozens of feet below the shifting soil and building scores of bridges, not to mention thousands of brick houses. It took 50 years to complete.

From the beginning, the master plan earmarked the Herengracht, the new canal closest to the city center, as the choicest; lots there were larger than others, and the practice of noisy, smelly or otherwise "intolerable and dangerous" trades was prohibited. Wealthy burghers and upwardly mobile tradesmen like Pieter Fransz snapped up the lots, built their little mansions, each with a garden in back, and settled in with their families. In the five-year period between 1628 and 1633, as the economy soared, the real, inflation-adjusted prices of houses on the Herengracht doubled. (By comparison, for the period 2000 to 2005, real home prices increased nationally in the U.S. by 38 percent, according to the Office of Federal Housing Enterprise Oversight. For a city-to-city comparison, between 1997 and 2005 real home prices in Boston rose 93 percent.)

Then two things happened almost simultaneously: tulip mania and the plague. As their country became the center of international finance, the Dutch had taken to speculating on everything from tobacco and spices to tulip bulbs, and it wasn't only professional traders who gambled on the prices of goods but ordinary citizens, with much of the trading taking place outside government regulations. After a one-month period of manic speculation in tulip bulbs, in which the price for one variety —Witte Croonen or White Crowns — shot from 64 guilders per half-pound in January 1637 to 1,668 guilders (the price of some houses in Amsterdam) in February, the bottom dropped out of the market; White Crowns later stabilized at about 38 guilders.

The collapse of the tulip market was not in itself the cause of a wider financial collapse, but more likely a component. The plague had begun to sweep through the country in 1635; in Amsterdam alone more than 17,000 people — 14 percent of the population — died of the plague in the year 1636. Peter M. Garber, an economist at Deutsche Bank, in his book "Famous First Bubbles," speculates that this "death threat" may have resulted in a "gambling binge" on tulip futures.

In the wake of these twin calamities, house prices dropped 36 percent. Piet Eichholtz says that this sort of episode — in which unpredictable disasters combine unpredictably — has relevance for today. "It's true that economic and social conditions were different back then," he said. "But major crises do happen, and we can't necessarily predict them. Will bird flu be a major disaster? Will there be more hurricanes? I don't know. Nobody knows."

To this, Richard Peach of the Federal Reserve Bank of New York counters, quite reasonably, "I'm not in the business of forecasting the next international calamity or outbreak of the plague." Economists look at economic data and create economic models. And not all calamities are followed by a drop in real-estate prices, at least not in the short term; home prices have soared in New York City since Sept. 11, 2001, for instance. But if there is one clear lesson that emerges from history, it's that life can be messy.

Another lesson is that the word "bubble" may be a misnomer. If the housing market in Amsterdam plummeted in the late 1630's, it quickly stabilized: by the early 1640's prices had surpassed their previous heights. "The bursting of a bubble is the wrong metaphor for what housing prices do over time," Eichholtz says. "What you see is rising and falling, sometimes dramatically, depending on whether the city had a stable economy or became hostage to outside forces. That's not a bubble bursting — it's volatility."

"Volatility" is indeed the watchword as the buying and selling of homes on the canal unfurls against the backdrop of modern history. In the 1650's and 1660's, the Dutch Republic reached the height of its golden age, and prices rose sharply. With money came changes in architectural fashion: new gable types and, on the Herengracht, larger houses built along classical Italian lines. The Fransz family still lived at the oldest end of the canal, but now the mansions farther along, with their clean facades, made the blocky, busy Renaissance style of their home look dated. Where houses sold in the 4,000-guilder range in earlier decades, they were now fetching 9,000 to 15,000.

Then, once again, the bottom falls out. In 1672, France and England declared war on the Dutch Republic. The English strangled Dutch shipping; Louis XIV invaded by land. From 1670 to 1677, houses on the Herengracht lost 56 percent of their value.

Then the cycle begins all over again: from that low point, prices head back up.

But what does "up" mean? The most surprising thing about Eichholtz's study is that it contradicts a maxim of the real-estate profession. "There is a myth which says that real-estate values go up significantly over time, and that this is especially true for central city locations," Eichholtz said. "When I began to study the Herengracht, I didn't know what I would find, but the data ended up challenging that myth."

