I bought my midtown studio around 2007 peak and would like to trade up in the near future. My parents say you can never time real estate, and if you sell low you need to buy low in the same market. Otherwise stay put till your ready to trade up. I tell them the bigger risk is waiting too long to sell, losing too much equity, and not having enough left to trade up. Although prices in midtown seem... [more]
I bought my midtown studio around 2007 peak and would like to trade up in the near future.
My parents say you can never time real estate, and if you sell low you need to buy low in the same market. Otherwise stay put till your ready to trade up.
I tell them the bigger risk is waiting too long to sell, losing too much equity, and not having enough left to trade up.
Although prices in midtown seem to have stabilized a bit, I'm betting they'll either stay flat in coming years or drop again. If I cut my losses and sell now, I would recoup a good chunk of my 20% downpayment after closing and I'd lose around 40K renovation/improvement costs I put in. I could get a better 1-2 year rental (for approx. my current carrying costs), and keep my cash safe at 1% until I'm ready to buy more. But not in this bipolar climate, and I'd rather wait a few years to build up my reserves. If in the meantime prices fall, my bet pays off.
I know its all a gamble. My parents say my bet is too risky and parents are often right... but are they?
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Response by NYCMatt
almost 16 years ago
Posts: 7523
Member since: May 2009
It sounds like you bought real estate for all the wrong reasons.
Your home is not an investment ... it's your HOME.
The time to sell is when you need to either move out of the area or if you outgrow your current space.
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Response by M76
almost 16 years ago
Posts: 5
Member since: Mar 2010
Thanks Matt,
You're right, I thought I was buying a starter home, but in hindsight I actually bought a starter investment. Obviously didn't work out, since I'll have outgrown the home long before I recoup the investment. But the goal was always to build and trade up to a permanent home.
Along those lines, my parents say I shouldn't think of the apartment's cash value, only of its relative market value to other properties. Easier said when you don't have most of your equity invested in it!
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Response by West81st
almost 16 years ago
Posts: 5564
Member since: Jan 2008
Taking a completely neutral view of market direction, I think your parents are demonstrably wrong. I think they are suggesting that you increase your market and concentration risk by replacing an unhedged long position with a bigger unhedged long position in the same asset class. Depending on your circumstances, trading up might make sense for a variety of reasons, but risk management probably isn't among them.
If you take your own advice and the market moves against you, you will incur opportunity cost. If you take your parents' advice and the market moves against you, you'll incur something much nastier.
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Response by front_porch
almost 16 years ago
Posts: 5316
Member since: Mar 2008
not enough data here to solve this problem.
X factors are: how much do you make; what percentage of your income are you currently spending on housing costs; how quickly do you expect your income to increase?
If your income is moderate and flattish and stable and you think prices are flattish or are coming down, there's a good argument to be made for moving out of the studio, renting it out at a small loss, renting yourself a better apartment, using the small loss and depreciation on the property to shield some of your income from taxation, saving more towards a down payment, and then doing both the sell and buy trades after the market drop you expect occurs. If prices instead go up, you are somewhat hedged by being long real estate. If prices and rents don't move one iota, you get the benefit of a tax policy that is biased towards ownership.
ali r.
DG Neary Realty
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Response by M76
almost 16 years ago
Posts: 5
Member since: Mar 2010
Thanks front porch- I need to see with my accountant about the renting scenario. I've also resisted that idea because it's in great sell condition and I'm weary of rental wear and tear. I think I would sooner stay put than rent it out.
My current carrying costs are $2500. At 28% of gross salary I could afford to buy a better located 1 bedroom with carrying costs of around $3500. But if prices drop further and I lose more of my current downpayment, I just won't have the reserves to trade up and it could take a long time to make up for that lost 20%.
West 81st- I've been going back and forth on this every day, and today I'd say your thinking about risk assessment makes perfect sense. thanks!
