Best Approach to Investment Property?

NYC is a terrible market, and this a terrible time, for buying investment property.

>Alan - totally agree. My husband wants to diversify assets - and I keep telling him that NY real estate is just not the place for "investment" property - not at these prices.

Buying property as a cash flow investment is dramatically different, or should be different, from purchasing a home for yourself to live in.

People who do this on a larger scale than just one apartment have ways of analyzing markets and returns to decide whether to purchase a particular property, or not, as a rental investment. It's a big subject, to say the least.

One statistic always considered is the cap rate. It's not the only thing to look at by any means but it's extremely helpful. The problem is, it's a garbage in-garbage out kind of metric, you had better get the right numbers and the honest numbers, not the wishful-thinking numbers, for the input, or else GIGO.

I've analyzed properties for clients who wanted to buy an apartment to rent out as an investment, up to the $2 mil range, and I've never found a cap rate on residential rentals in Manhattan above 3%. Most are around 1%-2%. In Brooklyn I once found a cap rate of 4% for a multifamily townhouse investment. This was about 2-3 years ago.

None of these numbers qualify as a decent rate of return in my book, given the risk. Also inventory is tight now and in my opinion prices are unjustly inflated as a result. The rental market is definitely softer than the sales market, it's not hard to find a rental in most popular neighborhoods, so the cap rates are probably worse now than they were 2 years ago.

I've also met a few people totally strung out because their Manhattan investment was bleeding money. This is not a risk free investment. One example is a fellow real estate agent whose downtown loft building hit her with a huge assessment for emergency roof repair (owing to deferred maintenance), money she simply did not have and could not get. The fact that the apartment was rented was cold comfort; last I spoke with her she was headed to foreclosure.

The problem in Manhattan and north Brooklyn, in a nutshell, is that you can't get rents that are high enough to justify the relatively large initial costs to purchase and the carrying costs.

I think you can do better in Queens and parts of Nassau County, if you want to stick close to home, but most people also want the cachet of owning in Manhattan. That's fine, I'm a sucker for cachet too, I just love making a good return on my investments more.

I can't prove it, but I suspect a lot of small landlords make little or no money in Manhattan, or lose money. Large landlords help make it work by sheer volume, just like the penny candy store.

"I can't prove it, but I suspect a lot of small landlords make little or no money in Manhattan, or lose money."

Agree over the first 5 years you are probably correct. Over the long term 10 to 20 years probably not the case. I always thought this type of investment particularly in Manhattan works better if you have a long term objective.

Very nice kharby2! One of the best and honest post I have seen here for a long time.

>kharby - agree with Sunday "! One of the best and honest post I have seen here for a long time."

Kharby2:

1. I think your investors are buying the wrong properties
2. Sponsor Unsold Share coops are worth a premium because of their no-board feature
3. but if I priced mine to a 2% cap rate, they would be worth 2 to almost 3x comparable Sold Share coops
4. that magnitude of a premium makes no sence

Thanks for the responses, everyone (especially kharby2).

kharby2,
How do I find out the cap rate? Is this an official, set number? Or just an observed percentage?

Also, (alanhart & ph41): I am looking at properties in the outer boroughs, not Manhattan or top-tier prime Brooklyn (ie, Heights). Additionally, I am thinking longish term (7-10 years or perhaps longer) ownership. How does this change the investment picture?

kharby2, you have it right. Almost impossible to find a condo in Manhattan as an investment property and break even. The only place you can "make" any money is on the tax savings. I am always looking and cannot find any with any cap rate over 0

rb345: Elsewhere you stated that your properties have 6% cap rates. Where are these located, and at what price point are they? It seems to be in direct contrast with what everyone else here is saying.

FWIW, my LL grosses 3% with 1.5% going to common charges / taxes. Management fees & misc repairs eat up another 0.5%. That leaves 1% before amortizing vacancies, renovations, & transaction costs.

I've always been curious, why do people hold onto properties like this? Because someone will pay even more for it later, since "owning for yourself to live in" is different (per comments from some people here). Cachet is great & all, but doesn't that go to the person living there?