That is to say, where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long-term investments, this longest of long-term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."

The house that Pieter Fransz built is a case in point. In 1855, an estate agent named Robertus van Zoelen bought the house for 6,850 guilders. In 1881, his children sold it to a carpenter, Johann Diederich Brinkmann, for 12,100 guilders — an increase of 93 percent in real terms. But when Brinkmann sold it in 1888, it was for 10,000 guilders: a net loss. The next sale, in 1899, at 9,600 guilders, was also at a loss. Fifteen years later, with World War I looming, a real-estate agent named Georges Jean Josef Salen bought it for 10,000 guilders: again, a loss in real terms. And when, in 1955, a woman named Grietje Uitentuis bought the house, the 15,000 guilders she paid was, after adjusting for inflation, less than what the house sold for in 1855. Over the course of a century, Pieter Fransz's house actually lost 30 percent of its value.

This sort of thing isn't surprising to Shiller, who says he believes that the notion that real estate is a terrific investment comes in part from the long-term nature of most purchases. You know that your grandmother paid $15,000 for her house in 1951, and it's now worth $250,000. That sounds grand, but most of the increase is simply matching inflation. An analysis Shiller made of home prices in the U.S. going back to 1890 showed an average annual increase of a meager 0.4 percent. By way of contrast, Jeremy J. Siegel of the Wharton School of Business has calculated that over a 200-year period, the stock market had an average annual real rate of return of 6.8 percent. It's only in recent years, Shiller says, that huge increases in real-estate prices have become the norm and that people have come to expect them.

It's worth noting, however, that rocketing prices aren't everything. The word "value" has many meanings. Buying a home gets you tax deductions that you wouldn't get from renting. And no economic analysis can diminish the other kind of value that comes with homeownership: the fuzzy kind, the sense of place and rootedness.

Beyond that, probably few homeowners in 2006 are worrying about how much the value of their homes will have increased by 2206 or 2406. It's 2 or 5 or 10 years down the road that matters, and neither Shiller nor Eichholtz is willing to go out on the limb of making definitive short-term predictions. The value of studying a really long term housing market would seem to be less in revealing the how and when of downturns as in underscoring their inevitability. Really bad stuff happens, and when it does, there is often a collapse in real estate.

On the face of it, Amsterdam doesn't seem the most apt model to apply to other cities, particularly American cities. For one thing, the Dutch have a turbulent history. The Low Countries were invaded or occupied many times by foreign powers, with subsequent collapses in the housing market. Also, notes Shiller, "Amsterdam — with tulip mania and the birth of the stock market — is the home of speculation. If you look at, say, Milwaukee, you don't see the same degree of volatility. In a place like that, price is driven by land availability and construction costs, which is the tradition."

But then, volatility is more prevalent in world history than stability, which, as far as Eichholtz is concerned, makes the Herengracht data more, rather than less, widely applicable. "The financial literature has been dominated by America," he said. "And most models are created using post-1950 U.S. data, which give a biased picture of reality. There has been no other country like America, and there has been no other period like that in terms of stability. So I would say that in global terms, Milwaukee is the exception, not Amsterdam."

Besides which, speculation has now gone global — and with speculation comes instability. "Today we see bubblelike activity even in places where there is no land constraint, such as Phoenix," Shiller said. "They have miles of available land, so there's no justifiable reason for the kinds of increases you see there." So while it may have been true in the past that the ups and downs of the Herengracht index would make it a less-than-perfect model for American cities, that's not necessarily the case anymore. As Shiller says, "It's plausible that the sort of volatility we see now will make the rest of the world look more like the Herengracht index."

Amsterdam also turns out to be a pretty good model of recent history. After it had its 17th-century heyday, it settled into a poky, second-tier status among European cities. It was slow to hitch onto the Industrial Revolution, and of course the world wars hit hard. Real-estate prices lagged far behind those in larger and jazzier cities — until recently. The last time that Pieter Fransz's house changed hands was in 1983, when a Hungarian financial adviser and his wife, an English actress, sold it to a pair of doctors for 440,000 guilders. Today, prices on the Herengracht run from one million euros for family houses to three million or more for mansions (the Dutch currency was converted in 2002 at a rate of 2.2 guilders per euro). Even assuming that the house would sell at the low end, and accounting for inflation, this means that after taking three and a half centuries to double its real value, the house has tripled in value in the last 22 years.

