Cap rates on coops ~5%

Rhino, I think you are misusing the term cap rate as it is typically use by RE investors. It typically means the rent-to-price ratio minus monthlies, with an allowance for vacancies. I think rent-to-price on a typical condo is around 4.5%. Monthlies drop it to around 2.5%, and a vacancy allowance drops it to 2%. That's what an investor would quote it at.

On specific instances, I've seen rent-to-price as low as 3% (cap rate 1%) and as high as 6% (cap rate 3-4%).

Just because you cant rent out a coop doesnt mean it isnt a perfectly good frame of reference. FYI there is no vacancy allowance in cap rate. You are actually misusing price to rent and cap rate.

I see coop cap rates on comps to my rental at 4.5%-5.0% right now. There is not a vacancy allowance. Vacancy is understood.

Any thoughts on current cap rates on multi-fam townhouses?

Rhino, not only does cap rate include a vacancy allowance, as inonada indicated, but it also recognizes that structures are deteriorating objects heading towards obsolescence, and as such includes guesstimates for capital replacement costs of all sorts.

Here's a great worksheet: http://visulate.com/investment ... note which items are to be entered as monthly amounts, and which as annual.

Ok for simplicity and to avoid the work to figure out who is right here... I am just taking market rent minus maintenance times twelve over the purchase price. To introduce vacancy then begs the question of what vacancy rate from hood to hood.
As such, the recent rise in rents and what I see as a flattening of prices has boosted the cap rate of a comp to my rental to about 4.6% from prior levels around 3.5%. Most of the change is my rental probably rose from $5200 market to around $6000 market.

Further, I am ignoring depreciation of fixtures.

Cap rate is 3% for coops assuming no depreciation. 2000 sq ft AVERAGE coop will rent for $9K and will cost $2.2mm. Maintenance $2500 per month. $6500 per month benefit. For HIGH END coop price and maintenance will be higher but higher rent equivalent will offset that. If you want to live in the coop, you do not have to worry about vacancy. In my opinion, very good return if you want to live there as 3% is post tax return and you are buying a good deal of protection against inflation (not full protection as the maintenance will go up). An added benefit is that you can leverage this investment without any margin call (just have to buy what you can easily afford or would have paid in rent anyway for no margin call assumption).

3% post tax return is good?

With inflation protection thrown in 3% is fantastic. Also, capital gains are free for the first $500K. This is without leverage. You borrow 70% from the bank, you can increase it as your after-tax cost 2% on the loan. Govt is giving away free money. Why not take it? 5/1 rates are just over 3.25% or below for jumbos.

Most important part is only to buy what you can comfortably afford and keep enough liquidity for at 2 years worth of normal living and housing expenses - which most of us should keep any way if working for more than 10 years.

Also, you have to believe that real estate prices at this point of time have limited downside in Manhattan. I believe that they can go down 5-10% and up 5-20% with equal probability in the next 2 years.

Additional benefit vs stocks is that there is less stomoch churning with flash crash and SPX at 666 as long as you monthlies are similar to what you would have paid in rent any way.

Using the term "cap rate" the way Rhino is using it, cap rate on chez moi (minus monthlies + 10% allowance) is 5%. Not compelling, considering I bought into the market 10+ years ago at 8% (also minus monthlies).

3% after tax plus inflation protection is only fantastic until you realize its a a multi decade low for the asset class....sort of what nyc10023 is saying.

Cap rates are a good valuation tool, but just as in the stock market price and value are two very different concepts. That coops for all practical purposes do not permit their use as an investment property severely limits the application of this metric.

Most public companies dont pay out 100% of their FCF yet DCF models are considered among the best valuation methods for equities. Your point is moot. Cap rate adjusts for the wide range of maintenances in the market and as such its a much better frame of reference than simple price to rent. If you accept the premise that purchase value relates to rent and the price of money, then cap rate allows comparison to mortgage rates. You need some way to measure how much you are paying for aforementioned "inflation protection" relative to prior points in history.

Also cap rates as I describe with the 0% vacancy assumption allow me to compare being a cash owner to being a renter and my after tax cash returns in other investments. Right now, I'd rather be in a combination of stocks and cash than have a big chunk of my new worth in coop equity. 1 / (S&P P/E) is much higher than 3% and that provides the same "inflation protection".

