Buying Now Beats Renting

"All" investing is not a gamble. See the definition of "risk free rate."

"Who said 25 years? You're the one always citing 7 years."

LICC, for one, and I'm not "always citing" 7 years. I said 7 years is the average amount of time an owner owns a home. It is irrelevant to the point that you and LICC are trying to make, which is for rental property. My point about rental property is that you should at least break even from Day 1. I retain that position.

In any case, your 7 years is quite a long time to be running in the red, and you STILL can't make any accurate predictions about 7 years hence.

"We're talking about a day 1 loss, which you think is code for "don't invest." That's the point I disagree with."

In investor-owned real estate, a Day 1 loss is a Year 1 loss. You apparently are willing to hold a losing investment for a year, with no guarantee that after that year you will a) be able to dispose of that loss; or b) be able to cure the loss.

That is dumb. No wonder you consider all investing a gamble.

"In any case, your 7 years is quite a long time to be running in the red, and you STILL can't make any accurate predictions about 7 years hence."

Again, who said about running 7 years in the red? Don't distort. It's true that in most cases a day 1 loss is a year 1 loss (unless you're on month-to-month), but there are no guarantees about anything afterwards in this scenario. What happens if rents stay flat or go up and your carrying costs go down (which incidentally is what's happened in my neighborhood and building, respectively, this past year)? Obviously if the carrying cost is double what your projected income is, you're probably not going to come out ahead. But if it's close and you see positive changes ahead, that's far from a dumb investment to make. You're too stubborn to concede that point, but ultimately, it's to your detriment.

Steve...

Do you know the definition of a "risk free rate?"

Well here it is...

What Does Risk-Free Rate Of Return Mean?
The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

As you can see the risk free rate of return is a THEORETICAL rate of return. In true practice it does not exist since even governments can default. Yes all investments are a gamble in one form or another since they have uncertainties.

"See the definition of "risk free rate.""

Yeah, a truly "risk-free" rate exists only in theory. There is always risk. Sorry.

steve really is just juvenile. This is typical of him. He arrogantly makes an unintelligent statement, others point out his mistakes, he lashes out and digs a deeper hole with even more unintelligent statements, distortions and lies to defend his original position, all his idiotic statements are pointed out again, and he refuses to admit his is wrong and just keeps sinking deeper and deeper.

bjw is one of the best commenters on these boards, with lots of good, common-sense posts, but steve still decides to just insult and spin.

steve, all long-term investment decisions require informed judgements on future projections. You look at current and historical data and make a decision. When a company decides on a capital project that will last decades, you will advise them that if they are not profitable on the project in month 1 (or is it year 1 now, since you changed your story again) that it is a bad investment. Ridiculous.

Historically, over the long-term rents rise. Over the long-term property prices appreciate. There are short and medium-term cycles and fluctuations, but long-term history shows rising rents and prices. Nothing about the state of the world or the United States of America signals this long-term trend to change. Nothing in logic, reason or history supports your dumb statement that a purchase has to be day-1 cash flow positive to be justified financially.

These boards were so much nicer for those few months when you stopped commenting. Most people here can disagree without the type of obnoxious, unintelligent comments that you make. The combination of stubborness and stupidity in your comments is a bad mix.

jhochle - you need to look up "theoretical," and that rate is usually deemed to be US Treasury bonds.

"It's true that in most cases a day 1 loss is a year 1 loss (unless you're on month-to-month), but there are no guarantees about anything afterwards in this scenario."

Exactly my point. Exactly why, with a long-term illiquid asset, very few people other than LICC would be willing to invest in a money-losing venture.

"Nothing in logic, reason or history supports your dumb statement that a purchase has to be day-1 cash flow positive to be justified financially."

See the above, Long Island City. Moreover, see:

http://www.investopedia.com/articles/01/110701.asp?viewed=1

Long-term in accounting is anything over 1 year. Thus:

"no business can survive in the long run without generating positive cash flow per share for its shareholders. To have a positive cash flow, the company's long-term cash inflows need to exceed its long-term cash outflows."

If you lock in a Day 1 loss with real estate you are locking in a Year 1 loss. Therefore, by the very definition of a "going concern" - which is: "In accounting, "going concern" refers to a company's ability to continue functioning as a business entity" - locking in a Day 1 loss precludes a business from being classified as a "going concern," making it subject to liquidation, or constant contributions of capital.

http://en.wikipedia.org/wiki/Going_concern

"The combination of stubbor[n]ness and stupidity in your comments is a bad mix," LICC.

Really. This is basic stuff.

"and that rate is usually deemed to be US Treasury bonds."

Yeah, as jhochle pointed out, still risk there. Sorry.

"Exactly my point. Exactly why, with a long-term illiquid asset, very few people other than LICC would be willing to invest in a money-losing venture."

You misinterpret. No guarantees does not mean you throw your hands up in the air and just make your decision on the day 1 numbers. Bad idea.

Steve, here is a further explination from investopedia..

Investopedia explains Risk-Free Rate Of Return
In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

Try to read the part that says "In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk"

Yes, treasuries are used to estimate risk free rates, but true risk free investments do not exist!

Steve, I am beginning to think that you are insane? Do you have family to check on you? I am not kidding.

"Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate."

Enough said about this. If you think that investing in the U.S. Treasury bill is a "gamble," feel free.

Gamble: "take risky action in the hope of a desired result."

In fact, the Treasury bonds are where people put their money precisely when they DON'T want to take risky action.

"No guarantees does not mean you throw your hands up in the air and just make your decision on the day 1 numbers"

Then WHAT DO YOU MAKE THEM ON?

No business that cannot survive 1 year is deemed a going concern. How long do you wait to turn positive?

Two years? Three? Four? A thousand?

Steve, you are an idiot

"steve, you live in a cheap rental between 8th and 9th avenue in midtown. Do you think anyone in a beautiful new condo at the waterfront in LIC is jealous of that??????? HAHAHAHAHAHAHAHAH!"

I LOVE MY WATER/Manhattan Skyline view and so does everyone that visited my place.

