Sell or Rent?

"If I sold I could probaby still make about an 8-10% return on my down payment."

Your return is not on your down payment. It is on the price you paid less the interest and expenses you paid to get your mortgage.

If your "return" is 8-10% on your down payment, calculate in your a) real estate agent's fee (6%); b) conveyance tax; c) flip tax, if any

Then you will lose money when you sell.

the 8-10% is ex-transaction costs. thanks for clarifying.

Sell, quickly unless you're planning on living in the apart. later on.

LOLsteve thinking people don't know how to calculate a profit/loss.

I would sell NOW. The 2009 bonus season is going to suck and that will slow the market down. And if layoffs continue, that translates into fewer buyers. Good luck!

I would have to agree with julia on this- right now, with all the uncertainty in the air, risk-aversion is what all the fund managers and professional traders are doing. Same thing with many real estate investors here in Manhattan.

Now, here's an article that's relevant in your case:

http://www.nysun.com/real-estate/inventory-spike-signals-cash-out-mentality/80712/

could you make out well in the end by renting? surely a possible scenario.

do you want to take the risk given all the uncertainties not only in the local RE market but also in Wall/Main Street? perhaps, but you better make sure you are comfortable with your propensity to 'get by' during potentially difficult times, especially with respect to cash flow.

Ultimately, the decision is yours. Make sure you analyze the potential outcomes and the risks that they represent.

Now, if I happened to switch roles with you and put myself in your position, I would probably sell, and sell quickly by offering a very attractive price.

reaper: "LOLsteve thinking people don't know how to calculate a profit/loss."

Well obviously he didn't, because he calculated it on the down payment and excluded the transaction costs.

sellorrent, there's nothing trivial about transaction costs. They eat away most of your profits. They make you poor and your broker rich. The thing to remember is that while you base your return on your down payment, brokers, co-ops, the State of New York, etc... base their transaction costs on the sale price.

So if you flip a $1,000,000 property for a 10% gain on the same day you bought it (no interest costs), sell it for $1,100,000 you lose money. $100,000 - $66,000 (broker) - $10,000 (mansion tax) -$50,000 (closing costs) = -$26,000.

sellorrent, I forgot to subtract your co-op flip tax, if any.

80sMan, you forgot the conveyance tax:

NYC Real Property Transfer Tax: 1% of purchase price if $500,000 or less of the entire amount; 1.425% of purchase price if over $500,000 of the entire amount
NYS Transfer Tax .4% (.004) of purchase price

Mansions tax is paid by the buyer.

For condos, mortgage recording tax.

Why in the hell would you sell a rental property when you can cover all of your costs on day 1? What is wrong with you people? He doesn't need the money. Rent it for the long term and have someone pay your mortgage for you. Sell it in 7-10 years from when you can make some real money on it. sellorrent, please don't listen to this very bad advice, I'm shocked at what some very smart people are recommending here.

I agree JuiceMan. He should definitely hold onto it.

The long term annual real estate appreciation for NY is 5% using Case/Shiller. If you hold for 20 years, you should expect to achieve 5% annual returns. Sellorrent should hold onto the apt until he gets a price that would satisfy a 5% annual compounded return. Then sell. Then he makes what he should have expected to make. If he goes for anything more, then he's rolling the dice.

For example, using Case/Shiller (what else do we got?):

If you bought at the then-top in Feb 1988, index value 83.92 and expected a 5% annual return, the first chance you would have to sell would be in Aug 2005 then the index hit 202.

As a pure investment that covers it's carrying costs I would hold until it reaches its objective of matching its long term expected return.

JM, though I made no statement on the actual question, you're right. If he covers his cost and IS ABSOLUTELY POSITIVELY 100% CERTAIN that he can rent (being a co-op) it forever, then keep it.

80sman: "The long term annual real estate appreciation for NY is 5% using Case/Shiller."

No it's not. It's 0%. Do a moving average from the end of WWII.

The nominal rate may be 5%, but not the real rate. C/S does not include Manhattan, since it only includes single family homes, 0.9% of Manhattan real estate.

So Feb 1988 was the worst-case.

Another example is buy in Jan 1998 index value 83.36 sell in Jan 2000, index value 100.

You may think it would have been stupid to sell in 2000 but the apt purchased at a high price in 1988 only had a short window to sell in 2005 if you wanted 5% annual returns. Yes, the 1988 apt is still up money in 2008 but the rate of return has fallen below 5% (it's underpeforming).

OP
Like you said- I can put that cash to other uses at the moment. Then SELL.