If we were measuring inflation the way we did back in the Carter years(pre-Boskin) would you be happy with a negative return over inflation? By the way, John Hussman who is one of the more analytical and thougtful fund managers says the stock market is priced to deliver no more than 4% annually over the next ten years which is not very good considering equities should be priced with some risk premium.

I read Hussman. I guarantee if you applied a similar method to real estate it would imply lower than 4% returns. Any return to trend in real estate which is basically what Hussman does with corporate returns, margins and multiples is down from here before up.

The argument that coops in the financial capital of the world at 2.5x 2000 value are a good value is a silly one, especially given that maintenance costs are up roughly 50% since 2000 and rents are basically flat in absolute terms. You are making the stock market bull case at S&P 1350 on the way down from the 2000 peak.

What no comeback? Lets face it, if you are trying to make a bear case vs. stocks on valuation you are setting yourself up to be double slammed on real estate valuation. A 3.5% cap rate is about as attractive as the S&P trading at 30x EPS. The stock market would need to essentially double before Manhattan real estate at current prices to be equivalent. And thats conservative. Cap rate of 3% is priced to deliver negative real returns.

1. Streeeasy Condo index is up 80% in nominal terms since the beginning of 2000. Adjusted for inflation at 3% per year (conservative estimate as the commodity inflation is far higher), it is up 45% not 2.5 times * 2000 value.
2. Cap rates are closely related to treasury bonds rates. In 2000, 10 year treasury rates were much higher at 6% vs today's 3% resulting in higher financing cost and of higher expected minimum return for all investment.
3. Rents are certainly up relative to 2000 by 15% for contracts signed now. Hence if the current cap rates are 3% (same as 10year treasury), with prices 80% higher, you only get 4.7% or so cap rate in 2000 (below 10 year rate of 5.5-6%). As an example 2000 sq ft AVERAGE coop would have rented for $7.5K and cost $1.4mm. Maintenance $2000 per month. $5500 per month benefit.
4. Rent in 2000 were at the peak and came down but in the next two years they are only likely to go up. Current cap rates calculation assume flat rent.

I realize that the analysis is appx but you get the point that you can not look at cap rates without considering bond rates and direction of rents.

Hence I like the cap rates of 3% as long as we are going to live in it and get tax deduction which is not factored in cap rates. Purely from an investment point of view, there are better places in US to invest but you do not get inflation protection on your rent and tax deduction.

Rhino, What happened to your reply?

Rhino got into a bar fight

Best thread in a long time

Nice job...learned something

What reply? I just dont find 3% attractive unless you have impossible certainty that your apartment will suit you for 20 years. At least if I buy a house, I can know it can suit forever (at least size wise) and I know that I am unlikely to find comparable quality in the suburban rental market. Neither of those things hold true in Manhattan.

You can tell me 3% is attractive but I would rather pay my rent with income from much lower risk investments...and I'd argue most investments are lower risk than real estate. Life changes take time. I havent made good money for over three years and I am still in Manhattan because I can afford to be on our savings. But in time we and others will high tail it out of Manhattan and what then? Even Printer has put his tail between legs and admitted that he is selling at a loss and that before transaction costs.

I would not find the 3% attractive either if last three years were not ok (not saying good). But I think the last three years as the worst time. Things will only better if you have continued to work in your chosen profession. (people who did not have jobs for the last couple of years, it will be more difficult and I feel sorry for them as they are many good and capable people in that situation).

I have not worked continuously. Same time, I had very good years as well. ... I just don't like real estate here in the epicenter of finance at a time when the government is propping real estate prices. Maybe the prices simply sit flat for 10 years who knows.... And maybe another year or two of rising rents and locking in a payment at those prices represents a better cap rate. I'd wait for that...if I were set on living in the city to begin with,.

Rhino, just buy in the suburbs. Find one you like , even a smaller house in upscale Conn burb , then expand house. So much easier than expanding NY apartment

Friends bougt in Short Hills , immediately added large family room, a few years later enlarged kitchen and dining room. Very hard to do in Manhattan , especially when you seem locked into a very tiny neighborhood in Manhattan. Okay, that's where the in-laws are, but is that where you must be?.

I have not pushed a neighborhood move because if we stay here...why not be here near the inlaws, the park, and in PS 6. Plus pushing a hood move is dilutive to my push to move out. We'll probably stay here for one more year. I have the option on the lease and I've already paid for nursery school. I appreciate the value of time...so until we have a second kid, we can live fine in this space. Its the 3 bed that I dont want to spend the money on down here....especially since I have developed a sense of what a house that is the same cost as a Manhattan 3 bed looks like.

