Looking for opinions on high maintenance

How much mortgage does $2500 a month get you? That's your answer.

A 500K mortgage at 5% will cost you $2083 a month for the interest only.

Take the annual difference in maintenance and divide by your cost of funds, say 6%.

$2,500 * 12 months = $30,000

$30,000/.06 = $500,000

I would submit to you however that the land lease issue needs additional valuation besides just the increased cost reflected in the higher maintenance.

Things you are going to want to understand and valuate.

How much term is left on the land lease?

Are there extension rights on the land lease?

How much more does the land lease cost you as a shareholder due to scheduled increases?

Mortgage may be more expensive due to land lease and will certainly impact value when you resell.

Probably many more things to consider.

Just had second thoughts about the capitalization rate. Ten year treasury is 3.616% as of today. Probably should use this rate. If you buy a ten year bond to pay out the additional cost of maintainence it costs you $829,646

$30,000/$3.616 = $829,646

Also, if you assume maintenance increases at 2-3% rate, the discount should be even higher.

The logic makes sense to me, I just struggle with what "cost of funds" to use. Treasury risk-free is one end of the spectrum, the blended cost at which I would have to borrow the extra purchase price (meaning some percent my cash/equity and some percent debt) is the other end of the spectrum. So I can see logic in using 3%, or 7-8%, or anything in between.

Totally agree on landlease, need to do my homework on that. Thanks.

You're seeking to compare the NPV of the cost of the extra maintenance over the life of the condo to the NPV ($500K) of the present sales price discount. So you need to use a matched-maturity rate that corresponds to the avoided cost of the debt service on that $500K. Assuming you were going to do a 30 yr mortgage, you'd take the $30K add'l cost per month, for 30 months, at say 5% (if that's the mortgage rate you can borrow at). That gives you a present value of $461K. When you consider, as someone noted above, that the maintanence will likely increase, you need to consider the delta of, say, a 3% annual increase on the additional $2500k/month. that probably brings your total close to $500K, so it's probably a push on NPV of cashflows. Which means you should let other factors decide - how do you feel about borrowing $500K more for a place with low maintenance, not knowing if the maintenance needs to go up? Conversely, will the extra $2,500/mo crimp your lifestyle significantly? And how is resale impacted by such a huge maintenance?

sorry, should say "you'd take the $30K add'l cost per month, for 30 YEARS"...not 30 months...heh heh...

er, actually, it should say "you'd take the $30K add'l cost per YEAR, for 30 years". I can't think straight today. you should probably disregard anything i have ever said...

no, your post best addresses the inquiry

there are other issues obviously---people laden with cash dont like high maintenances, for one

"The logic makes sense to me, I just struggle with what "cost of funds" to use."

How about you use whatever cost of funds that led you to the conclusion that buying is a good idea over renting? If you came to the conclusion that, say, paying $2M for a place that you could rent for $7500 with $2500 in maintenance makes good sense, then the logical extension is that you are willing to pay $1M upfront per $2500 a month (plus inflation) saved. The nice thing about this method is that, unlike other methods, it keeps the asset's risk profile & illiquidity & high transaction costs constant relative to the comparison.

and forget the whole thing--dont buy in a land lease bldg, period--and dp's good analysis cant address the landlease--no info provided--much more complicated, likely, than a mntnce differential analyioss

No, Dwayne, you're right on target. Excellent explanation!

Nada's point on renting is an extremely good one -- these two apartments have value as goods, not just in comparison to each other, but in comparison to the universe of other goods that can be substituted for them.

Therefore the comparison isn't just about value and borrowing costs now, it's about likely value and borrowing costs in the future.

For example, you need to throw into this mix your assumption on what the lending environment will be like when you sell (which I imagine will be much sooner than 30 years from now). Will rates be high or low, and how will that impact competitive rents? Will credit be tight (making the land-lease possibly comparatively better, because of the lower down payment required to purchase it) or liberal?

Also, try to forecast what will happen to the maintenance on Property A vs. Property B. If you're spending $2mm, that can be done at a higher level of sophistication than guesstimating the same 2-3% for both properties.

ali r.
DG Neary Realty

I would avoid land leases. Buildings at 101 west 23rd street and 301 East
63rd Street have collapsed in value because of them ... in the case of
the 23rd street coop, by about 50% +/- ... re 63rd Street currently about
80% or more.

301E63 is no longer a land-lease. They bought the land recently, for some huge amount of money. Paying for it jacked the maintenance way up, which reduced the prices, so same difference short-term.

I would guess 301e63 may have some future 2nd ave subway issues to contend with as well.

dont buy the high maintance. you will have problem unloading in future

Ali G- When you say this:

"If you're spending $2mm, that can be done at a higher level of sophistication than guesstimating"

You sound like Meredith Whitney, when she says this:

“There are fifth-derivative dimensions that I don’t think I need to spell out to my clients”

i have no clue what she is talking about

low price/high maintenance apts are shit to sell--way more illiquid than standard stock
so are land leases

and i know your going to be there forever or whatever; but if you get serious cancer, cant work, have inadequate disability, etc; you will want to sell, fast--youll puke the place up if you ever need badly to sell

both come with much greater risk of stinky financial surprises--smart buyers know this and require big discounts to buy, and usually avoid them altogether--why buy a problem when there is plenty of normal stock to choose from?