"Steve, you are an idiot "

I second that.

steve- wrong again. bjw's point was that investing entails gamble. You just proved yourself wrong with the definition- risky action.

Did you want bjw to say "Investing, other than investing in the three-month U.S. T-Bill, is a gamble"? Would that make you feel better? Do you actually think that your petulant harping on the T-Bill makes you look like you won the argument?

"Steve, I am beginning to think that you are insane? Do you have family to check on you? I am not kidding."

Must have been the Chelsea (high cancer rate in NYC) water that he was drinking the past few years.

> Enough said about this. If you think that investing in the U.S. Treasury bill is a "gamble," feel free.

Oh my lord. Steve, you're just digging yourself in deeper.

Even if we go with the "no capital risk part".... which is bs.

There is INTEREST RATE RISK.

Seriously, Steve, you ever take an economics class.

These are basic, basic mistakes you are making.

> "No wonder steve couldn't make it in the finance industry"
> I did pretty well today.

Well, there we have it. Steve can't see past today (or before today).

Its a bad investment if it doesn't make him money today.

And Steve lost 90% of his investment int he stock market, but 1% came back yesterday.

Thats all he can see.

Now I get it.

steve, I'll try to talk to you at a 5-year old level, so maybe you can understand. Large companies make capital project planning decisions. They may decide to expand or build out a new business. They may not project this business to be profitable in the first year, but for it to be highly profitable at some points subsequent. They would not be idiotic and use a steve analysis that they cannot make any investments that are not profitable in year 1.

Go ahead steve, say something insane again in response . . .

of all the idiotic things you've posted over the years, this might take the cake. according to you, every new venture must be CF+ from day one, or it is a terrible investment?

on another note, the 1 month or 3 month T-bill rate is considered the risk free rate for a US $ investment, so let's leave it at that - given the incredibly short duration, you really don't have interest rate risk. and since the fed gov't can literally print money, there is no credit risk.

lmao

printer...

I am not saying that t bills are not considered risk free. I am just saying that the idea of a risk free rate of return us only theoretical. I understand that the US has not defaulted on its debt, and I don't think that it will, but just like any investment, things can change. People (myself included) use t-bills to estimate a risk free rate of return simply because it is the closest thing to a true risk free investment.

Most governments have the power to print money, yet their bonds are not considered risk free.

"Enough said about this. If you think that investing in the U.S. Treasury bill is a "gamble," feel free.
Gamble: "take risky action in the hope of a desired result.""

I'm sorry, what's your point? Risk is risk, however small. I think you misinterpret the word "gamble" as "high risk" when it's clearly not (especially since you provided the definition).

"Then WHAT DO YOU MAKE THEM ON?"

For the nth time, people make financial decisions based on many things, most notably projections and assessments. Day 1 numbers are a tiny piece of the puzzle. How do you not know this? Do you call who wins the World Series based on who wins on Opening Day?

"How long do you wait to turn positive?
Two years? Three? Four? A thousand?"

Naturally, it depends on your goals and how long you want to hold the investment. Basic stuff.

For the record, Steve only brought up this whole risk-free nonsense because he scoffed at my stating that all investments are risky. Do not trust this man with your money.

Oh, dear! We have it again! Long Island City shouting from one side, Brooklyn shouting from the other, and JuiceMan laughing along with them.

The Triumvirate!

"he scoffed at my stating that all investments are risky."

I scoffed at no such thing. I scoffed at your saying that all investments are "gambles."

And I still scoff at it.

Life is risky. Can't avoid it. You don't have to gamble, though.

"They may not project this business to be profitable in the first year, but for it to be highly profitable at some points subsequent."

And how would they do that, LICC? What is the method of becoming profitable? Would it be by increasing sales and taking advantage of economies of scale, perchance?

Neither of which is possible in real estate.

"Day 1 numbers are a tiny piece of the puzzle."

By your own admission, Day number 1 is Year number 1 in real estate.

So all you great real estate investors - how long do you wait to break even? If not on Day 1 = Year 1, then when?

"Oh, dear! We have it again! Long Island City shouting from one side, Brooklyn shouting from the other, and JuiceMan laughing along with them."

You forgot swe, printer, and jhochle who also think you are wrong.

"Long Island City shouting from one side, Brooklyn shouting from the other, and JuiceMan laughing along with them."

And wherever jhochle, erico, printer, and somewherelse are broadcasting from. Your point? Cause you're still wrong, and mind-numbingly stubborn.

""he scoffed at my stating that all investments are risky."
I scoffed at no such thing. I scoffed at your saying that all investments are "gambles.""

This is the thread you're desperately hanging on to? Semantics? According to the very definition YOU gave, a gamble is a "risky action." So even to you, gamble and risk are interchangeable. Sorry, you're just being an idiot here.

"Life is risky. Can't avoid it."

Says the guy who asked us to look up the definition of "risk-free rate."

"So all you great real estate investors - how long do you wait to break even? If not on Day 1 = Year 1, then when?"

Every investor is different. Personally, I'd probably stay away unless I saw break-even within 4-5 years. Real estate is (and should be) a long-term play. The short-term flipping stuff is nutty to me. Does that mean you shouldn't look for investments that are more profitable from the get-go? Of course not. But you have to have an idea of what the future holds in store to really feel comfortable putting your cash up.

And how would they do that, LICC? What is the method of becoming profitable? Would it be by increasing sales and taking advantage of economies of scale, perchance?

Neither of which is possible in real estate.

So a big mgmt company like glenwood has no economies of scale vs. a mom & pop?

Also, there are some ways to expect greater rents aside from inflation: it may make sense to renovate & reach a higher price point, you may think that the neighborhood is undervalued or on the verge of gentrifying, you may think that a particular unit has a below-mkt rent that you will be to raise at the next expiration, among others.

"it may make sense to renovate & reach a higher price point"

steve would never make this investment because it would not be profitable on day 1.

> You forgot swe, printer, and jhochle who also think you are wrong.

I think it would be easier to list the people who don't disagree with steve.