300_mercer, your arguments have me shaking my head...

What were cap rates in new York city (residential) in 2002/2003?

Rents fell in 2002 and 2003, prices were rising but still had a few years of rising to go. I dont know that answer but I would be willing to bet blind that they were higher than they are currently.

Ok I dug up a Massey Knakal report from 2007 which showed Manhattan cap rates going back to the second half of 2002. Rates back then were (median or average) 6.5%. They fell to as low as 2.8% in 2006 but the data stopped in 2007. Would be curious to see if anyone has a recently updated comparable data set for 2010.

http://www.millercicero.com/research/mk1h07.pdf

I dont see why an equity holder would every accept a cap rate lower than a prevailing mortgage rate. Appreciation is simply compensation for added risk. What is a mortgage rate these days?

"What were cap rates in new York city (residential) in 2002/2003?"

Let's use a $800K condo renting for $3000 for illustration, $1200 monthlies. Rhino cap rate is 2.7%.

Using Miller Samuel average rents, rents currently are about 10% higher than back then. Call it $2700. Maintenance up slightly more than CPI due to higher portion being energy costs, call it $900 (CPI would place it at $960). According to the SE index, prices up around 50-60%, so call it $525K. Rhino cap rate would have worked out to 4.1%.

Go back to 2000 when people were making silly arguments about equities that had me shaking my head.... Rent was at $3000, monthlies were $850, price was $436K. Rhino cap rate of 5.9%.

Go back to 1996, rent was $2300. Monthlies at $775. Price at $290K. Rhino cap rate of 6.3%.

maklo - we bought mid-2003. Hard to know precisely what comparable rent was, but on an assumption that I think is reasonable to conservative our rhino cap rate was about 6.25%. At the high end of what rent might have been, low 7s.

>(RHino)
I dont see why an equity holder would every accept a cap rate lower than a prevailing mortgage rate

Bingo, why Ive never bought a straight investment property in manhattan.

(Nada)
>Go back to 2000...Rhino cap rate of 5.9%.
>Go back to 1996..Rhino cap rate of 6.3%

I was near 10% outside manhattan in and out of state.
Now granted the differences were higher risk in tenants and vacancies in both '96 and '00.
For some, they prefer the stability manahattan offers (or offered) with a near zero vacancy rate.

But today, the risk is equally bad everywhere.

That being said, I did buy a coop a couple months ago and that cap rate comes in around 4%.

But investment is only a small part of the equation,a home is the bigger part for me on this instance.
Im fortunate enough to look for high(er) investment returns with other capital I have.
I can also should the market go way south(500 p sq ft) sell my current unit at the loss and buy bigger at 500 p sq ft.
So for argument's sake sell my 1 million dollar apartment for 700K, but buy a $2m apartment for $$1.4m.

I recognize most dont have this type of opportunity and if I were month to month on my assets and job, I'd would only be renting.

What some people do with 90% of their asset load blows my mind.

This I'd buy bigger on a dip BS rationalization is my cue to check out. Peace!

Really Rhino, you've never hedged anything?

I clearly don't endorse it for most people, only those who could afford it.
Please read my posts more carefully.

Sure I've hedged...but paying too much for a small apartment because if prices drop you'll buy a bigger one isnt a hedge. It's an unconvincing line of bullshit.

Err no, I was looking for something bigger than I needed, didnt like that the 50% drop never came so I bought what I could live in now instead.... and if I have to, for 5 years.
Unless by some miracle Im married with 2 kids in less than that time.

I still think I paid a little too much(a bit over $800 per sq ft) but not a lot too much and don't see the market tanking to $500 per sq ft, sorry.
It would also be a bit disingenuous for me to preach that nobody should buy after I just bought.

See ultimately, I agree with you most of the time, heck Im still a bear, HOWEVER, I no longer see a home purchase STRICTLY as investment.
That's what ultimately led me to get off my ass and buy.

Aren't you tired of the stories you dad told you how much he could have bought this for or that for... back during such and such.

Really what's my downside? down to $700 per sq ft? maybe $650 per sq ft foot?
For a $500 per sq ft average that would mean units selling at $300/$400 per sq ft.
Sorry that's an unconvincing line of bullshit to me.

