Upsizing your home in order to increase profits

They've got to have somebody to sell to. People who have made money in Manhattan real estate have either made long-term gentrification plays (people who bought on CPW a generation ago) or have benefitted by being part of a demographic that could pay ever-increasing prices for its housing (say, the two-income Gen Xers with one finance or Big Law income that have jacked up Tribeca prices due to love for the neighborhood, its school system, and its proximity to Wall Street jobs).

A $1.2 million house isn't play #1. If it's play #2, they'd better feel confident that there are buyers coming up behind them to whom they can unload in ten years.

Otherwise, it's worth limiting primary housing expenditures to 25% of income, and if they want more exposure to real estate, they should look at doing it through equity vehicles, or by investing in a second home market, where the demographics might be more favorable to play #2.

ali r.
DG Neary Realty

Financing anything in the jumbo category is an effort. I would think the opportunities are greater buying a 2nd home as a buy-to-let. The other benefit is the renter helps cover your cost-of-carry.

I thought 2nd homes are terrible investments, and anyone who actually turns a profit just got lucky. Isn't the conventional wisdom that vacation homes are luxury expenditures, and not "investments" ?

Oddly, everything they're looking at has been on the market for over a year, but that doesn't seem to deter them. (There is no market for these homes if they aren't selling) I guess the price should reflect market equilibrium.

Ali, does your "first offer is your best offer" rule also apply to suburban towns?

Front porch: is your ratio based on net or gross income? Your 25% ratio....

Look dealboy if you Are confident the market will go up then by all means lever up with A bigger mortgage and accept the larger risk profile.

I personally think real estate is dead money for a decade as the market absorbs shadow inventory and prices rationalize to reflect lower incomes and employment levels going forward.

I'd rather take the money and invest. But I am a banker so am much more comfortable in that arena. The obvious downside to your plan is being trapped in your home, with an under water mortgage essentially indefinitely. So if you go this route you should make sure you can handle this place for the linger term.

My $0.02

I thought 2nd homes are terrible investments,

Buy-to-let = investor property and not 2nd home.
The difference is a renter is helping to pay your carrying costs in whole or in part...hopefully you have a positive cost of carry.

dealboy
about 2 hours ago
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A friend is looking to sell their $700k house in a tier 1 suburban NYC town, and upgrade to a $1.2mm home. Taxes will increase from $25k to $35k.

What is worth talking about is that the primary motivation is to make money in a larger property. They made a nice profit on their first house before the bubble. They rolled it into a $800k house and did a lot of work on it. They will lose $200k on their current house #2.

Undeterred, they are now looking to get into a $1.2mm range house #3. The idea is to have "more house" in order to make more profits over time. More exposure. They might also be looking for a recession deal that will pay off over time.

Most of this forum are irrational perma-bears, but can anyone speak to this logic objectively?

this is about nyc, not "tier 1 suburbs" (what a fucking joke thing to say). go elsewhere

Dealboyz. Comez on!!!?!!!!? Explain to your 'boy-friendz' go big or go TGIFridays. $2mm, more leverage and less they can afford the better their returnzzzzzz.

Get two. Maybe three. Get their parents involved. Go lever up some 401ks. Sell some gold. Sell their jewelry. Don't take vacas. Take mass transit. But for the love of God/Allah. Go big in nyc RE! Buy buy buy.

w67thstreet, do you have anything more constructive on this person's logic?

Sounds like stupid logic -- the main thing will be the nearly-doubled amount of housing they are consuming every month, not the investment aspect. You have to be especially delusional to think capital gains will cover consumption.

But let me get this straight. They bought for $800K, hoping to sell for $700K after putting in $100K in improvements? And then another $60K to transaction costs, probably another $40K to negative carry compared to renting. So down $200K in their own minds, but probably more like $300K. People buying at the peak of the bubble thinking it is a good investment, as it sounds like these people did, have no ability to determine the soundness of an investment. But the idiots think they know something.

inonada, I will get the numbers, but you're about right.
Bought for $850k. Invested $150k. Selling for $800k.
As far as negative carry and transaction costs, hindsight is 20/20.
If the house was now worth $1.3m, they'd be brilliant, and those costs are moot.