The reason, of course, is that Amsterdam is part of the global housing boom. To get an idea of recent history, I asked Babs Persoons, owner of Babs Persoons BV, one of the premier real-estate agencies in Amsterdam's center city, to reminisce for me. "It started in 1998 — prices just went up amazingly," she said as she sat in her office on the Prinsengracht, another of Amsterdam's three grand canals. "For a while, every agent had a queue in front of their houses, and many were selling for more than the asking price. We didn't know that phenomenon in Holland before."

But if this description of the past few years typifies the brave new world we live in, putting it into the perspective of time — rise, fall, rise, fall — leads us back to what may be the oldest history lesson of all: it tends to repeat.

Russell Shorto is a contributing writer and the author of "The Island at the Center of the World," a book about New York's Dutch beginnings.

Copyright 2006 The New York Times Company

Calc the return on the downpayment not the whole price. Pay down th mortgage in the amount you'd otherwise be paying in rent every month.

You are long winded, yet thick.

Rhino,
The house bought in 1960 was bought using leverage. Duh. Again, you're not factoring in expenses, which is paid for with your rent dividends.

No offense, but I am no longer interested in continuing this exchange. You know, the one you never wanted to have to begin with. Your wish is granted.

Thanks for giving up and admitting I'm right. To try to explain to me that a 400 year return of 3% beats 10% is truly idiotic. Thanks for playing.

Excluding leverage and assuming maintenance is = equivalent rent, that is sheer genius.

Read a book and get back to me when you understand the difference between levered return on equity and unlevered return on capital. If they put 20% down that $5k is now worth $470k. Thats a 26% compounded annual return YOU FUCKING DIPSHIT. The interest and maintenance is roughly equal to the amount they'd shell out in rent...And drum roll... 1969 rent. They pay 1969 rent through 2009.

Didn't I tell you the NJ house was bought with leverage? How dense are you? It doesn't matter. Your long term returns suck. If we were having this conversation in Japanese, it wouldn't even be more than a few words. They are still down 30% from 1989 prices. You lack of long term perspective is truly amazing.

What do you do for a living rhino? RE cheerleader I'm guessing?

Time out. Do you really not understand this? They bought it for $26k, but they presumably did not put 100% down. If they did, then your argument stands. My point is most people take 70-75% mortgages (or more). The appropriate analysis is return on equity, not unlevered return. If you disagree and believe unlevered returns are the appropriate comparison, then bully for you.

Do you suck dick in some back office role? You seem to know just enough to cobble together shitty arguments, but not quite enough to appreciate the crux of the matter.

Of course they didn't put $26k down. They paid interest to a bank for 30 years, and property taxes, money to the lawnmower guy, new windows...meaning they spent a lot of money. Money you don't seem to want to put into your calculation. Do property taxes go down? No. Your "profit" is fantasy.

And I'm a stockbroker, not back office. Still waiting on your title. Are you one of my RE clients that can't put $ in their SEP, and are actually selling and withdrawing because they're broke?

Broker? Nice. I am an equity analyst. I little further up the food chain. All that maintenance is part of their cost of shelter, and can be paid directly to the gardener or the landlord. Assume this house was purchased and rented to a different family. That family would pay the owner rent. The rent would exceed all those costs you describe, or at least equal them. Get a clue. You're out of your league.

I gotta go with rhino86 on this one.

Costs of mowing the lawn etc don't matter, unless you are going to back out rent from your stock investments. Presumably whether you own or rent you still have to mow the lawn.

You tell me that I'm out of my league, yet you can't show me a real example. Typical analyst bullshit. You write reports, but don't have the brains to put your money where your mouth is. A little higher up the food chain? Huh? Who the fuck reads research, especially after last year. You are truly irrelevant.

BTW, of course the family who rents the house pays the bills. That's what this whole conversation is about. Your return after expenses is between 1-3%. Dumbass.

I win. Modern has more money than me...and I have more money than you.

I am a buyside equity analyst. I have had multiple seven figure years making money on the long and short side. Actually more of a PM as I have not typically been required to gain approval.

Although I did publish from the sellside in the 2003-2004 timeframe.

