I think NYC real estate will probably go up by inflation + 1%, for a 1% or so real unlevered return. Maybe a 0% real return for a while. I think rental income and NOI is unlikely to grow by more than 1% above inflation, and I think cap rates are not going lower from the low 3.5-4% of today. Had I bought in '99, when I first moved here, I would have captured not only the massive cap rate... [more]
I think NYC real estate will probably go up by inflation + 1%, for a 1% or so real unlevered return. Maybe a 0% real return for a while. I think rental income and NOI is unlikely to grow by more than 1% above inflation, and I think cap rates are not going lower from the low 3.5-4% of today.
Had I bought in '99, when I first moved here, I would have captured not only the massive cap rate compression, but also the huge NOI growth, largely fueled by a strong economy, Wall Street, and the fact that good Manhattan real estate is supply constrained. So I missed that boat, i.e. the smart trade boat.
I would be curious to hear people's views. I know some are bullish, and some are quite bearish. My sense is that NYC incomes are doing reasonably well - and like it or not, I think a lot of today's Wall Street salaries are actually sustainable. Or if not, I don't see huge corrections from here. I could be wrong. Bank balance sheets and leverage levels are much more reasonable, and the pre-provision earnings are healing some wounds. I don't see their ROEs being too great, but they have stabilized.
So when I do the math and think about things, I think Manhattan real estate is an ok buy. Without the low rates and mortgage deduction, I would not consider buying at a 3.5-4% cap rate. But given those things, my equity return on a 2% inflation case is decent, say 8% after tax relative to renting. So good, but nothing to write home about though. If inflation is higher, obviously I do better. If I am buying too high, then my math is off.
I know this sounds absurd and has all sorts of implications - and I certainly would need a mortgage to buy the place I want - but I have come around to seeing the wisdom of those who say to never use recourse leverage in your personal life. If you have a mortgage in NYC, and lose your job - that's very stressful. And in NYC the job market and housing market are quite correlated. It could lead to you having to sell your apartment, or at least rent it out where you bleed cash since in NYC rent < mortgage + common charges + property taxes.
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Response by opco
over 15 years ago
Posts: 15
Member since: Sep 2010
Incomes could go down, but I still see Manhattan wealth increasing. That is what I mean by "I don't see huge corrections from here." I do worry about the fiscal imbalances globally and the huge deficits and debts and off-balance sheet healthcare/pension liabilities we have. The S&P could certainly turn south. But I don't see Manhattan real estate taking a dive from here. Maybe worst case it ticks 10% lower, which over a long term hold is bearable. Not ideal if you are buying today, but bearable.
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Response by matsonjones
over 15 years ago
Posts: 1183
Member since: Feb 2007
where's w67th? and stevejhx?
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Response by rootless
over 15 years ago
Posts: 38
Member since: Aug 2010
@opco:
I think buying real estate in Manhattan based on the speculation of sufficient price appreciation over the next years comes with the high risk of making a loss, currently. With current general state of the economy, price-rent ratio or price-income ratio still highly elevated above historical normal in NYC, or compared, e.g. to 11 years ago, with likely rising mortgage rates over the coming years, which will put pressure on prices, such a price appreciation, while prices in the rest of the country have resumed to decline, is not as likely. Instead, I think a reverting back to pre-bubble values of the price-rent ratio and price-income ratio is more likely in NYC over the coming years.
It also depends on the time frame, which you are considering. Over what time frame did you get 8% return for buying over renting? Taking your numbers, 2% inflation, 3% annual rental price increase, 3% annual home price appreciation, and using a home price of $2,000,000, 20% down, 30-year fixed mortgage with 5.5% interest rate, $2000 monthly common charges, 0% renovation costs, $9200 monthly rent, 35% marginal tax rate, rate of return on investments 5%, you have to be in the home for more than 5 years to be better off with buying than with renting (e.g., using the NYT calculator, http://www.nytimes.com/interactive/business/buy-rent-calculator.html). If home prices appreciate only with the inflation rate, i.e, only 1% less than in your assumption, it already takes more than 10 years. If rental prices also increase only with inflation it takes longer than 14 years.
And it only gets worse with even lower home price appreciation. Let's take your assumed worst case scenario of a 10% price decline, let's say within 5 years. This is about an annual 2% decline. After 5 years, and if you sold then, you will have had almost $500,000 less cummulative cost for renting than for buying, or almost $100,000 a year.
However, is a 10% price decline really the worst case scenario? To revert back to pre-bubble values, price-rent ratio and price-income ratio would have to decline by about 30 to 50%. What nominal home price decline this implies depends on the time frame over which the adjustment takes place, since the denominator in both metrics can be expected to increase over time.