I am in the camp of not viewing their home as an investment but as a primarily consumption-oriented activity. Thruthskr, you say you believe this too, but the "I can buy on a dip" runs counter to this thinking - it is very much looking at it as an investment. If you had really felt like you could have gotten something bigger by not buying, then you really should have just rented. (Note: I have purchased in the last two years after renting for a long time)

Hmmm maybe there is a problem with the way I am expressing myself.

I thought my following statements;

>Bingo, why Ive never bought a straight investment property in manhattan.
>But investment is only a small part of the equation,a home is the bigger part for me on this instance.
>I no longer see a home purchase STRICTLY as investment

..demonstrated it is BOTH for me. But didn't eliminate one feeling or the other totally.
My "I can buy on a dip" is not counter to my thinking as I am not of a "it's all black" or "it's all white" mentality that this forum likes to draw lines on.

This market has hovered in the $1000 per sq ft neighborhood for 2 years now.
To rent like kind of what I bought or happy to live in would be around a $7500 per month apartment. That's $150K I would have spent while living in limbo wondering what I wanted to do, where I wanted to live,etc.
I believe this limbo will stay another 2 years. Should I spend 150K the next 2 years to pay the same price for something today?

It's true I FELT I could have gotten something bigger but that confidence has changed, thus I bought. Doesn't mean I went from 100% to zero percent believing.
More like a 70/30 30/70 swap.

See all the (serious) points and arguments W67 has raised over 3 years and financeguy among others are so dead on. Logically the market supports $500 per sq ft average. But there is no way to predict what interference stops that.
See Citibank along with a few others should be bankrupt. But they are not. Why? Interference(govt)...rule changes, etc.
I bought Citibank at $1.10. As soon as I realized the government wasnt going to let them go under. No brainer. And dumped it at $3. Why? Becuase it's piece of garbage worth .50 cents and I made my hay move on.

I am very confident NYC will not an average price per sq ft condos/coops at $500 per sq ft. Too many variables and interference.

But make no mistake, on the small chance it does I will absolutely sell and buy on the dip. Because no matter how much I may like my home, the investor in me will jump out.

I should also point Nada's points particularly his rents vs own are excellent.

Here's what's changed for me;
I am older, the uncertainty as each lease year ends, having to search for apartments "just in case" I have to move, "just in case" the landlord gets unreasonable, "just in case" the market is at a disadvantageous moment got tired for me.
I knew no matter how much I said I could rent a like kind to what I would buy, I know in my heart of hearts I would never shell out $75K/100K plus a year on rent, thus leaving me in "lesser" apartments than I wanted.

I know my comments probably displease both camps and this board thrives on polarization.

What can i say.....

Truthskr, I agree with you that this forum is very polarized, black & white. I am of the same mindset that there are many shades of gray between renting and buying. And to your point, you are at a certain life stage where you value not having to move, perhaps more than others. Everybody has a personal perspective on value and can have drastically different implications on assumptions that go into a pure rent vs. buy model.

truthskr, great, candid post. Believe me, it's refreshing to have posters who don't actively try to be polarizing at all times.

I still think I paid a little too much(a bit over $800 per sq ft) but not a lot too much and don't see the market tanking to $500 per sq ft, sorry.

Why are you apologizing to me? Prices dont need to fall to make cap rates decent. Rents could rise.

Owners need to find another source of self esteem. I dont need to forget math and redo my kitchen to feel good about myself. I'd rather see rents rise 20%, rates rise, and prices stay flat. At least then I would be locking in a somewhat attractive monthly cost. Today its just a joke.

BJW
Thanks hon,though you know I'll keep flaming borkers and those who pitch "investment' condos in manahattan. :)

Rhino
Fair enough, your right. And I feel for you bro, you've been looking as long as me.
Sit down with the wifey and make a list, what's important, what's not, assign values,pros,cons,total it up.May sound silly but sometimes things are different when you look at it written.

I promise a 3% plus/minus cap rate difference will(or should) end up last on the priorities.

truthskr, fair enough, though I think those two groups have enough to worry about that flaming them is kind of like running up the score, IMHO. But flame on! Where did you end up buying, if I may ask?

bjw
if you have an email address to give me, I'll trust you with details if you like

I dont want to put too much info on a forum that keeps information longer than plutonium's half life.

Really I should concern myself with paying at a 3% cap rate when that means 2z overpayment? Anyway, cap rates I see for my apt are more like 4.6%. If rents rise a bit the price might be okay. The frictional costs as you say have more value in a tight rental market like the late 1990s which this aint.