There, done.

"swe, printer, and jhochle who also think you are wrong."

I am glad!

"Says the guy who asked us to look up the definition of "risk-free rate.""

Yup. Read the context.

"Personally, I'd probably stay away unless I saw break-even within 4-5 years. Real estate is (and should be) a long-term play."

So, you would buy an apartment that costs you $10,000 a month to own but you can only rent it out TODAY for $5,000 a month, and you would not expect to break even within 4 to 5 years?

Am I understanding you correctly?

So you would expect to sink another $200 grand, or $40,000 a year on average, into the place just to hope that MAYBE you could turn a profit?

Because that's what we're talking about here.

If that's your answer, GOOD LUCK TO YOU!

HAHAHAHA!

Now then, if you're actually not talking about what everybody else is talking about, but talking about buying a place to LIVE in versus to rent, and you're overpaying by $40,000 a year and it takes you 5 years just to BREAK EVEN, then it will likely take you another 5 years to make up for your past losses.

So. You would be willing to buy an apartment to live in today versus renting the same one IF you recovered all your losses in 10 years?

Without including transaction costs, as they are not included in what we're talking about.

Add another 5 years.

So - it would take you 15 years to recover all your losses and expenses of owning versus renting, and you think that's a good idea?

WOW! You really do need to study what "risk-free" means.

Juicy - you agree with bjw now?

"So a big mgmt company like glenwood has no economies of scale vs. a mom & pop?"

Absolutely NONE in terms of what they can get for any specific apartment, or what the majority of their fixed costs are.

That is why, FYI, property management companies are generally not very large. It's not a commodity business like retail banking or Wal-Mart. It is a highly fragmented industry because above a certain point it becomes MORE expensive to manage additional units; the economies of scale are negative. Every building you have requires essentially the same number of staff, whether you have 1 or 100. It's very much NOT like manufacturing cell phones, where the 100th unit is much cheaper to manufacture than the first.

And how would they do that, LICC? What is the method of becoming profitable? Would it be by increasing sales and taking advantage of economies of scale, perchance?

I used to think that steve was just stubborn and not this dumb, but these comments are incredibly stubborn and stupid. Increasing rents over time change the cash-flow comparison.

steve is hanging on to the T-Bill argument even though it makes his case even worse. bjw said that investing involves a gamble. The only investment steve could come up with to rebut this is the 3-month T-Bill. Sure appears that bjw is correct on this one.

I love it, steve posts, what, 30 lines in his response... all numbers...

and they're 100% made up

and he thinks he's making his case.

this is getting funnies my the minute.

Steve, you're completely ridiculous. So much distortion, exaggeration, and outright lying, I don't know where to begin. Good luck with your hilarious investing "strategy."

Steve...

What do you think the risks of renting (not buying) are, if any?

steve: So, you would buy an apartment that costs you $10,000 a month to own but you can only rent it out TODAY for $5,000 a month, and you would not expect to break even within 4 to 5 years?

If the apartment costs $10,000 after tax per month to own, then a comparable apartment will not rent for as low as $5000, the two apartments are not comparable, or it is a very bad deal. But this is completely made up in steve's insane bizarro world and not based on current real life situations.

Typical steve idiocy.

"Increasing rents over time change the cash-flow comparison."

$5,000 in rent. $10,000 carrying costs (with tax exemption).

Number of years for rent to increase to owners' carrying cost at 2.5% rent increase per year:

THIRTY.

At 5% rent increase per year:

SIXTEEN.

At 10%?

TEN.

Keep on going - Good luck with your hilarious investing "strategy."

Bjw - that is what you said, is it not? If I'm wrong, then tell me where.

You said you would buy an apartment to rent it if you BREAK EVEN after 4-5 years. I picked 5 because the math is easier, but you can pick 4.

If you BREAK EVEN after 5 years, you then have 5 years worth of losses to recover.

How long will it take you to recover those losses?

Another 5 years.

Then you have to add the transaction costs into the equation.

Another 5 years.

It will take you 15 years to recover all of your losses under your scenario.

Sorry you don't like the math.

"$5,000 in rent. $10,000 carrying costs (with tax exemption)."

These are numbers you pulled out your rear. Find me the post where I made such a proposal. I even specified that the discrepancy can't be too large from the get-go. The point is there can be a discrepancy and it can still be a good investment. I also said nothing about not including transaction costs in your calcs (your assertion, once again). Get a clue.

Transaction costs?? Another idiotic theory by steve. He includes transactions costs but ignores price appreciation.

steve, you can make up all the numbers you want. We don't live in the ignorant steve world. In real life, those ratios don't exist.

"Juicy - you agree with bjw now?"

Yes I agree with what bjw actually said, not with what you wrote.

"$5,000 in rent. $10,000 carrying costs (with tax exemption)."

steve, why don't you make this easier on yourself. $1 / month to rent $10,000,000,000,000,000,000 to buy.

"it may make sense to renovate & reach a higher price point"

steve, can you give an example of when it would make sense to renovate a rental unit to achieve a higher rental value?

This must be tough on steve. At some point he had this arrogant notion that he is a very intelligent person. Graduated college and all, got some good grades. Then he came on these boards and started interacting with people who really are very intelligent. Everyone picks apart his mistakes and dim analyses, and since he is so obnoxious, he just lashes out.

steve, the sad, sad man.

"why don't you make this easier on yourself."

Because we were discussing the example of the Link, posted earlier in the thread.

"These are numbers you pulled out your rear."

See the above. Change the example based on a real-life example, and I'll look at it.

"can you give an example of when it would make sense to renovate a rental unit to achieve a higher rental value?"

Start a different thread, show me one, & I'll let you know.

"Transaction costs?? Another idiotic theory by steve."

From: http://www.corcoran.com/guides/index.aspx?page=ClosingCosts

New York City Real Property Transfer Tax: Sales over $500,000, 1.425% of sales price

New York State Real Property Transfer Tax: 0.4% of sales price

Mansion Tax: 1% of entire sales price

Title Insurance: Approx. 0.5% - 0.8% of purchase price

Mortgage Tax: 1.925% of entire mortgage

Broker Commission: 6%

Total: About 14%, excluding legal expenses, capital gains taxes (if any), flip tax (if any), points, etc.