"For example, you need to throw into this mix your assumption on what the lending environment will be like when you sell (which I imagine will be much sooner than 30 years from now). Will rates be high or low, and how will that impact competitive rents? Will credit be tight (making the land-lease possibly comparatively better, because of the lower down payment required to purchase it) or liberal?"

how could anyone possibly assume these things? west67th has taken the crystal ball.

thanks all for comments, very helpful. Like both Dwayne Pipe's approach and inonada's approach.

Using Dwayne Pipe's, it's actually right around $500K.

Using inonada's would be something like pay $2MM to buy with $3K maintenance (using average apartment, not this particular low-maintenance one) to avoid paying $11K in rent. So $1MM for $4K monthly payment avoidance, or $250K for every $1K avoided. Then extra $2500 in maintenance is around $625K off price.

wbottom - the answer to your question is that there really isn't plenty of normal stock to choose from. We have a lot of criteria but not an unlimited budget, so we have to compromise somewhere. Obviously a land-lease is not a negative, but if we like all/most of the other things about the apartment, sufficiently understand the risks, and get enough of a discount, we'll consider it.

and agree with aboutready that forecasting future conditions is pretty tough.

Have you really found that it takes $11K to rent $2M with $3K in maintenance? In this same market where you can find places like this: $15.5K to rent a $6-7M apt with $6K in monthlies?

http://streeteasy.com/nyc/rental/672298-condo-25-columbus-circle-lincoln-square-new-york

If you want to buy, go for it, but your numbers (and hence implied tradeoff on maintenance) seem way out of whack.

Ali G-

when you say:

"Will credit be tight (making the land-lease possibly comparatively better, because of the lower down payment required to purchase it) or liberal?"

How do you know that the land lease requires a lower down payment? Maybe the cost is lower, but you have no idea if the building requires 10% down or 50% down or all cash.

Honestly, I shouldn't be surprised by your comments at this stage in the game.

Or here is a place that hit one of my filters. I think you'd have an easy time getting this place for $11K; 4 floors below recently sold at $3.15M with $3K monthlies:

http://streeteasy.com/nyc/rental/719989-rental-220-riverside-blvd-lincoln-square-new-york
http://streeteasy.com/nyc/sale/505820-condo-220-riverside-boulevard-lincoln-square-new-york

Inonada's calculation is simply the Home Price to Rent ratio. Usually the Rent part does not exclude taxes/monthlies. And arguably, the cutoff point is 15x. I agree with Inonada that OP's example is way off - In OP's example, the ratio will be 15x [2M/(11K*12)]. With 15x, I would think even the perma bears here will jump on the deal.

I have another way to look at this: Using 500K/(2.5K*12), it's approximately equaled to the "break-even years", i.e. 16.7 years. You can argue that 2.5K will increase over time, so make it 3K. It still takes you 13.9 years to break even. Are you going to stay that long in the apartment?

Higher monthlies (given in non-landlease situations) might not be a bad thing since most people don't stay in the apartment over 10+ years. People might argue that the higher monthlies can impact negatively on resale value. However, I think they have to take the premium into account (in OP's case, 500K) before making such judgment.

The above is only a rough estimate. I think the better approach is using Dwayne_Pipe's approach.

As a side note: The above situation makes me think of paying 20%-30% more to own a condo vs a coop - In a 1M apartment, the premium will be 200K-300K. Is this premium worth the "rental right" and the "less invasive buying process"?

I don't like land leases either unless the price is so low that it makes sense. I want to own the land, not lease it. The land, especially in Manhattan, is worth much more than the construction. Manhattan apartments are supply constrained because there is limited land, not because people can't truck in bricks and wood and tiles from NJ. Most people who purchase land lease apartments might as well have kept renting - since they're basically "renting" by owning the land lease apartment. Also, a land lease apartment is not a great inflation hedge.

But again it depends on the price of the apartment and the terms of the land lease. Just compare the NPV of the two decisions, side by side. You need to now exactly how the land lease works. I am sure there are those who fully understood the points I've raised and still went ahead with the land lease since it might have made sense for them mathematically. But I will say that I know people who have purchased land lease apartments, paid the same per square foot price as a normal apartment, and did not understand the implications.

In terms of which discount rate - I would use the same discount rate for both analyses to keep it simple though one can argue differently. Like I said, you should NPV the cash flows of both scenarios side by side. The discount rate should reflect your own credit, it should reflect the risk of you not being able to make all payments. If you are a billionaire and have no chance at all of defaulting, use the risk free rate. So technically the discount rate is not your mortgage rate; it's independent of that. The mortgage rate is set by banks and it is a cost to you, but not necessarily reflective of your risk of default. If the banks knew how to price risks I think mortgage rates would be much higher!