Modern, the 10% return on comstock is after expenses. Mowing the lawn reduces your return from the rent. It's not even close.

Rent minus lawn is still a positive figure. Locking in 1969 rent has value - value I havent even included here.

You are a BROKER? That is hilarious. You are a dreg.

Can you show me an example where mowing the lawn, property taxes and all the other crap gives you a return even close to 5%?
Do you own anything? Of course not. You write reports. You have no real world examples because it's all bullshit. If you made the money you said you did, you would give real examples. I call bullshit.

A dreg? Oh no! How horrible to grow my income 25% a year.

Go use that stock pitch on somebody's grandma loser. I trade and invest. Get hooked on phonics.

Exactly. You have no examples because you're an internet warrior. I don't even know why I discuss anything on this site. Nothing but a bunch of soon to be out of work RE Brokers.

Jazzman,
You're for real, right?

Care to give make believe rhino a quick breakdown on expenses for one of your buildings? He seems to think he can make more than 10%.

Rhino,

I'll give you 24 hours. If you make the $ you say you make, and you are convinced that there is such a great profit to be had, then I look forward to hearing about your investments. If you can't put a quick breakdown together show how what you write about works for you, well, I guess I'm talking to a frickin 14 year old. This is the internet after all...

positivecarry - do you really think every real estate guy in this country does all of their work for returns of 1 to 3% per year? Do you really think that all of us are guys who just aren't good at math and that we'd be getting better returns is we just played golf all day and invested our cash long US equities?

It doesn't matter what my expenses are other than to say my revenues are greater than my expenses. My revenues also cover my debt service and my principal payments.

I'll let you do the math and get back to us. Buy a $2M building with 25% equity and 75% debt. Your income in year one is $200K and your expenses are $120,000 your debt and principal payments are $80,000. Over these 30 years you pay off your loan and your revenues go up 8% per year and your expenses go up 5% each year. You sell at the same 10x your gross cash flows valuation that you bought at ($200K of gross cash x 10 = our $2M purchase price).
What is the IRR?

postivecarry -- not an apples to apples comparison - -you still need to live somewhere - the interest/property taxes etc is RENT - where do you live? what do you pay for it?

Jazz, dont try to teach a stock broker. Real estate is higher return...its also higher risk (you can lose more than 100%), higher vol (vacancies, unexpected repairs) and more work (being a landlord). But if you get it right, you can stop working, end of story. You hire a property manager and do whatever you want all day.

"If you can't put a quick breakdown together show how what you write about works for you, well, I guess I'm talking to a frickin 14 year old. This is the internet after all..."

Dude are you deranged? Why would I work for you? I dont even take calls from people like you.

no thanks...i can build my own muni ladders...and so can any chimp--put me on your do not call list, genius

I call bullshit on you rhino because you're a internet fake. You claim to make money, yet can't write up info on one property. Are you copying straight from a textbook? Does the property manager work for free, or are you adding that to expenses? How come hedge fund managers are still buying apartments and guys like Gary from Extell are walking away from projects? Leverage is a killer.

Put me on your do not call list! That's great! I never heard that one before! You're still broke ubottom, and I promise you can't afford my minimum.

Rhino - "I dont even take calls from people like you." pretty funny line.

positive - further - most guys like me don't focus on our IRRs - because our "investing" is really work we care more about how much money we will make. Our investors care about their IRRS but I could care less. Certainly my returns are much better than they would be if I invested in the Qs - but what I'm after is total profit. If I do a deal where I put in 5% of the equity and get 40% of the profits and the deal has a 15% IRR - I don't care that my IRR is huge what I care about is how many dollars did I make - then take that profit and divide it by the time and effort I put in and I'll decide if it was a good deal.

Rent or buy,

We're talking investment properties.

Jazzman,

Do I need to link to the post about Manhattan rents falling 9%, or have you seen that one. How bad does that screw your profit?

Get back to pounding the phones, peon.

Jazzman,
Regarding your last post, all I can say is EXACTLY. You have to work how hard and how long with a bunch of welfare cases to make some money? It's not worth it, especially if you're buying today. Maybe we'll be like Japan. Maybe 20 years after 2007 prices will still be depressed. I sure hope so. Mabe then it will be a good deal. Right now, IMO, it's not. You have to respond to 87 calls from some jerkoff about the heat to make some $? How the hell do you even take a vacation? You talk about one day being able to have "layers of management" between you and the tenant. How much is that going to cost? It's not worth it. I don't expect people to agree with me on this site, but I see the brokers starving and liquidating assets to stay afloat and live the doorman dream. I pay 3 figures for rent, and love it.