Based on that, I estimate about 15% of the total cost of the apartment.

"but ignores price appreciation."

HAHAHAHAHA!

Your hopes that your Long Island City dive is one day going to be worth what you paid for it again, BEST OF LUCK TO YOU!

LICC, you have such a following yourself. all hail LICC.

Steve bjw was saying that he would consider a purchase that would break even after 4-5 years. I am pretty sure he was including all transaction costs in his break even analysis. I am pretty sure he was also including recouping any short term cash flow loss in that time. So in 4-5 years he would be break even already factoring in these costs. It would not make sense to then say it would then take an additional 10 years to recoup these costs. He is already factoring them in.

I am still curious what you think the risks of renting are? If any?

"Because we were discussing the example of the Link, posted earlier in the thread."

Yeah, no one's mentioned it in over 100 posts. What a cop out. It's clear from the conversation that we were simply discussing a situation where carrying cost was greater than rental income. I never suggested any scenario where the cost was 2x. So do you still hold to your "day 1" theory if the cost is, say $4000, and the rent is $3700? At what point do you accept that it might be worth going for it? If you're only using that x-y formula from day 1, you're just not a very smart (and hard-working) investor.

jhochle, bingo. For some reason, I'm still holding out hope Steve will comprehend.

"can you give an example of when it would make sense to renovate a rental unit to achieve a higher rental value?"

Start a different thread, show me one, & I'll let you know"

Just answer the question steve. Is there any scenario where renovating a rental unit to achieve a higher rental value would make sense?

steve, you didn't get those numbers from the Link example. The number from the Link example were not even close to what you just posted. You just lied again.

The idiocy of your theory (among many other things) is that you count transaction costs but you do not count price appreciation. You can list all the numbers you want, your theory is still idiotic.

Well, bjw, think what you like but look at the numbers I posted and they're all the same all the way through.

"So do you still hold to your "day 1" theory if the cost is, say $4000, and the rent is $3700?"

Fair question, bjw. If it were to buy it as a rental property then NO, I would not buy it if I were guaranteeing myself a loss. Not ever. Because the risk is too high that I couldn't rent it out, or that the renters would trash the place, or that I might run into some other problem not making the risk worth it.

IF, on the other hand, you are asking whether I would PURCHASE TO LIVE IN a unit that cost $4,000 a month versus one I could RENT for $3,700 - that would depend on a number of other factors, principally how long I planned to stay in the place.

For instance, I currently pay just over $3,600 a month rent. If I could buy the apartment where I currently live and it would cost me $4,000 a month under normal financing conditions, YES I would buy it. But for that to happen the cost would have to be around $625,000 with a 30-year fixed 80/20 mortgage WITHOUT transaction costs, or $531,000 WITH transaction costs, and even less WITH opportunity costs.

Based on comps, however, buying my apartment would cost me around $1,000,000. Therefore, it's not even in the cards.

That's the problem I'm trying to highlight.

> Sorry you don't like the math.

Steve, if you pull the first number out of your ass, its not math.

I love it, Steve starts with the PREMISE of buying costing more than renting, and then uses it to prove that buying costs more then renting.

steve, that isn't math, thats.... horrible, horrible logic.

"Is there any scenario where renovating a rental unit to achieve a higher rental value would make sense?"

Maybe in Toronto, where they film "Income Property." Not that I am aware of in Manhattan.

"You just lied again."

No. The Link rental is $5,600, comparable no-fee market rentals I posted in the immediate vicinity are significantly lower, in the $4,500 range, so I averaged them.

The Link price includes a tax abatement. I took that out as it's a temporary feature.

"you count transaction costs but you do not count price appreciation."

Wish all you want, LICC, tilt at any windmills they build on the Newtown Creek - you're underwater and up sh*t's creek where you bought, and you're never going to get even your principal back.

There is no short- to medium-term price appreciation in Long Island City, and long-term, it will be 20 years before you even break even.

"steve, you didn't get those numbers from the Link example. The number from the Link example were not even close to what you just posted. You just lied again. "

Steve thinks 2 is greater than 4. If you double both numbers, then halve them again, then spin around a few more times...

he has "proven" that 2 is greater than 4.

steve just loves to make a fool of himself. Those numbers are ridiculous. A $625,000 purchase price, meaning a $500,000 mortgage, would NOT have at after-tax cost of $4000. It would be more like $3000-$3500, even including maintenance. And there he goes like an idiot including transaction costs but not price appreciation.

If you do the comparison by only counting costs and not tax deductions or appreciation, you can get to steve's conclusion, but you would be in fantasyland.

And it is highly unlikely that a dumpy rental on 52nd and 8th has a comparable purchase price of $1 million.

"Maybe in Toronto, where they film "Income Property." Not that I am aware of in Manhattan."

Why would renovating a rental unit to achieve a higher future rental value be location specific? Please explain how it would make sense in Toronto and not in Manhattan. I don't follow your logic.

"Fair question, bjw. If it were to buy it as a rental property then NO, I would not buy it if I were guaranteeing myself a loss. Not ever. Because the risk is too high that I couldn't rent it out, or that the renters would trash the place, or that I might run into some other problem not making the risk worth it."

Ok, those last few "risks" aren't even in the realm of what we're discussing. That's just your personal fears that a renter would trash the apartment (or "some other problem"). The main point, is you're not guaranteeing yourself a loss. It may be a loss, but if you project rents to rise and your costs to stay flat, you may have yourself a worthy investment. Understand? Investing is much more complex than looking at your day 1 return or loss. That really should have been self-evident.

"Based on comps, however, buying my apartment would cost me around $1,000,000."

Normally I would defer to you since there's no way we can know that, but since we know your actual unit and building, it's pretty easy to call bs on your unit costing $1m. You're guilty of doing what you've accused others of here: convincing yourself that your place is "special."

