Owners renting out and renting themselves

not suprising

That's spinning if I ever heard it - downsizing property owners can't sell, so they rent out the properties they can't afford to live in themselves. A townshouse rented to a group of nursing students. Now, that's not quite converting a mansion into an SRO, but ..... And the spin is that the owners are cashing in on the big profits to be made from their splendid, rare properties. This makes a better story than overextended people whose incomes have tanked.

Not necessarily true. Renting out your big apartment and renting yourself a smaller one generates a positive spread while maintaining upside associated with owning. You assume they'd prefer to sell, which is not necessarily true.

I know two people who are doing this.

I get your point, R, but look at this way for a minute: The article talks about the demand for distinctive luxury properties, the one-of-a-kind homes. But the example is given of the tenants being a (presumably numerous) group of nursing students. I'm trying to picture a group of, say, 5 or 6 nursing students dressed in their Sunday finery interviewing high-cost real estate brokers about that oh, so special, hard-to-find mansion they've been looking for. You know, it's not easy to find a distinctive turn-of-the-century renovated townhome with polished hardware floors, original molding, and restored original fireplace mantels, Ms. Broker, and we don't want to live just anywhere. After all, it's not easy finding a share we can split up for a net cost to each of us of around $1,000 a month, and it's impossible to find a $1,000 studio. We just looked over on the Upper East Side, but none of those limestone mansions just off Fifth Avenue are available for rent and we SO had our hearts set on a mansion. Chelsea has some nice brownstones, but .... oh, it's just not the same thing as this Upper Manhattan charming vintage .... yadda-dadda. That's what I meant by the spin. Students are a find, dependable source of potential rental tenants because students always need housing. They're not high on the list of wished-for.

444 W 162 for sale on the citihabitats website.

Lowery,, There's always the thought that they may go back to living there later on in life...

i know people who did this who aren't over-leveraged and CAN continue to pay their current mtge off..

..meaning it was a choice more so in response to the rising rental market as opposed to 'economic downturn.'

..one of them (single) actually purchased a smaller studio while collecting rents on his larger, though i wouldn't call him the norm.

R, yes, I see that, but there's also the possibility they needed to spend less per month on housing because of life changes and they couldn't sell it for a profit. The situation hol4 is referring to is a lot different - when the value of one's property is much higher than when one bought it, perhaps one owns it free and clear, etc. So...... all these people downsizing their living quarters and that has nothing to do with trying times? They're all just swimming in wealth that they've decided to cash in on? I don't think so.

So the owner of the Washington Heights house bought in 2003 and has been trying to sell at a loss, but apparently isn't willing to realize enough of a loss to actually free himself of the place. Instead, he chooses to rent at a 4% gross return on his purchase price. The article states that this "covers his mortgage" but clearly it offers no return on his investment.

So the headline should have been: "Owners decide to take losses slowly, drawing out the agony of bubble price decline." Or "Property fantasy entraps reluctant investors; unwilling to face their losses, homeowners take on unpaid RE management job to pay the bank." Or "More Bubble Misery: Even those who thought they were winners, lose."

Despite R's headline, though, owners aren't yet "renting themselves." It'd take quite a bit more deflation to bring us to the Three Penny Opera and Wiemar Republic.

At $6K a month it's more like a 5% gross yield, but that's with high wear-and-tear tenants. The place was bought for $1.4M, with a $1.2M mortgage (fixed at around 6.5%), so $6500 in interest. Add in around $1000 for taxes & insurance and $1000 for maintenance, it's costing $8500 a month so he's looking at a $2500 loss for every month he carries it. So $30K a year. When he was living in it, there was a $1500 tax benefit so only a $12K a year loss (assuming the generous 5-tenant $6K rent).

On the other side, he's facing $100K in transaction costs and probably $100K in a capital loss. Add in the negative carry, it's cost something like $320K more to have owned it than rented it for the past 8 years. About $3500 a month too much, for a 2003-2004 purchase.

A typical example of what I've been saying for years: the well-off will bleed their losses slowly. A few thousand a month in negative carry here... A bit of transaction costs there... A bit of a capital loss... A bit of renovation...

Yeah, that wasn't a really good illustration of the article's premise.

Maybe he can get a refi at a lower interest rate assuming the appraisal holds up (unlikely).

The other part of the spin is the implication that these owners have chosen to live in more modest accomodations, but they really could afford their more expensive homes if they wanted to. Oh, an ower is saving money to start a business, by living in a cheaper rental? S/he probably lost his/her job that supported the more expensive housing. People downsize because they have to.

nada: I think this explains those listings where people have been trying to sell for over a year with no takers, but refuse to budge on price. It's the slow bleed approach. They don't want to take the loss, but they have enough free cash that they can take a low negative cash flow for a long time.

but now they have to sell for much more to end up where they would have been had they sold when the property was their primary residence

nyc10023: The loan balance is probably down to $1.1M by now. Assuming the place is worth $1.3M, the added equity means there's still plenty of skin in the game. A no-brainer would be to do a $100K cash-in refi to knock your interest rate down by 2%, saving around $2K a month. So I gotta figure there is no $100K sitting around.

thoth: I think that's how the affluent prefer to take their losses: death by a thousand cuts that are rationalized away. Sucks if you feel the need to buy what they're selling, but better than having their losses backstopped by taxpayers.