Rhino,
Thanks for admitting you're probably a 12 year old girl from westchester.

Unsolicited advice from a 20-something peon broker who doesnt understand the difference between return on equity and return on capital. Good times. Jazzman, I guess you ought to hang it up and start cold calling grandmas.

I'm far from a 20 something. I actually have the career I speak of. You can't even think of a place to say where you own a property. Can you at least make up a neighborhood where you "own"? Hahhahahahahha

If you are not in your twenties, thats even worse. I never said I own rental property. I only said I know how the math works. And my math was confirmed by Modern and Jazzman. So what is it you are stil jabbering about. You're like the Germanic tribe at the beginning of Gladiator. If you step back, you'll realize I tought you something here today. Be greatful. Now I'm gonna block you. Get back to the phones.

Jazzman,

How much was the commercial boiler you had to buy for the building you just bought?

" You have to respond to 87 calls from some jerkoff about the heat to make some $? How the hell do you even take a vacation?"

Sounds like the life of a money manager to me.

Jazzman, your $2M example is very illustrative, so thanks for that example in the middle of this asinine pissing contest. A few questions for you. Is 10x gross rent a typical number these days? Is that market rate or rent stabilized? You seem to imply a loan rate of 8%; is that typical for non-recourse loans currently? What do building costs outside of financing (i.e., the $120K interest payment and $80K principal payment) look like? Also, is you 8% annual revenue increase assuming market rate or rent stabilized?

pc -"Manhattan rents falling 9%, or have you seen that one. How bad does that screw your profit?" it hurts but it's really just a glancing blow - most of my apartments are rent stabilized and this year we get either 3% or 6% increase - so overall my rent rolls will go up this year.

PC - "How much was the commercial boiler you had to buy for the building you just bought?" It cost a bit more than $30K. BUT I can raise my tenant's rent so that I recoup the cost over 8 years then going forward all of the rent increases will still be based of the higher rent from the tenant.

PC - and again - do you really think every real estate guy in this country does all of their work for returns of 1 to 3% per year? Do you really think that all of us are guys who just aren't good at math and that we'd be getting better returns is we just played golf all day and invested our cash long US equities?
What about all of the billionaires on Forbe's list who made their money in RE? Did they make 3%/yr or perhaps 3000% per year?

inonada ; "A few questions for you. Is 10x gross rent a typical number these days? Is that market rate or rent stabilized? You seem to imply a loan rate of 8%; is that typical for non-recourse loans currently? What do building costs outside of financing (i.e., the $120K interest payment and $80K principal payment) look like? Also, is you 8% annual revenue increase assuming market rate or rent stabilized?

10x was typical for Northern Manhattan - now it's closer to 8x.
Almost always non-recourse debt on first mortgages - can't get 2nd mortgages anymore but those were recourse loans.
the 8% rate is because I was lazy - we're getting money below 6% right now - if you float off of libor which one of my loans does I'm paying 2%.
8% increase is on my units which are a mix of market and stabilized. But here is the HUGE problem with what I do (and positiveC has reason to be skeptical) - Like I said before if people don't move out of my rent stabilized apartments then that LLC that owns that building will go BK. It's just that simple - I'll do all of this work and bleed a slow death. Certainly there are real risks here. Certainly landlords go bankrupt. But certainly there are fortunes to by made in real estate just as there are in other fields. And generally speaking just like in every other field, the talented operators outperform the market and the idiots get crushed.

Is the cap rate > mortgage rate in multifamily?

yes - now it is - outside of NY my friends are buying 11 and 12 caps. We're buying 6 and 7 caps - why do we buy lower caps - because rent rate growth is much more certain here both long and short term. They think they're right to be buying 12 caps I think I'm right to be buying 6 caps - time will tell - perhaps they're right, perhaps I'm right, perhaps we're both right, perhaps we're both wrong.

There it is! Rhino admits he's a walking, talking gasbag.

What a surprise you don't own anything.