Why would Urbandigs recommend investing money into Manhattan rental units to increase future rents? Why on earth would someone do that if it wasn't case flow positive on day 1?

http://www.urbandigs.com/2008/04/renovating_to_rent_keep_costs.html

Why would people in Toronto think it is a good idea to renovate a rental to increase future rents but people in Manhattan wouldn't?

So many questions, so few answers.

JuiceMan - start a new thread.

LICC - we're not talking about after-tax costs, are we? I never was.

Bjw, I'm sorry you're so unhappy with and don't think my apartment would sell for $1 million.

But alas, it would. Just to make it easy for you:

Real estate for sale
in Midtown West
We found no listings with monthly payments of no more than $4,000 with 2 bedrooms with at least 2 bathrooms

That is based on a down payment (the only variable I can enter) of $200,000, which would be 20% of $1,000,000.

There aren't any.

Even if you took the approximate cheapest comp:

http://streeteasy.com/nyc/sale/490109-coop-100-west-57th-street-clinton-new-york

At $799k (down from a $1.15 million asking price - they're desperate with a 31% price drop) it still costs

Down Payment $159,800
Mortgage Amount $639,200
Mortgage Payment $3,629
Total Monthly Payment $5,996

versus $3,600 to rent it.

That's an outlier, but since it benefits you I thought I'd use it.

"Why would Urbandigs recommend investing money into Manhattan rental units to increase future rents?"

Last time I talked to him on the phone a few weeks back, he didn't mention it to me. I'll ask him next time he calls.

so an apartment that is larger and nicer than yours, yet is for sale for <800k, 'proves' that your apt would sell for more than $1mm? Please explain.

Of course you never talk about after-tax costs steve. That is another reason why your whole analysis fails.

got cut off - an apartment that is larger and nicer than yours, yet offered for $800k, proves that your place would sell for $1mm? Please explain this piece of logic to me

"JuiceMan - start a new thread."

No. It is the same topic, the question is why would someone would make an investment in rental real estate that wasn't cash flow positive from day 1. Seems like Urbandigs has answered that question. The only thing I got from you is that the answer would be different in Toronto vs. Manhattan.

typical

"Last time I talked to him on the phone a few weeks back, he didn't mention it to me. I'll ask him next time he calls"

LMAO. No need to call him, just read his post in the link I provided. Don't think that is cash flow positive on day 1 is it?

Makes as much sense as when steve told JuiceMan that he should take out a mortgage to buy egg mcmuffins.

printer, that's also arguably a better location. Steve, I fail to see how a bare bones Streeteasy search proves anything about what your apt would fetch on the market.

"an apartment that is larger and nicer than yours, yet offered for $800k, proves that your place would sell for $1mm"

I deliberately picked the CHEAPEST one. It's approximately the same size as mine, without the balconies. It's a co-op, cheaper than what mine would go for, as no one converts to co-ops anymore.

FYI: Real estate for sale in Midtown West

We found 144 listings with 2 bedrooms with at least 2 bathrooms
Median price: $1,674,500 Median size: 1,247 ft² Median price per ft²: $1,300

Median size is slightly larger than my apartment. psf2 = 1,300.

Here's another, about $1 million:

http://streeteasy.com/nyc/sale/483399-coop-100-west-57th-street-clinton-new-york

Here's a better comp:

http://streeteasy.com/nyc/sale/489298-condo-350-west-50th-street-clinton-new-york

at $1.195. Same size (no balconies) just steps away.

You're right, bjw, that is no guarantee of what this apartment would sell for. That we wouldn't know until we got there.

"Of course you never talk about after-tax costs steve."

Oh but I do, LICC. I just wasn't talking about it this time, because as I have always said, if you buy a place and rent it out, EVERYTHING is deductible except principal amortization, and the land can't be depreciated.

I see lots of attacking here, but I don't see anyone post anything that's even close to a reasonable analysis.

So I'm waiting.

"Oh but I do, LICC. I just wasn't talking about it this time, because as I have always said, if you buy a place and rent it out, EVERYTHING is deductible except principal amortization, and the land can't be depreciated"

but we were talking about owner-occupied at that point. Which is a substantially different situation tax wise than investor-owned, because you are allowed to deduct the mortgage interest against your OTHER income.

No, LICC was talking about all sorts of things, I'm never quite sure what he's talking about. My statement was that if you buy a property to rent out, you should cover your costs from day 1.

Buying a property to rent out = market rents.

Therefore, if you buy an apartment to live in, it should cost no more than market rent.

That is the long-term equilibrium: market rent = owner's carrying costs.

Everyone else is arguing with me all sorts of different arguments that try to make hay of that, but all have been unsuccessful.

If they want to drink the real-estate Kool-Aid, let them.

This whole thread is about buying an apartment to live in.

It must be getting to steve how we all expose the lunacy and stupidity of his arguments. He can't just admit he is wrong or even just drop it, even though he looks like an even bigger fool trying to defend himself.

We just went through over 100 posts showing how stupid it is to assert that if you buy an apartment to live it, it should cost no more than market rent, yet he just repeated it again.

steve, why do you keep posting here to show everyone that you are clueless?

Long-term equilibrium: market rent = owner's carrying costs.

Cry me a river, LICC:

http://realestate.wharton.upenn.edu/newsletter/owner-occ.pdf

"House values are determined by the capitalized value of market rents."

Wharton Business School.

Exactly what I've been saying ALL ALONG.

Price to rent ratio = 15.7 with a standard deviation of about 4. In exact agreement with everything I've ever posted, and NY's 12x falling well within it.

And you have it again:

http://thismatter.com/money/terms/p/price-to-rent-ratio.htm

And again:

http://www.seattlepi.com/money/386018_real01.html

Everything I say is supported by reams and reams of documentation. Everything you and JuiceMan and others say is supported by nothing.

steve just tried another of his idiot tricks. Make an out of context statement, then cite a source that does not support his statement but say it does.