80s, I've consistently said that owner-occupied real estate is NOT an investment. It is capitalized rent. There is no appreciation.

If you buy someplace & rent it out, that's a different animal.

So DROP the "it appreciated x%." It may have, but tomorrow it will depreciation x+1%.

If you rent it out, that's different. But to live there...

...it's a capitalized expense.

"It will depreciation"?

Too much Shiraz.

As I said,

As long as you are comfortable with your propensity to 'get by' during potentially difficult times, especially with respect to cash flow.

That includes potential periods of time (month or months) when you can't rent it out, maintenance and upkeep costs, etc.

If you have no issues with cash flow in the event of these type of difficult stretches of times, then renting makes sense in the long run.

It all depends on your particular situation.

MMAfia, that's what I said to Sneaky Pete. How dare you plagiarize?!

:0

=d

stevehjx, I was doing the analysis for the OP who said the unit could command enough rent to cover costs, so it would be an investment property. A property that does not pay dividends (e.g. can rent for twice the carrying costs) you only have price appreciation as a guideline.

I agree with you Steve. The primary benefit of owning a home is that you get to live in it. But, hey, there are always stories of nuggets of gold the size of a man's fist. And "A Diamond as big as the Ritz".

steve and 80s are completely delusional if they think the growth in Manhattan real estate long-term is 5% annually or less. You either are completely ignorant or completely dishonest. Why don't you try reality - just pick any co-op in any prime Manhattan neighborhood from the 1960s, 70s, 80s, or 90s and compare the prices then to now. Let me know what the annualized growth rate is, even net of transactional costs. Your 5% will look pretty dumb if you do.

LICComment, I based my numbers on Case/Shiller. If you know of another dataset, I would be happy to hear about it. Anecdotal evidence is not a dataset.

A found some actual data points that support the 5% Manhattan average price increase theory

From the New York Times April 1992

"Sotheby's International Realty, which tracks town-house sales in Manhattan south of 96th Street, recorded...the sale of one- and two-family houses, from 50 in 1990 to 63 in 1991. ...there was a 20 percent drop in the average selling price of town houses. The average was $1,710,019 and the range was $200,000 to $12 million."

Average townhouse Manhattan 1991 $1.7MM

From Miller Samuel

"The average sales price of a Manhattan townhouse was a record $4658155 in 2007"

Average townhouse prices increase from $1.7MM to $4.6MM over 16 years. That's an increase of 6.3% annually compounded.

If you bought the average townhouse at the top of the bubble in 1988, at $2MM, your increase is 5.2% annually compounded.

There have always been and always will be good deals and bad deals. Those $200,000 townhouses were on Washington Square Park.

LICC, let's say, for a moment, that properties in Manhattan fall 25% in the next two years. (They're already down 10%.) Your "numbers" will then look ridiculous.

Any "appreciation" that includes this latest bubble phase will be wiped out in the next (inevitable) crash phase. Property prices can't increase more than incomes and leverage and stay there for long.

Caveat emptor.

sellorrent, I tend to agree with JuiceMan here - if you can easily cover you carrying costs and feel confident you can continue to rent the place, it's not a bad idea to hold on to it. The only other factors I would consider are your willigness to be a landlord (which is work) and the likelihood that you'll be living within reasonable distance while you rent it. Long-distance property management can be difficult, and tenants are likely to be a little more careful when they know you're not too far.

OP here. To clarify, it is a coop and I am a licensed broker and plan to list and sell myself without outside brokers. There are rental restrictions but the board is quite lenient on them.

I put 20% down, put in another 5% of purchase price in renovations and the saleable value would give me roughly an 11% return on top of those costs ex-carrying costs, but federal income tax would chip away from that 11%. Its a second residence currently thus were I to hold on I could potentially avoid the income tax altogether on a future sale. May just do that. Thanks,

Sellorrent

Good strategy! Hold and lose principal/profit to avoid income tax as RE goes down.

> Why in the hell would you sell a rental property when you can cover all of your costs on day 1?

Because, uh, we know math.

Covering your costs doesn't mean you aren't losing money. If you can sell for more now than later, not having to lay cash out doesn't justify ending up with less money.

> please don't listen to this very bad advice, I'm shocked at what some very smart people are
> recommending here.

I'm not shocked by what the dumb people are recommending. This ass is telling folks to buy in the Toren.

sellorrent, according to Elliman data from 1988, 1991 and 2008 co-op studio apartments have averaged 11% and 14% returns from 1988-2008 and from 1991-2008 respectively. So the returns aver very high. Sounds like you should hold onto the apartment. The only caveat is that the returns are very volatile. Co-op studio prices fell 41% at one point, before rebounding. I always find people have an easier time riding out volatility if they set a return target and stick to it.