All theory and none of the practice. If this actually worked for anyone, people would be backing up jazzman. The problem is, it doesn't. It sucks to be a low income landlord. If you were my client (and I know you can't possibly make any money so that's not an option) you would know I was bearish about RE since 2005.

People that held back, parked it in bonds are sitting pretty. The guys who bought three Miami condos because the website looked pretty? They're in bankruptcy. I have hundreds of people to watch and see how this is turning out on the micro level. It's horrible, in every way.

The speculators are wiped out, the brokers are liquidating retirement accounts, couples can't sell their starter apartment because they got a interest only loan in 2007 and are upside down on the mortgage.

I'm making a healthy six figure income, and growing my income exponentially. My expenses are frickin zero (3 figure rent) and when I do buy places, the interest from my portfolio will be able to pay the bills.but why should I buy now, when my clients have crazy vacation homes that I can crash at? So I can own a illiquid investment? I'm not that stupid. If we even come close to Japan, you're all fucked. I'm not even 40, yet shortly I'll be able to walk away. What about you?

The way you laid it out, why would you go BK even w/o RS->FM rent increases? The way you laid it out, it seems like the whole things starts cash-flow positive. $2M place, $200K rent, $1.5M loan at 6%, so $90K interest and $110K to cover other expenses and principal. How big are other expenses? What am I missing? Sure, expenses increase over time, but don't RS increases roughly cover that?

BTW, really appreciate your response.

I am not sure we should have a much lower cap rate... I think equity risk calls for 8%...It feels like you have a tight margin of error. I wish you luck. Where can I buy 11-12%, I'm interested.

Jazzman,

Did you ever think that you're buying at higher caps because you are overpaying?

I am a liar but you are a windbag piece of shit broker, the lowest form of Wall Street life, who is bragging on the internet about nearing retirement in his 30s. Hmmmm. Then you are attacking Jazzman who has been nothing but polite to you...and has done nothing but educate you. Honestly, what is your malfunction? I know being a broker sucks. Maybe some day you can do something else. Maybe you could even learn some basic finance.

How am I attacking Jazzman? By asking him if he's overpaying? Ayn Rand wanted to buy a 5th Ave apartment decades ago, but her friend Alan Greenspan told her it was overpriced. If you wanted to own hundreds of apartments, they must surely be cheaper elsewhere. People overpay all day for growth stocks, only to get crushed when they miss earnings, just like when your value drops as rent rolls decline. I'm sorry you don't make enough to buy a place. Don't take it out on me. I love my job. My clients are the best, and I've been to some of the most beautiful places on earth with them. I'm sorry nobody likes you enough. As for people like ubottom, the reason really wealthy people ($100 Mill) use a guy like me is because although they could build their own bond ladder, they're busy enjoying life. Who the F wants to be stuck in frontof a screen looking at inventory? Ubottom can, because he has nothing to do.

Inonada - "why would you go BK even w/o RS->FM rent increases?" - if my expenses grow faster than my revenues (in real dollars) then I'm cash flow negative in year 2 and only more negative in years 3 through 30 - eventually I bleed to death.

Rhino - "Where can I buy 11-12%, I'm interested." In the hard hit areas - Vegas, Miami, PHX, Detroit etc.

postive C "Did you ever think that you're buying at higher caps because you are overpaying?" yes of course I have. I met a guy once who had 500 buildings, my friend asked him how he got that many. His response was that 500 times he was willing to pay more than anyone else. Time will tell if I'm making the right calls. I keep watching my bank balances and so far I seem to be on the right track.
It would take you only 30 seconds in a room full of NY real estate families to realize that (over the last 30 years at least) people have made a lot of money in multi-family in NY. Even considering that the last 2 years have been crushing, they still are extremely wealthy.
Good luck - your business can be a pretty good business - especially if one has family/friend connections to wealthy people.

Right the winners curse. Are those hard hit cap rates 'real' in the sense that they are vacancy adjusted? I'd feel so much better about real estate if they'd let the interest rates rise a little.

As for the Forbes list, on their website of the 400 richest americans, it lists 8 people from the list who are in real estate, and 18 from hedge funds alone. Even I don't think that is correct because of inheritance.