I find it strange that LICC, bjw, and JM are simply intent going back-and-forth in circles with Steve without actually putting any numbers to anything. Can one of you put some numbers behind your arguments? Show the rest of us an example of how it all works in your view. Or is it all some vague notion?

"but we were talking about owner-occupied at that point. Which is a substantially different situation tax wise than investor-owned, because you are allowed to deduct the mortgage interest against your OTHER income."

Although owner-occupied RE has this tax advantage, investor-owned RE has its own set of unique tax advantages (depreciation, the ability to deduct the cost of repairs, etc.) that limit the relative advantage of owner-occupied RE. I'm not saying that the up-to-$20K-ish tax deduction available to owner-occupied should be ignored, but rather that it is a mistake to think that investor-owned RE is at a substantially different cost basis than owner-occupied RE.

Those boys can't do math.

I'm not sure whether it's that they can't do the math vs. that they don't want to do the math.

"then cite a source that does not support his statement but say it does."

Apparently, LICC can't read:

http://realestate.wharton.upenn.edu/newsletter/owner-occ.pdf

Page 5 (among other places).

And if the cost of housing = a capitalized stream of rent, unless something very odd happens along the way, since owner's carrying costs are the amortized version of that - that is, the opposite transaction, the amortization of the capitalization - they MUST be the same from Day 1.

Of course anything beyond finger painting is truly beyond LICC - and, sadly, now bjw - it's like talking to a wall.

nada, you're right. But if economic theory is to be taken as empirically tested, in the long-term the market adjusts to those distortions so that everything works out the same. Which is why all the mortgage interest deduction does in the long-term is increase the price of housing. Get rid of it tomorrow, and the price of housing will collapse.

Shiller proved this over 350 years - no matter what distortions were introduced into the property market, no matter how constrained the land, housing prices maintained a direct correlation to rental prices, which maintain a direct correlation to incomes.

LICC is just trying to convince himself that he made a good moving buying in Long Island City; bjw for buying in Brooklyn at the peak (location, location, location!) and JuiceMan is trying to recover from years of saying that prices would never go down and only go up.

So do you think that they don't understand the math, or that they don't want to understand the math?

Just being facetious. Seems to me (I haven't read ALL the posts) that neither LICC nor steve respond to direct questions about their numbers or line of reasoning.

LICC's stance is that the same apt (apples to apples) cannot be found at 20x, 25x unless you pick some really outlier examples. Steve isn't wrong, but makes his points a little inelegantly.

nada, we've done the math with steve ad naseum in the past, and it doesn't matter. He just lies and goes around in circles. Look at his cite above. The capitalized stream of rent must be based on all the rent for the life of the investment, not the lower rent level in place on day 1. But that is too complicated for steve to understand. His statement above about the tax deduction is just circular nonsense. He bases his cost analysis on a price that he says would be lower without the tax deduction, but he doesn't reduce the cost by the tax deduction, because the deduction causes the price to be higher. Ridiculous.
He comes to a conclusion- renting is better, because he has been a renter for over 10 years. He takes that conclusion and distorts all the analysis any way possible to justify his decision. Because he can't admit that he is wrong and that he is just not very intelligent.

nada, they don't want to DO the math. it doesn't suit their interest.

steve would be much better off getting rid of his apartment as an example forever and amen and just using real examples of units actually available for both rent and for purchase.

"I find it strange that LICC, bjw, and JM are simply intent going back-and-forth in circles with Steve without actually putting any numbers to anything. Can one of you put some numbers behind your arguments? Show the rest of us an example of how it all works in your view. Or is it all some vague notion?"

Try as you might, everything with Steve is about theory and formulas. He just won't agree to use legit numbers, so you're ultimately left banging your head against the wall. I'm a bit of a math nerd, so I'm all for it if others want to discuss. The argument to buy in this scenario ultimately comes down to when you think rents will rise again. I'm not seeing that yet, though I am a bit surprised that rents have held up so well in my neck of the woods.

I'm all ears, bjw. You've seen how I think it adds up, you've seen my assumptions, you've seen my justifications. Fire away with your numbers, I want to see how you think it all adds up end-to-end as I'm curious to understand where we might differ.

LICC, ignore steve's numbers and pointing our deficiencies. Walk me through your numbers step by step.

nada- I just grabbed the first building on the featured listing on the streeteasy homepage. Completely random. It was the John Murray House by the Morgan Museum. I don't know anything about the building. It showed unit 12Q, a 2-bedroom apartment, had sold recently. It didn't have the sale price but it was listed at $999k. It also showed 7Q recently rented, and it was listed at $4700. The building has other 2-bedrooms in different lines listed at higher prices ($1.2m to $1.8m), but I couldn't find the rentals in those lines. Let's go with this. Maintenance on 12Q is $1380.

Based on an 80-20 mortgage, pre-tax the monthly payment would be around $5900. After tax, somewhere around $4500. Add your percentage increases in rent and price appreciation, amortize transaction costs, and the spread gets better to own over time.
nada, use a real-life situation instead of your hypothetical and see how the numbers look.

"we've done the math with steve ad naseum in the past, and it doesn't matter."

HAHAHAHAHA!

That's why you moved to Long Island City, right? Because you can subtract.

"The capitalized stream of rent must be based on all the rent for the life of the investment, not the lower rent level in place on day 1."

That's absolutely true. Now, LICC, here's a problem. You capitalize a stream of rent for 30 years and then amortize it over 30 years, and compare it to the actual rent. And you get: IT'S THE SAME!

"He comes to a conclusion- renting is better, because he has been a renter for over 10 years."

Hahahaha! I rent my primary residence and OWN my vacation residence. There goes that theory.

"steve would be much better off getting rid of his apartment as an example forever and amen and just using real examples of units actually available for both rent and for purchase."

Did that - it doesn't matter to them.

"Based on an 80-20 mortgage, pre-tax the monthly payment would be around $5900. After tax, somewhere around $4500. Add your percentage increases in rent and price appreciation, amortize transaction costs, and the spread gets better to own over time. "

HAHAHAHA!