You also can not simply count the negative carry vs renting without considering the whopper tax deductions they got in exchange. Then again, at their income level (~$500k), they are phased out anyway, right?

Also, it might be more expensive to rent than to own, like in most parts of the country.

Don't underestimate negative cost of carry. If you can't survive long enough to realize the benefit of your position then it's all for naught. Just ask Jon Corzine.

> the main thing will be the nearly-doubled amount of housing they are consuming every month

I don't think it's doubled.

House #2: $670k mortgage + $25k taxes = $5700/mo (Current)
House #3: $1m mortgage + $35k taxes = $8300/mo

I guess utilities and upkeep will increase.
I'm not sure if house #3 will be turnkey, but let's assume it will be.
You could also factor in the extra $70k equity tied up in the house.

dealboy, I have never sold in the suburbs (as an agent -- when I sold my beach house I hired an agent to do it) but I don't see any reason why not. The idea is that there's demand in any submarket, and some of that demand is "waiting" to see what hits the market next -- so even though people cycle in and out of the demand pool, it's generally not any bigger than when you come to market, and since those buyers have been "waiting" they are pretty savvy about pricing.

The exception I guess would be a surburban market that's very seasonal -- say a big law firm in Armonk brings in a new crop of hires every year, and those people are selling houses somewhere else and are predisposed to buy houses. Then I would presume "best offer" would come from that wave of potential buyers, whenever they show up ... presumably spring/summer for fall job starts.

ali r.
DG Neary Realty

dealboy, if this family needs more house and has additional income/assets to justify it, will make sense as all they are doing is the equivalent of putting in more money into an asset when they think it is attractive. If their income has remained similar, why would they increase the monthly expense? Also, upgrading has significant transaction cost.

dealboy, on "almost double", I was comparing $1.2M against $700K (what I thought you had said in your original post). But if it's $1.2M against $800K, then you're right -- "50% more" is appropriate.

"You could also factor in the extra $70k equity tied up in the house."

I'd also consider that part of the "50% more" as it'd be 50% more equity tied up in the house.

> probably another $40K to negative carry compared to renting.

Cost = $850k. $25k taxes.
Equivalent rental = $3400.

Back of napkin, how bad was the negative carry vs. renting? (For 7 years)

Renting = $3400 /mo
Owning = $5700/mo (Just mortgage + tax)
$2300/mo * 12 * 7 years = $193.

Almost another $200k net carry loss based on rental equiv.

(Renting was half ?!! Holy shit that is a textbook blunder.
Buy vs. rent calculator, people!! Real estate 101)

dealboy: "inonada, I will get the numbers, but you're about right.
Bought for $850k. Invested $150k. Selling for $800k.
As far as negative carry and transaction costs, hindsight is 20/20.
If the house was now worth $1.3m, they'd be brilliant, and those costs are moot."

Putting aside negative carry, they're out somewhere in the neighborhood of $275K between lost equity and transaction costs.

On the $670K loan, I'm guessing they were carrying it with an interest rate that averaged 5-6% over the duration of ownership (assuming they refi'ed post-2008, which they may or may not have had the equity to do). That's $37K a year in interest before tax benefit, with around $12K in tax benefit for someone making $500K, so $25K a year in interest. On the $25K in property taxes, their income is squarely within AMT, so no benefits on that.

So their cost was $50K a year, with $330K of equity sunk into it. Was this place worth $4K a month in rent? If price/rent was anything like NYC during that period, $4K a month is just about right. So assuming the cost of capital on that $330K was 0, you could argue that they didn't have any negative carry.

But they did end up losing 83% of the $330K investment.

It's interesting to note what would have happened if the fantasy of a $1.3M sales price (62.5% above current prices) did happen. In that case, they'd have had another $50K in transaction costs, so their profit would have been ($1300K - $800K) - ($275K + $50K) = $175K. That's a 53% gain on a $330K investment. Assuming it were held for 5 years, since 2007, that'd work out to 8% annual gains.

Think about it. A fantasy sales price 62.5% above current market, representing 5.25% annual capital appreciation (16% above inflation over 5 years) from a point when everybody was saying "bubble". An illiquid levered investment. But only 8% annual returns to show for it? I'm sorry, but 8% annual returns isn't "brilliant".