Jazzman,

The reason I posted the article from the times is because what if the value of NYC real estate was just correcting from a "oversold" perspective. Now that the majority of the neighborhoods have been cleaned up, what's to push it higher? If you were david walentas today, instead of 30 years ago in dumbo, where would you buy? It's very hard to look at any part of this city as a bargain. Look at Swig, Macklowe and the others defaulting. Commercial RE will make this world very tough on the banks going forward. How will it hurt your building? By having the same bank that lent $ to Extell closing the credit cards of your tenants to reduce risk. The trickle down is going to be a bitch. Look at today's news about the fed restricting overdraft fees. They earn over $25 BILLION in fees from overdraft. Can you imagine how hard it's going to be to get a mortgage or a credit card in 18 months?

As for my business, it's all about the people you meet and doing the right thing. I knew no one when I started, and now I'm flying private in a couple weeks for a long weekend in the caribbean.

rhino "I am a buyside equity analyst. I have had multiple seven figure years making money on the long and short side. Actually more of a PM as I have not typically been required to gain approval."

right. and you're paralyzed over whether to spend $1.2mm on an apt you think might go down by $100k. $100k should be a rounding error if you were who you think you are - you could make that up with 6 months of flying business vs. NetJets.

Perhaps you work for a PM who makes that money, and you are just confusing yourself.

on the plus side, think of all the extra $ you'll have now that WMT has started the price war on books w/Amazon. you must be giddy like, well, a 14yr old schoolgirl

PC - "Commercial RE will make this world very tough on the banks going forward. How will it hurt your building?"

Hard to say really - I think a blood letting in office space will be good for our city long term. New owners who buy foreclosed office space at pennies on the dollar can afford to rent out space at $50/ft and still make money. And with office space at $50/ft we are much more likely to retain current companies (and imagine, it might even be possible to attract new companies to the city). Office space at $50/ft makes having a business here much more viable and our population will grow again if that's the case. This growth is huge for my business, because we all know the government officials will never stream line the building process and building new units will always take longer than it should and cost more than it should. This limited ability to build new units (through restrictive regulation not limited land mass (we can always build taller and there are thousands of vacant and underutilized lots in the city)) will always help ensure a need for my product.

"Can you imagine how hard it's going to be to get a mortgage or a credit card in 18 months?"
Or get a loan for a new home - people have to live somewhere and having the cheapest apartments is where you want to be in bad times. My vacancy rate is zero right now.

Congrats on your success - I fly commercial and probably always will - love my JetBlue:) I'd rather give money to a charity than pay for a private plane.

futher ""Commercial RE will make this world very tough on the banks going forward. How will it hurt your building?"" One worry I have is a guilt by association mentality here. Once the office defaults start making the news I worry that real estate as an investment class falls further out of favor - this could cause my buildings to become less valuable as there would be fewer buyers out there. But on the flip side if my buildings are getting cheaper so are the ones I'm buying.

I've been on both sides of the business, and building a successful wealth mgmt business is 100X harder and more impressive than being a research analyst. at the end of the day, you are just an employee - granted a well paid one, but that's it. get fired at the wrong point in the cycle and you've got nothing. positive not only makes money now, but he has a revenue stream that he can monetize when he wishes, or hand down to his kids.

no matter what way you cut it, at the end of the day you are just the PM's bitchboy.

all that said, i think you are correct in this particular analysis - i'm not sure why positive is missing the equity vs. capital and income stream aspects of owning real estate.

Jazzman,

I'm glad you have no vacancy at the moment, I'm just not bullish on the economy at the moment. The banks could drag for years. As they go, goes the economy.

As for flying private, it is great, but it's not like I'm paying for a penny of it. I'm not even paying for the room, which is over $600 a night. The client takes care of everything. Your business takes off when you become more than a broker to your clients. That's how you meet real money. On the beach, on the plane, at their crazy Hamptons house. It's a tough nut to crack, and the vast majority fail, but some of us make it.

Somebody made a stupid comment before when I said that, for the money, I wouldn't be able to handle all the 311 calls. They said something like "sounds like the life of a money manager". Is staring at a screen full of bonds prices all day boring? Yes. Is sitting courtside, going to private events and tiny islands fun? Yes.

I respect Jazzman because he has the numbers to back up what he says. If it works for you, and you don't mind the work, then good for you. What I can't stand is some bs artist with no skin in the game.