First of all, you're talking about eggs and oranges. Buy that $999,0000 apartment and try to rent it out to an unrelated third party - by your own calculation it would cost you $5,900 - assuming your numbers are correct. The best you could hope to rent it for is $4,700. Therefore, you are LOSING $1,200 a month.

If you CAPITALIZE this stream of rent over 30 years and then amortize it over 30 years, guess what you come up with? $5,900. Compared to $4,700 for your potential rental income.

That, to LICC, with his own numbers, is a GOOD DEAL!

HAHAHAHA!

What were the numbers you used to buy your LIC pad, LICC? Anything similar.

"Add your percentage increases in rent"

About 2% per year on average. Then add in your maintenance increases, special assessments, tax increases, PLEASE.

"and price appreciation"

HAHAHAHAHAHA!

How about price depreciation?

"amortize transaction costs"

15% over let's say you hold it 10 years (far more than the average) = another $1,200 a month.

"and the spread gets better to own over time."

Yup. With transaction costs it costs you $7,100 to own, whereas at best you can rent it out for $4,700, AND THE SPREAD GETS BETTER TO OWN OVER TIME!

Oh - the tax deduction! HAHAHAHAH!

Oh - rents only ever go up (even though mine just went down by $1,000 a month).

Oh - property prices only ever go up (even though they've already fallen about 25% from peak).

Oh - you wouldn't actually make any money on the $200,000 down payment. HAHAHAHA!

And let's take a look at your "increases in prices":

12/16/2008 #8Q $875,000

11/09/2006 #8Q $799,000

No increase there - the real estate commission alone eats up the bulk of the "profit." Add in the flip tax and transaction costs, AND YOU'RE IN THE RED.

steve, thanks for that slew of idiotic comments. You fit a lot (although not all) of your dumbest thoughts into that one. Ignoring tax deductions, ignoring price appreciation, ignoring increasing rents, overstating transaction costs, referencing misleading comparisons.

Is it your purpose to show everyone on these boards how much of a clown you are?

"AND THE SPREAD GETS BETTER TO OWN OVER TIME!"

You mean as your "tax benefit" is amortized over time, as well, meaning that it gets smaller and smaller and smaller.....

"I find it strange that LICC, bjw, and JM are simply intent going back-and-forth in circles with Steve without actually putting any numbers to anything. Can one of you put some numbers behind your arguments? Show the rest of us an example of how it all works in your view. Or is it all some vague notion?"

Besides the fact that there are three years worth of threads that use actual numbers to prove steve wrong, steve will continue to ask for numbers. nada, look at past threads, it's nausating.
As for LICC & bjw's numbers, I have challenged them on many occasions and their numbers have been spot on. I don't always agree with their point of view but they don't make up numbers to support their position. Read some of their past posts, both these guys know what they are talking about.

Lastly, you don't need numbers to discredit steve's statement that an investment property should be cash flow positive from day one. All you need is an Urbandigs blog post discussing capital investments in a rental property to increase future rents. He is avoiding this discussion because he knows he is wrong and can't weasel himself out of it. Also waiting for his explanation of why Toronto and Manhattan would be different in terms of capital invested in rental properties to increase future rents. That will be a good one.

This is a public service nada, just making sure that someone doesn't make a bad decision because they listened to this clown.

Cool, LICC. I have been saying recently that nondescript coops in Midtown East and Yorkville offer the biggest skews towards buying around.

However, I'm going to call a bit of BS on what you picked, the same way I did on the Link place with Steve earlier in this thread. The 7Q at $4700 you picked came onto the market 12/29 and disappeared after about a week. Meanwhile, a much higher-floor unit (15Q) was on the market at $4400 between September and December, a much better season. Leaving that out is disingenuous, IMO.

If you look at the Link example on the first page of this thread, I was very explicit in calling BS on Steve and giving real numbers for sale and rent. The rent is known at $5600 because that's what the seller says in his/her sales listing as what the tenant is paying. Note that this is 14% lower than the final asking rent of $6500 that resulted in the $5600, just to give you a sense of how far asking and actual rents can be. I argued with Steve saying that just because the building next door rents for $4000, it don't mean squat because there are plenty of comps in the building supporting that $5600 number. On sales price, I used the lowest possible comp of an actual sale I could find at $1.59M, which was 13 floors lower, so I upped it to $1.7M. That gave a rental yield of 3.95%. I used actual sales and rental prices, not maybes, anywhere. There are plenty of other examples in that building that support both the rental price (actually-rented units) and the sales price (actually-sold units), all at around 4%. I'm pretty sure that is a very solid comp, using actual rent vs. actual sale on units only different by elevation, with several other transactions in the same building supporting both numbers.

That being said, I do think that in the market segment you picked, 4% is low. How about we do this: let's say the 15th floor unit is a decent comp to the 12th floor unit because we have last asking prices on both, which likely transacted. We raise the comp on the 12th floor unit from $999K by $10K per floor to get to $1029K for the 15th floor unit. That means the latter is 3% superior, the the comparable rent on the 12th floor unit would be $4400 * 0.97 = $4268. We assume that the rental discount to ask and the sale discount to ask are the same. That works out to a rental yield of 5.1%.

Good enough?

FWIW, I also have market segments that are even below 4% (the higher-end stuff), but I would prefer to go forward with your example.

"Besides the fact that there are three years worth of threads that use actual numbers to prove steve wrong"

HAHAHAHA! Point out a few, JuiceMan. Like the ones where you say that prices will not fall more than 5% in Manhattan, that rents will skyrocket, and the bubble will live on forever?

I remember those. Look at past threads, it's nausating.

"you don't need numbers to discredit steve's statement that an investment property should be cash flow positive from day one."

You're right, Juicy: the only way anybody would invest in a long-term money-losing proposition is if they didn't look at the numbers. (And, BTW, I said "break even").

"All you need is an Urbandigs blog post discussing capital investments in a rental property to increase future rents."

What does capital investments to increase future rents have to do with anything we've been discussing? Typical JuiceMan - changes the subject to something completely unrelated.