In any case, please keep buying Manhattan investment RE for cachet. Fuels new developments & renovations, improving housing stock for the likes of me, but alas no one is able / willing to pay higher rents!

kharby2, I've stated for some time here that the losses in Manhattan RE are going to be bled out slowly. There are some weak hands (like the broker you describe & other strung-out players), playing a high-leverage game of chicken. You look up ACRIS on some properties, you look up their mortgage, look at their job, and it's clear they are gambling. On the other hand, you also see a number of very-strong hands. All-cash, high net-worth, etc.

What fraction of Manhattan investors do you think are strung out vs. "whatever"?

inoitall, why did you have trouble then with the decision on this thread: http://streeteasy.com/nyc/talk/discussion/35248-should-we-sell-or-rent-out

Do you think most strong hands take risks or were they ever weak hands before than became stronger?

My friend bought a 2 bedroom condo in the west village about 8 years ago and basically broke even for the first 2 years after all was deducted such as cc, taxes, renovations, etc. After 2 years he was net positive on his investment about 1-2% cap. This year he is net positive for about 3%. The property appreciated about 30% but he has no intention of selling it for at least another 15 years. Even at 3% with all the money being printed today where are you going to get that return? Certainly not in a bank savings account. So you have a choice savings, CD, bonds, stock market or real estate.What's riskier the stock market or buying a condo in downtown Manhattan. Both are probably equally as riskier (stocks being more liquid) but I don't see interest rates rising anytime in the near future so where are the rich folks mostly likely going park their money?
I really do believe that RE investing is a very very long term investment so if you look at it for the short term it's probably a bad investment.

sorry I meant to say before they became stronger.

I agree that it is often tough to get a good return on investment when renting a place in manhattan. But, there can be exceptions, especially if you can buy new, pay all cash, and consider appreciation in your investment and you buy into a neighborhood that is gentrifying. For instance, we are about to sell a property in Harlem that we bought two years ago. We did not rent it out, but assume for the sake of argument that we did. Let's also ignore the last six months-- the year and a half before that stayed flat for most of NYC, but my neighborhood was gentrifying. We bought our place from the sponsor early on for about $650K. Carrying costs would have been about $1,000 a month all-in (including unit maintenance and upkeep), and the rent for our 2BR unit (based on rents of the same floor plan) would be about $4,500 a month. That's a 6.5% cap rate on its own. Then, factor in value from October of last year and consider an 18 month time frame from purchase to sale-- the unit above me sold for $925K. Back of the napkin, the ROI is about 50% in just 18 months -- assuming an all-cash deal, of course.

Inonada:

1. the apts I am referring to were bought in the 1990's or early to mid 2000's
2. they are in Manhattan, Queens and Brooklyn
3. as a % of current market value, they now net between about 5% and perhaps 8%
4. altho some have lagging rents which could rise perhaps 0.5 to 1.0% this year on current value

5. as a percentage of actual cost, my current yields range from 20%+ to about 500%, and rising
6. my returns can not be replicated today because the RE market is very different

7. if I were buying in NYC today I would look for at least a 6-8% cash-on-cash return
8. real estate investment entails high capital loss risk, especially in today's market
9. and various other risks and aggravations
10. if you're not being well paid to take on those risks and aggravations you should think 2x about RE

I'm sorry, the rental market is soft? Has no one seen The Worst Room yet???

http://theworstroom.tumblr.com/

I think if you want to make money on multi families as an investment, you need to look at Staten island, the Bronx, the "bad" parts of Brooklyn and Jersey City

t2t:

1. buildings like those often have much higher damage/repair costs
2. and oftgen serious and.or chronlic collections problems

>I think if you want to make money on multi families as an investment, you need to look at Staten island, the Bronx, the "bad" parts of Brooklyn and Jersey City

You got a problem with those areas?

To make the most money you have to take a few risks, right now commercial highway property in NJ gives the best cap rate up to 8%. Residential property always goes up first then commercial (retail, then office) goes up a year or two later. So if the past holds true for the future buy commercial realestate.