Printer,

Thanks. I really doubt he's a analyst, or else he would have at least own place to refer back to.

As for equity versus cash flow, I'm bearish in that I think even if you are able to squeak out some net cashflow, banks might no be able to lend, and RE owners will be underwater and unable to sell. What is cash flow on a loan that is worth more than the property? Look at Japan. Niall Ferguson (?) on PBS had a great doc called the Ascent of Money. His trip to Japan was scary as all hell. What if, 20 years into your mortgage, you're still underwater? Would you plow more $ into new properties? Probably not. I like being liquid. Commodity based currencies are the place to be for short term cash.

couple things - how would you have done putting your yen into the japanese stock mkt over that same time period? i think the nikkei peaked around 40k, and now around 10k, so i don't know that example is a great one. the example i was referencing was your family's home. the relevant return is on the equity they put into it, not the cost of the house. back then it was likely 20%+, which still makes it greater than the return on stocks over that period, and that's just assuming that the rent you took in was = to the costs (loan, taxes, expenses, maintenance, etc.). likely it cashflow +, which added substantially to the return.

but yes, the headaches of owning are real, and of course you'd have to impute a cost of that, or factor in the cost of professional mgmt (though you still have to manage the mgrs).

printer,

Reread what positivecarry wrote, he doesn't own a money management business, he is just a broker building bond ladders for clients. There is little money in that.

I'll be impressed when he has his own NetJets share, not just hitching a free ride. And if he is staying in a hotel room, I guess his clients aren't wealthy enough to own multiple homes. And anyway a flight to the Caribbean is fairly cheap, it is the cross-country flights that run up the big bills, both more distance and bigger more expensive plane required. My favorite is the Citation X, fastest passenger plane made at 600mph.

And wait until his wealthy clients hear he is paying less than $1,000 per month to rent an apartment, that will really impress them. I mean really, for $900 month where can he possibly be living?

I love a warm apartment -- in the early 90s I had a cheap bastard landlord (fmv) who kept the place too cold. I had to wear a down coat in my apartment. This is crap. There are elderly tenants who need to not have the arthritis aggravated by a douchy landlord....

The temp in an apartment is comfortable at 72 - 75 degrees. You should be able to walk around barefoot and short sleeves and be fine.

Ac if they prefer colder. Steam heat...

modern,

so be it. i don't know positive or his/her exact situation. point is that building a successful money mgmt portfolio (doesn't have to be your own biz, as long as your clients are willing to move with you), is 100x harder and more impressive than being a research analyst. done well you not only make money, but you build something.
analysts are just well-paid employees. and outside of very few, as a group they aren't particularly shrewd or original in their thoughts.

printer,

I agree, in general nobody gets rich working for somebody else (with some exceptions).

Most brokers are really glorified salesmen, like real estate brokers but a little smarter in general, who mostly pass on the ideas their research staff told them to push in their morning meeting. And research analysts are mostly useless. What a combination.

pc - "Niall Ferguson (?) on PBS had a great doc called the Ascent of Money"
Crazy the book just arrived yesterday and yes you spelled his name right - can't wait to read it - saw him on Charlie Rose about a week ago - definitely the "smarted guy in the room" type.

Modern,
if you say a healthy six figure salary is "little money", then congrats on your success.

The client I'm going with is worth 9 figures and they are in their early 30's. They own plenty of real estate, this is just a trip to celebrate a birthday. When you're making 8 figures like them you can compare. Who cares if it's not a cross country trip? I'd rather have this job and the perks of "working" with fun people any day over collecting rent.

Jazzman, I liked his Ascent of Money a lot. Good read. His House of Rothschild is great, too. His other stuff is on my list.

Printer,

Not sure which comment you are talking about. When I talk about Japan, it's to remind people that their housing market has behaved as poorly as their stock market over the last 20 years. If it could happen to the worlds second largest economy, why couldn't it happen to the largest?

Modern,
How could I tell clients to walk away from their deposits if I'm some schmuck paying $4000 a month to live in some new construction doorman building. I practice what I preach. I'm fiscally responsible. People with money actually respect that. People with an inferiority complex can't understand it.

Jazzman,
The videos might still be on the website.

Who knows, maybe Jazzm will be the next Solil empire. They started buying in the Depression.