"Ignoring tax deductions"

We weren't talking about them, LICC, but when you rent out an apartment to an unrelated third party, you get to deduct EVERYTHING.

BTW that "tax deduction" goes away over time.

"ignoring price appreciation"

Let's take a look at your "increases in prices":

12/16/2008 #8Q $875,000

11/09/2006 #8Q $799,000

Same building, same line. No increase there - the real estate commission alone eats up the bulk of the "profit." Add in the flip tax and transaction costs, AND YOU'RE IN THE RED.

"ignoring increasing rents"

I said they increase at about 2% per year, and have actually fallen in recent years.

"overstating transaction costs"

I got the transaction cost figures from corcoran.com. Reference supplied. What's yours?

"referencing misleading comparisons"

I referenced YOUR example and YOUR building.

HAHAHAHA!

Those two will do ANYTHING to try to disprove the fact that real estate remains vastly overpriced: except show REAL examples.

Like LICC's, where he says that it's a good idea to buy an apartment costing you $7,100 a month so you can rent it out for $4,700 a month, and then claim that the spread gets better over time.

HAHAHAHA!

nada- I jumped on the latest comparable rental. I have no issue with using $4400 instead, the point still holds- just because it is not cash-flow positive on day 1 does not mean it is a bad investment. If you are certain prices and rents are going to decline significantly, then of course you would not buy. But the day 1 ratio is a separate factor, and other things being equal, these numbers are very reasonable to justify a purchase. And I didn't search out the comparison- I went with the easiest most random selection possible: whatever appeared on the featured listing on the streeteasy homepage.

i too just pulled up a unit on featured listings. that unit had no discernible rental comp. another in the same line, however, was recently removed from the rental market. it is in contract, hasn't closed yet, last listed at $3.2mm with monthlies of around $4000. in the rental listing it was listed at $10,000.

http://streeteasy.com/nyc/sale/482379-condo-15-west-53rd-street-midtown-new-york

i agree with nada. in a few neighborhoods for certain types of units the numbers don't look so bad. but i'm still surprised at how low rents are headed. so even though the purchase prices and monthly numbers don't look bad to me from a recent historical perspective, they don't look so hot in a current rent/buy analysis.

"What does capital investments to increase future rents have to do with anything we've been discussing? Typical JuiceMan - changes the subject to something completely unrelated."

Can't weasel out of this one steve? Unrelated? You said equilibrium is when an investor can buy a rental property and be cash flow positive from day 1. If that was true, why would anyone make a capital investment in a rental property to increase future rents?

This is not a confusing topic steve, this is basic stuff. Why would someone do this if an investor needed to be cash flow positive on day 1? Why steve? Why would Urbandigs, a respected real estate blogger, tell people to do this? Why is this different in Toronto than Manhattan? Why steve?

inonada, I'm a bit swamped at work, but rest assured I'll be back to go through the analysis at some point today hopefully. I won't pull a Steve on you!

inonada, here are some more numbers for you and another example of why steve's claims that we "never post numbers" are ignored. There are a 100 more like this.

http://streeteasy.com/nyc/talk/discussion/3814-new-york-times-on-buying-vs-renting

Are you in agreement with LICC's approach and numbers?

JuiceMan, you are a boor.

"Why would anyone make a capital investment in a rental property to increase future rents?"

A blanket statement for all properties in the world? Is that what you're saying?

JuiceMan's new argument: it's ALWAYS a good idea to make a capital investment in a rental property to increase future rents.

That's right folks! Invest $100,000 in a top of the line kitchen that will increase your rent $200 a month. 42 years to recover your investment!

Step right up folks, invest your money with JuiceMan! Give him a hundred grand, you'll get it back in 42 years!

"just because it is not cash-flow positive on day 1 does not mean it is a bad investment."

If you're cash-flow negative on Day 1 you're cash-flow negative for YEAR 1. How long are you willing to stay cash-flow negative, LICC?

1 year?
2 years?
5 years?
41 years?

"these numbers are very reasonable to justify a purchase."

Very reasonable to pay $7,100 a month for an apartment that you yourself say is worth $4,700 on the rental market?

Kewl.

OK, let's go with $4400 and discount it to $4268 to get it down on the 12th floor instead of the 15th. We should discount both and the $999K sale price by, say, 5% to account for the fact these are asking prices & rents, not actual. So that takes us to $949,000 for sale and $4050 for rent.

And $7,000 a month to own.

As you can see ladies and gentleman, steve has avoided answering the question once again. I'll post the questions again to see if he will answer them.

Can't weasel out of this one steve? Unrelated? You said equilibrium is when an investor can buy a rental property and be cash flow positive from day 1. If that was true, why would anyone make a capital investment in a rental property to increase future rents?

This is not a confusing topic steve, this is basic stuff. Why would someone do this if an investor needed to be cash flow positive on day 1? Why steve? Why would Urbandigs, a respected real estate blogger, tell people to do this? Why is this different in Toronto than Manhattan? Why steve?

"inonada, I'm a bit swamped at work, but rest assured I'll be back to go through the analysis at some point today hopefully. "

bjw, looking forward to it.

"Are you in agreement with LICC's approach and numbers?"

Yeah, I'm fine with $4050 vs. $949,000 for that place. Although the 5.1% yield is on the higher end of things in Manhattan, I do think it is reflective of that part of the market. As the Link comp points out, you do get to 4% in other neighborhoods. As AR's comp demonstrates, you also get to 4% if you go higher-end in Midtown East. I also believe that in other neighborhoods at the higher-end, you do start seeing 3.5% sometimes as well.

Nevertheless, if the market segment you're in is the 5.1% market segment, then that's what it is, and it's a fine thing to examine. If at the end of this, I see that LICC's market segment is at 5.1% and that motivates his views, I'll have learned something.

Nobody wants to be a renter. People in states of transition or without proper savings, or who are subsidized are the only people who are renting. If you remove rent control and rent stabilization and other subsidized projects like Stuyvesant Town, the natural situation is to be a homeowner.