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Response by ieb
over 15 years ago
Posts: 355
Member since: Apr 2009
For a cash buyer I think the minimum period to hold and come out OK is at least +5 years. That is based on mansion tax, flip tax, broker commission, CC, and closing cost.
If your require a mortgage it may be >10 yrs.
These are not reasons not to buy, but you have to be realistic as to what is possible.
I think that if your're thinking long term you will do quite well. To me, this really feels like a bottom unless there's a major economic disruption.
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Response by AvUWS
over 15 years ago
Posts: 839
Member since: Mar 2008
I think that ultimately in this market it still makes sense to buy IF you want to own something, just don't rationalize the finances of the decision as the only way to do it is to ignore all margins of safety in your assumptions about the future.
So if you want to own, BUY.
Just don't rationalize that it is the financially smart thing to do. If someone told you that you could buy stock (on margin) that doesn't have much hope of beating the market, has a 10% transaction fee, an illiquid market, and is at the high of its historical valuation, you wouldn't do it. This would be the case even if you could take a tax deduction on any losses against your current income.
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Response by opco
over 15 years ago
Posts: 15
Member since: Sep 2010
Rootless, AvUWS, and ieb - thank you very much for your comments. Thoughtful comments and I appreciate it. Rootless, I agree it has to be a long term hold. In my #s, I was using a 10-year hold. The opex in the building is pretty low. My assumptions were: $850,000 purchase with 20% down at 5% conforming rate. Taxes of $230 or so but normalizing in 4 years due to abatement expiring. Maintenance $850 due to large building so they can spread out their fixed costs. 850 square foot apartment with rent of $3,695.
So my 10 year owner occupied return relative to renting is 7-8% assuming everything inflates by 2% (value of apt, rent, all expenses). The truth is, I will probably only live in it for a few years and then move out, but I want to permanently hold it as a rental property. As a rental property with the same assumptions I get a 5% 10-yr return. These are after-tax. As a rental property, I don't get the same tax savings so the returns are lower. And since I am not in the real estate business per se, I can't deduct the depreciation against my wage income.
Now if I assume a 5% after tax return on what would have been my down payment (which is fair since I can source bonds which would do this), then I basically get that it's barely better to buy.
Looks like it's ok but not amazing. And AvUSE - I have to really like it and want to live there, like you say. You are right, it's more than just the numbers I am putting to it.
This would be my first time purchasing if I do it.
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Response by csn
over 15 years ago
Posts: 450
Member since: Dec 2007
"And since I am not in the real estate business per se, I can't deduct the depreciation against my wage income"
When you decide to rent, put the property into an LLC. Then you can deduct everything including depreciation up to $25,000 a year.
"I think that ultimately in this market it still makes sense to buy IF you want to own something, just don't rationalize the finances of the decision as the only way to do it is to ignore all margins of safety in your assumptions about the future.
So if you want to own, BUY.
Just don't rationalize that it is the financially smart thing to do. If someone told you that you could buy stock (on margin) that doesn't have much hope of beating the market, has a 10% transaction fee, an illiquid market, and is at the high of its historical valuation, you wouldn't do it. This would be the case even if you could take a tax deduction on any losses against your current income."
Very well put AvUWS
Ultimately, yes, some people just want to buy. But way too many people don't get that that is CONSUMPTION, not investment. In needs to be assessed on the correct terms. If you really, really, really want it but the math doesn't work (and it hasn't in most scenarios for a while), calling it an "investment" to make yourself feel better isn't accurate. And, unfortunately, it also got a lot of folks into trouble.
Incomes could go down, but I still see Manhattan wealth increasing. That is what I mean by "I don't see huge corrections from here." I do worry about the fiscal imbalances globally and the huge deficits and debts and off-balance sheet healthcare/pension liabilities we have. The S&P could certainly turn south. But I don't see Manhattan real estate taking a dive from here. Maybe worst case it ticks 10% lower, which over a long term hold is bearable. Not ideal if you are buying today, but bearable.
where's w67th? and stevejhx?
@opco:
I think buying real estate in Manhattan based on the speculation of sufficient price appreciation over the next years comes with the high risk of making a loss, currently. With current general state of the economy, price-rent ratio or price-income ratio still highly elevated above historical normal in NYC, or compared, e.g. to 11 years ago, with likely rising mortgage rates over the coming years, which will put pressure on prices, such a price appreciation, while prices in the rest of the country have resumed to decline, is not as likely. Instead, I think a reverting back to pre-bubble values of the price-rent ratio and price-income ratio is more likely in NYC over the coming years.