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Response by kharby2
almost 16 years ago
Posts: 279
Member since: Oct 2009
Your home is your home, but your home is also an investment whether you like it or not.
I have yet to hear a seller say, "Oh, it's OK that I'm losing X dollars if I sell now, because this is my home, it's not an investment."
What hasn't been mentioned here: The age-old advice is that the best time to trade up is during a down market. The worst time to trade up is during a rising market.
The reasoning goes, you sell your current property low and you buy a more expensive property that is also priced "low."
This brutal recession notwithstanding, eventually the NYC real estate market will go up if you wait long enough--(and if you're still listening to your parents, I'm assuming you're not 65 years old and getting ready to retire....)
If the market goes up 5%, say, across the swath that includes both your current property and your trade-up property, your 5% increase will be on a larger base on the trade-up property than it would have been if you had stayed put. So your actual cash return on investment will be higher on the trade-up property.
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It sounds like you bought real estate for all the wrong reasons.
Your home is not an investment ... it's your HOME.
The time to sell is when you need to either move out of the area or if you outgrow your current space.
Thanks Matt,
You're right, I thought I was buying a starter home, but in hindsight I actually bought a starter investment. Obviously didn't work out, since I'll have outgrown the home long before I recoup the investment. But the goal was always to build and trade up to a permanent home.
Along those lines, my parents say I shouldn't think of the apartment's cash value, only of its relative market value to other properties. Easier said when you don't have most of your equity invested in it!
Taking a completely neutral view of market direction, I think your parents are demonstrably wrong. I think they are suggesting that you increase your market and concentration risk by replacing an unhedged long position with a bigger unhedged long position in the same asset class. Depending on your circumstances, trading up might make sense for a variety of reasons, but risk management probably isn't among them.
If you take your own advice and the market moves against you, you will incur opportunity cost. If you take your parents' advice and the market moves against you, you'll incur something much nastier.
not enough data here to solve this problem.
X factors are: how much do you make; what percentage of your income are you currently spending on housing costs; how quickly do you expect your income to increase?
If your income is moderate and flattish and stable and you think prices are flattish or are coming down, there's a good argument to be made for moving out of the studio, renting it out at a small loss, renting yourself a better apartment, using the small loss and depreciation on the property to shield some of your income from taxation, saving more towards a down payment, and then doing both the sell and buy trades after the market drop you expect occurs. If prices instead go up, you are somewhat hedged by being long real estate. If prices and rents don't move one iota, you get the benefit of a tax policy that is biased towards ownership.
ali r.
DG Neary Realty
Thanks front porch- I need to see with my accountant about the renting scenario. I've also resisted that idea because it's in great sell condition and I'm weary of rental wear and tear. I think I would sooner stay put than rent it out.
My current carrying costs are $2500. At 28% of gross salary I could afford to buy a better located 1 bedroom with carrying costs of around $3500. But if prices drop further and I lose more of my current downpayment, I just won't have the reserves to trade up and it could take a long time to make up for that lost 20%.
West 81st- I've been going back and forth on this every day, and today I'd say your thinking about risk assessment makes perfect sense. thanks!
Your home is your home, but your home is also an investment whether you like it or not.
I have yet to hear a seller say, "Oh, it's OK that I'm losing X dollars if I sell now, because this is my home, it's not an investment."
What hasn't been mentioned here: The age-old advice is that the best time to trade up is during a down market. The worst time to trade up is during a rising market.
The reasoning goes, you sell your current property low and you buy a more expensive property that is also priced "low."
This brutal recession notwithstanding, eventually the NYC real estate market will go up if you wait long enough--(and if you're still listening to your parents, I'm assuming you're not 65 years old and getting ready to retire....)
If the market goes up 5%, say, across the swath that includes both your current property and your trade-up property, your 5% increase will be on a larger base on the trade-up property than it would have been if you had stayed put. So your actual cash return on investment will be higher on the trade-up property.