New York Time 1993
The sharpest drop has been for studios. The price of the average Manhattan studio, according to the Douglas Elliman report, fell 35 percent, to $40,538, in 1992 from $62,326 in 1988. In 1992 alone, the price fell 16.9 percent.

Douglas Elliman 2Q report 2008: average price Manhattan co-op studio $436K

Good returns but bad volatility. There is no free lunch.

Good luck whatever choice you make.

> averaged 11% and 14% returns from 1988-2008 and from 1991-2008 respectively

Yes, because when you can pick the best specific years, its always a great way to measure long-term performance.

Time for a finance class.

The long term real return on RE is near zero...

> I always find people have an easier time riding out volatility if
> they set a return target and stick to it.

Your goal is not to "ride out volatility", it should be to make money at the end of the day. Aiming to break even over 15 years isn't a goal. With carrying costs and inflation factored in, its also called a LOSS.

There goes Eddie, making things up again. So 1988-2008 is picking out the best specific years? 1981-2008 would probably have been better, or 1993-2008. If you think the long term real return on Manhattan real estate is near zero, you must have failed Finance 101.

There are no "returns" on owner-occupied real estate. You need to stop thinking about it like that. It is not an "investment"; it is a capitalized expense. Only twice before in history has there been a significant increase in real estate prices: after WWII, because prices had been held artificially low by the war and the Depression, and during the inflationary 1980's. This current increase is an aberration due to easy credit and negative real interest rates, and Wall Streeters paying themselves handsomely for selling junk securities backed by junk mortgages, or arranging LBO's at those negative real interest rates.

Unless incomes go up by 11%-14%, or the cost of credit goes down, or you're allowed to use infinite leverage (0% down), there is no way for such price increases to be sustained.

"If you think the long term real return on Manhattan real estate is near zero, you must have failed Finance 101."

You know you've been in a huge bubble when the folks who didn't finish a Finance class are giving economic advice.

Sorry, but the long term real return on real estate is just that... 0

Sellorrent, here's one way to look at this: you have an investment that you believe will increase in price to the point where it represents an 11% annually compounded yield. That point may be tomorrow. It may be in 20 years. Before it gets there, it may fall by 60%. It may rise to represent an 8% yield and then fall by 40%. That is volatility. As long as you're not forced to sell because of liquidity. As long as you can continue to rent it for what the carrying costs are. As long as you can withstand the slings and arrows of outrageous fortune. You have a chance to realize the raw return. Subtract transaction costs and that is your expected profit. Is this better than your next best alternative investment?

I'm assuming here that your tolerance for risk is infinite. It pretty much has to be with real estate investment.

steve, please read the OP. This is an investment question.

I have a couple issues with accepting the real appreciation rate of 0%

1. at a macro level i think it is possible (though unlikely) because you will have some areas that appreciation and others that depreciate in real terms. This will probably be due to demographic shifts related to the economic environment

2. As steve has said ad nauseam is that real estate prices are tied to income (I don’t agree with steve on much but I think price to income is a good marco level indicator) If that is true how could real estate not have appreciated when real per capita income has gone up significantly over the past century? It just doesn’t make sense to me?

So I guess I’m saying, real appreciation = 0%
Micro level – not true
Macro level – maybe, but I can’t see how

More crap talk from Eddie. I'm glad you are showing everyone how much of a joke you are. You have no idea what my finance background is. However, I do know that your 0% growth assertion is comical. Even steve doesn't try to claim that long term Manhattan real estate growth is 0%.

The real annual rate of increase in real-estate prices is 0.7% since after WWII, most of which occurred right after WWII. It increases at precisely the level of real incomes, which tend to increase in line with increases in productivity.

We have been seeing an anomaly, based on:

a) negative real interest rates
b) lax underwriting standards
c) excessive increases in (Wall Street) incomes based on the prior two.

We know that each of these factors is now being reversed: the brakes are on. Real interest rates are no longer negative, and are actually quite high for jumbo loans.

Lax underwriting standards reversed by banks, investors, and now by new regulations to be issued next week.