Funny you bring up the late 90s. One of the factors that helped me decide.
In '99 I was at the Printing House in west village paying $4500/month. It was 1400 sq ft, a 2 bed and office/2 bath duplex.
Last year saw an identical unit/ identical floor dip to $4900 before renting.
In '99 I think it was selling for $1.2m. In Decemeber a similar unit but a substancially higher floor in the building unit sold for $1.5m
Plusing and minusing for tax deductions vs increased equity but dont forget repairs, blah blah blah....damn near the same, I let my desire for stability take over.

truskr, just tack on @columbia.edu to my name. But totally understand if you don't want to share - there are those among us with less than honorable intentions, to say the least.

"In '99 I think it was selling for $1.2m. In Decemeber a similar unit but a substancially higher floor in the building unit sold for $1.5m."

That is very bizarre: the SE index is up 2x during that time. I think things more than 10% off the SE index are pretty rare as far as I've seen. What you're quoting is off the charts. So I looked up unit 603, which sold for $1.5M at the end of 2010. Sold for $1.625M at the end of 2005. Sold for some amount I'm too lazy to backtrack from ACRIS but had a mortgage for $690K, so call it $860K. More or less tracks. What $1.2M unit are you talking about? If it only moved $1.2M to $1.5M, it'd have been a very horrible underperformance to the market.

FWIW, the rents you quote line up with Miller Samuel rent data well.

I second that. truthskr10 your math is way off. $4500 rentals sold for ~$600k in 1999. There was no such thing as a $1.2mm 2 bed back then.

Sorry, I realize the way I wrote it, it sounds like I meant the exact same unit, I meant a similar 2 bed plus office 2 bath.
Source of '99 rent I can verify, I have an original copy as I was the renter.
What a unit of exact same size sold for that year I cannot.
My source for that number isnt the greatest either, it was a neighbor who worked for Halstead that told me a same size unit in the building was available for sale and ASKING $1.2. I'd have to believe it went for at least $1m.

Rhino
Whatever reasons you want to tell yourself for not buying anything is fine. Im not trying to serve you any lemmingade.

It's pretty easy to verify if you know the unit numbers, truthskr10. Just look up SE or ACRIS. Nothing in the vicinity of those numbers from my quick glance, but do tell us what you see. Or give us the unit numbers.

One thing seems certain, though. Brokers shilled just as hard in 1999 as they do today.

Ok I gave up after 10 or so lookups

unit 204/1279 sq ft/sale 1995
unit 209/1210 sq ft/sponsor owned
unit 212/1315 sq ft/ sponsor
unit 217/1279 sq ft/ sale 1995 (unit I rented)
unit 220/1290 sq ft/ sales 96/10
unit 306/1279 sq ft/ sales 93/04/07
unit 309/1280 sq ft/ sponsor
unit 312/1315 sq ft/ sponsor
unit 317/1279 sq ft/ sponsor
unit 320/1290 sq ft/ sponsor
unit 409/1280 sq ft/ sales 94/98 (no amount listed)/03/06/08
unit 412/1315 sq ft/ sponsor
unit 417/1279 sq ft/ sponsor
unit 420/1290 sq ft/ sponsor

And Im pretty sure it was a 300 series unit. Note also there aren't many identical units. Sq footage is from the condo declaration.

Unit 603 BTW is only 1140 square feet.

And so quite possibly was a unit floated out by sponsor that was for sale/not for sale, if I get my ridiculous price for sale,etc.

>One thing seems certain, though. Brokers shilled just as hard in 1999 as they do today.

And it was worse then because you couldnt verify anything with SE, Acris, or just plain "online."

But I do remember those years very well, particularly 97/98 receiving setups for 4 story buildings throughout manhattan. Every asking price was around 16 to 18 times rent roll. To me that couldnt compete with out of manhattan (yes crappier tenants) 12 time rent rolls.
Cap rates were hardly if ever in discussions or in real estate language then. Exotic financing started making 18 times rent roll acceptable. I used to cringe(and now more so) when I hear people taking 5/1 ARMS. But I am also one of those uncomfortable with personal debt.
In the end, I always end up at bank deregulation in the 90s as the firestarter.

BJW- did you get my email from last friday?

truthskr, I did, thanks - will respond when I get a moment!