It also depends on the time frame, which you are considering. Over what time frame did you get 8% return for buying over renting? Taking your numbers, 2% inflation, 3% annual rental price increase, 3% annual home price appreciation, and using a home price of $2,000,000, 20% down, 30-year fixed mortgage with 5.5% interest rate, $2000 monthly common charges, 0% renovation costs, $9200 monthly rent, 35% marginal tax rate, rate of return on investments 5%, you have to be in the home for more than 5 years to be better off with buying than with renting (e.g., using the NYT calculator, http://www.nytimes.com/interactive/business/buy-rent-calculator.html). If home prices appreciate only with the inflation rate, i.e, only 1% less than in your assumption, it already takes more than 10 years. If rental prices also increase only with inflation it takes longer than 14 years.
And it only gets worse with even lower home price appreciation. Let's take your assumed worst case scenario of a 10% price decline, let's say within 5 years. This is about an annual 2% decline. After 5 years, and if you sold then, you will have had almost $500,000 less cummulative cost for renting than for buying, or almost $100,000 a year.
However, is a 10% price decline really the worst case scenario? To revert back to pre-bubble values, price-rent ratio and price-income ratio would have to decline by about 30 to 50%. What nominal home price decline this implies depends on the time frame over which the adjustment takes place, since the denominator in both metrics can be expected to increase over time.
For a cash buyer I think the minimum period to hold and come out OK is at least +5 years. That is based on mansion tax, flip tax, broker commission, CC, and closing cost.
If your require a mortgage it may be >10 yrs.
These are not reasons not to buy, but you have to be realistic as to what is possible.
I think that if your're thinking long term you will do quite well. To me, this really feels like a bottom unless there's a major economic disruption.
I think that ultimately in this market it still makes sense to buy IF you want to own something, just don't rationalize the finances of the decision as the only way to do it is to ignore all margins of safety in your assumptions about the future.
So if you want to own, BUY.
Just don't rationalize that it is the financially smart thing to do. If someone told you that you could buy stock (on margin) that doesn't have much hope of beating the market, has a 10% transaction fee, an illiquid market, and is at the high of its historical valuation, you wouldn't do it. This would be the case even if you could take a tax deduction on any losses against your current income.
Rootless, AvUWS, and ieb - thank you very much for your comments. Thoughtful comments and I appreciate it. Rootless, I agree it has to be a long term hold. In my #s, I was using a 10-year hold. The opex in the building is pretty low. My assumptions were: $850,000 purchase with 20% down at 5% conforming rate. Taxes of $230 or so but normalizing in 4 years due to abatement expiring. Maintenance $850 due to large building so they can spread out their fixed costs. 850 square foot apartment with rent of $3,695.
So my 10 year owner occupied return relative to renting is 7-8% assuming everything inflates by 2% (value of apt, rent, all expenses). The truth is, I will probably only live in it for a few years and then move out, but I want to permanently hold it as a rental property. As a rental property with the same assumptions I get a 5% 10-yr return. These are after-tax. As a rental property, I don't get the same tax savings so the returns are lower. And since I am not in the real estate business per se, I can't deduct the depreciation against my wage income.
Now if I assume a 5% after tax return on what would have been my down payment (which is fair since I can source bonds which would do this), then I basically get that it's barely better to buy.
Looks like it's ok but not amazing. And AvUSE - I have to really like it and want to live there, like you say. You are right, it's more than just the numbers I am putting to it.
This would be my first time purchasing if I do it.
"And since I am not in the real estate business per se, I can't deduct the depreciation against my wage income"
When you decide to rent, put the property into an LLC. Then you can deduct everything including depreciation up to $25,000 a year.
Thanks, csn. I came across this link http://www.invest-2win.com/passive-loss-rules.html which seemed to summarize it, let me know if this checks out with your thoughts.
"I think that ultimately in this market it still makes sense to buy IF you want to own something, just don't rationalize the finances of the decision as the only way to do it is to ignore all margins of safety in your assumptions about the future.
So if you want to own, BUY.
Just don't rationalize that it is the financially smart thing to do. If someone told you that you could buy stock (on margin) that doesn't have much hope of beating the market, has a 10% transaction fee, an illiquid market, and is at the high of its historical valuation, you wouldn't do it. This would be the case even if you could take a tax deduction on any losses against your current income."
Very well put AvUWS
Ultimately, yes, some people just want to buy. But way too many people don't get that that is CONSUMPTION, not investment. In needs to be assessed on the correct terms. If you really, really, really want it but the math doesn't work (and it hasn't in most scenarios for a while), calling it an "investment" to make yourself feel better isn't accurate. And, unfortunately, it also got a lot of folks into trouble.