So was this a 2005 purchase then, dealboy?

Wait, in the fantasy, where did you get the $275k from again?
$500k cap gain, I see.
-$50k realtor, I see.

This negative 40k to renting, where are these theoretical rentals in this suburb?

But this idea sounds nuts dealboy .

"Wait, in the fantasy, where did you get the $275k from again?"

Sorry, I was being confusing. I was starting from an $800K sales price with a $275K loss as baseline.

Alternatively, it was $1300K sales price, minus $125K transaction costs, minus $850K purchase price, minus $150K renovations, leaving a $175K profit on the $330K of capital put up.

Dealboy. Bend over and gap up azzhole. Nothin in the universe says friends have to be financially savvy. In fact most of my 'friends' are financially illiterate. Like the couple that moved to shanghai. They are doing the slow negative carry on their trump unit as we txt. 2006 purchase. They looked into my eyes and begged the deflating was over.

I bought their daughters ice cream at the shanghai sculpture garden for $20 as 10 Chinese kids looked on in amazement (I guess 120 yuans for 2cones are expensive) and said 'it's a nice place to come back to nyc to!'. And proceeded to catch tadpoles in the water with my kids.

Funny, when the shanghai re bubble pops, they will be out of a job and sitting on $800k in losses over the 07 to 15' period in nyc. But maybe the yuan will strengthen and they'll time it right... Nah. They look like they will get divorced, the kids will end up in limbo and maybe they will learn to do a proper rate of return on their 'shanghaied' trip.

And the $125k trans. costs being realtor 6% of $800k and 6% of 1.3mm = $50k + $75k = $125k.
Funny how a $850k to $1.3mm profit only leaves $175k when you plow money into excessive renovations.
These renovations were known money losers, up front. ($50k bathrooms, etc)

They spent $150k in 'known' money losers on a leveraged asset they want to make more re bubble profits on after it's already popped and we are the 'irrational perma bears'. Flmaozz.

Omfg. Gap up azzhole.

Step aside buy the leveraged asset, or as it were - become prepaid renting perma bull.

> They spent $150k in 'known' money losers

What does this mean?

Try this to translate:

http://translate.google.com/#ape|en|

(Jumping into this late.)

Why is someone who buys a house for appreciation (IOW, looking to make money on it) also making upfront money losing renovations?

Seems to me they are using the appreciation/profit story as a justification to buy a bigger house because, well, they want a bigger house. And in that house, as in their last house, they want $50k bathrooms, or perhaps $75k bathrooms this time.

By why the need to rationalize their consumption?

They're not. I think they really think it's a money winning proposition. They don't need to justify anything to me. If they just wanted more house, they'd simply say it.

The $125K transaction costs on $1.3M are 5-6% for broker, 0.4% for state, ~0.4% for title insurance, 1.3% mortgage recording tax (say for Westchester), 1% mansion tax, 1% local transfer tax (depending on where exactly), points, etc. So close to 10% of purchase price.

BTW, we forgot insurance & maintenance. Those'll kick up the carry by a few thousand a year too.

All this analysis is well and good, but irrelevant. They're buying on bubble mentality. It worked the first time (so they say), which made them "smart." It definitely didn't work the second time, but they were just "unlucky." Third time?

Well said, Eric. It actually worked for the first 2 properties (I omitted the fact they used condo #1 profits to finance house #1). So, they are 2 for 3, or almost 70%, despite being at a net negative.

Any other general reactions to this plan? Another note is that the $1.2mm+ suburban home bracket is a different animal than what they've previously dealt with. Once you get past $800k, you're now dealing with a smaller segment of the population on a power curve. I wonder if this gets exponentially smaller. Many working class dual incomes can afford $800k and $25k taxes. But, I bet a lot fewer can afford $1.2mm and $35k. It's a jump that's harder to fake.

On the other hand, you can make an easy $500,000 a lot easier in the 7-figure luxury market than you ever could in the $500k entry level market where a house would have to double in price. In contrast, adding a $200k pool and a $100k kitchen could add $800k to your house price. At those levels, it's all funny money anyway.

Dealboy, if they are so bullish, why don't they buy the house that they need to live in, and then put the extra money into a REIT - this way they get the appreciation potential on the house, the appreciation potential on the REIT, but their carrying costs are in line with what they can afford, and the REIT will provide current income that would otherwise be eaten up by living in a too-big place. Also that too big place has a higher risk on sale because of the limited market, and has higher transaction costs than the trading and liquidity costs of a public REIT.

Ok. The bigger the risk the higher the return. Next retarded question.

But neither dealboy nor his friends see any downside. After all, they're two-for-three! Okay, they've lost everything, but I guess the two-for-three sort of kind of makes up for it.

They can easily afford the cashflow of the bigger house, or they wouldn't do it.
Are their many REITs that invest strictly in residential houses?
Otherwise, they have zero interest in being shareholders of some strip mall in NJ.

>Are their many REITs that invest strictly in residential houses?
Otherwise, they have zero interest in being shareholders of some strip mall in NJ.

You seem to know "their" preferences very specifically.

"So, they are 2 for 3, or almost 70%, despite being at a net negative."

Classic. You know, if they just don't sell and hang on to the place they will remain 2 for 2.

Kidding aside, in what year were each of their purchases & for roughly how much? (I guess we know the 3rd one was for $1M after renovations.)

Condo #1 late 90s - 2002. (Profit = $40k)
Guessing $200s

House #1 2002 - 2005 (Profit $140k)
$400s

House #2 2005 - 2012 (Loss of $50k, not including capital upgrade costs/realtor)
$800s

Thanks. Are those profits net of transaction costs, or just the difference between nominal sales prices? Also, were they done at 20% down the whole way (except upgrades on the last one)?

Ino,

I do not know if they are just nominal price differences, or net profits (counting cost of upgrades, realtor, closing costs, etc) The fact that they cited $200k as the loss for house #2 without netting for $50k realtor (putting it to $250k), leads to to believe it's the former.

I assume 20% down each time. They do well, and are savvy enough to avoid ghetto PMI.

So it sounds like nominally, they're down $20K overall ($40K + $140K - $200K), but actually $120K once you include the $100K in broker fees ($15K + $35K + $50K), and more like $180K once you include the other 3-4% of transaction costs on the $1.6M they have in aggregate sold.

Not very good given that they were handed a freebie in terms of the bubble, but it sounds like they never figured out that it has been a bubble.

And even more if you count the negative carry if renting was really $3400/mo for something equivalent. If that's really the case, buying was a very bad move.

What's interesting is that they are undeterred and scaling up regardless. Buying their way to the next step, vs. trading their way into it. It is easy to dismiss #3 as "bad luck.". There are a host of things you could blame it on, etc.

Also, we are assuming they get asking of $800k. Not sure how strong that market's been.

Friend says everything they're looking at in the $1.2mm range has been listed for over a year. If that's not a bad sign, what is? Personally, I'd be low balling the $1.7mm homes for $1.2mm.

Ino, thanks for taking an interest in this analysis.
Can you email me offline at gmail? "dealboydealboy"

If you look at the numbers, they made out like bandits on #2. Making $150k on a $350k property is intoxicating. The natural thinking is to scale up to twice the house, for more profits. However, #3 backfired.

"When the tide goes out, we see who's naked".
"All boats rise with the tide."

>And even more if you count the negative carry if renting was really $3400/mo for something equivalent.

Which suburb has this $3400 rental? It's one thing to be talking about rentals of quality in NYC, but in the suburbs?

Sometimes you just gotta scream 'shark'.

Some boats sinks because they have a thru hole that's improperly installed.

Some babies drown in a foot of water.

Most recently, underwater prepaid renter killed 8 afghanies cause his credit score went to shit.

Email sent from _se@yahoo.com, dealboy.

Is it safe to say that once you get into the $1mm home market, the odds of actually taking a loss increase? (Yes, next to impossible in real estate, over a longer time period)

Higher carrying cost.
And a much narrower segment of buyers.
(LOTS of people can afford $700-900k homes, but a lot less can do $1.2m)

Power curve...?

Wait, there are "tiers" ranking suburbs?

When did this happen?

Where can one find the guide?

Basically what the question is can one make more money in real estate by increasing one's exposure and/or leverage.
Question could have been can I make more money in the stock market if I increase my investment and/or borrow to do that.