Wall Street = enough said.

sellorrent/stevejhx, you need to subtract the risk-free rate from my calculations. 30-year gov't yield of 8%. So the studio is making 3% annual compounded.

steve, you are not living in reality. Two-bedrom coops in the UES in 1968 were selling for under $40,000. Today, let's fairly say they would sell for $1.2 million. That is nearly a 9% annualized return. I didn't cherry pick, I took a nice round number (40 years), long-term. Even after inflation, the real return is significant and much higher than your claimed 0.7%

LICComment: "steve, you are not living in reality. Two-bedrom coops in the UES in 1968 were selling for under $40,000. Today, let's fairly say they would sell for $1.2 million."

STOP!

Let's say that 5 years ago that co-op would have sold for $500,000.

"I didn't cherry pick, I took a nice round number (40 years), long-term."

As long as you include the past bubble years, you will be cherry picking.

Any talk of "inflation adjusted price appreciation for real estate" should bring up Robert Shiller's now famous study and graph (forgive the repost):

http://randolfe.typepad.com/randolfe/images/housing_projection.jpg

Over time, and adjusting for inflation, the only time that home prices went up without coming back down was during the Baby Boom after WWII.

We clearly did not have a Baby Boom recently, but we did have a Credit and Housing Boom. Chances are, we are heading back down.

if prices are related to income and income has increased 5 fold since the 30's in real terms, how could prices not go up in real terms i.e., appreciation?

MMAfia, if you look at the graph there is a green line showing the long run average post WWII (1945-2000) as 12-14% AFTER inflation. The line is gradually increasing. Maybe 05% a year?.

I mean .05% a year

Nice post, MMAfia. Notice in the lower right: this corresponds to a 43.5% decrease in house prices.

What have I predicted? 50%. Some overshooting. In past parlance, JuiceMan said equilibrium (between rents and imputed rents) would signal a huge buy opportunity.

Not.

mschlee, they did go up. Along with incomes which go up along with productivity. Incomes went up, as you say, "5 fold since the 30's in real terms," but housing prices in Manhattan went up 7 fold in since 1998.

Don't believe me? Go here:

http://350bleecker.com/policy/sales.html

and check out the per-share price: $944 in January 1998, to a peak of $7,439 in 2007.

Unsustainable.

I mean .5%. Half a percent a year.

steve, my question is if real (not nominal) incomes rose 5 fold, then house prices should have risen 5 fold (again in real terms). i dont remember exactly, but i think from 1930 to 2003 real income rose about 5 fold. that means house prices should have risen 5 fold as well. in other words, about 2.5% per year in real terms.

that is why i dont buy the 0% appreciation argument.

"The long term real return on RE is near zero."

Is this based on a housing value index such as Case/Shiller? If so this is the price return of RE for someone who bought the RE with no leverage. The total return of the RE will also include the income stream generated by it, i.e., rental income. For an apartment with price/annual rent ratio of 20, the current yield from rental income is 5% per year, which will also grow with inflation. This return from income needs to be added to the price return.

This is applicable to owner occupied housing as well, because without owning the house the owner would have to pay the same rent to live in a comparable house.

So, if the long term real price return on RE is indeed near zero, what is the long term real total return on RE?

mschlee, you're counting the current bubble. If as Shiller predicts housing falls 50%, then 2.5% becomes 1.25%, which is still unsustainable in the long-run. You also forget about income distribution. Up until recently, real wages increased uniformly. Now, real income increases accrue only to the top 2%, which includes me and probably most people who read these threads.

Go here:

http://www.census.gov/hhes/www/income/histinc/h06ar.html

and you will see that since 1975 REAL household income in the United States increased by 22% through 2006, from $39,302 to $48,201. That is an increase of almost exactly 0.7% per annum:

$39,577.11 1976
$39,854.15 1977
$40,133.13 1978
$40,414.06 1979
$40,696.96 1980
$40,981.84 1981
$41,268.71 1982
$41,557.60 1983
$41,848.50 1984
$42,141.44 1985
$42,436.43 1986
$42,733.48 1987
$43,032.62 1988
$43,333.85 1989
$43,637.18 1990
$43,942.64 1991
$44,250.24 1992
$44,559.99 1993
$44,871.91 1994
$45,186.02 1995
$45,502.32 1996
$45,820.84 1997
$46,141.58 1998
$46,464.57 1999
$46,789.82 2000
$47,117.35 2001
$47,447.17 2002
$47,779.30 2003
$48,113.76 2004
$48,450.56 2005
$48,789.71 2006

That is what real incomes go up in a year. That is what housing prices go up in one year. Barring exceptional circumstances - bad underwriting, negative interest rates - housing prices CANNOT go up faster than incomes, because there's nothing to pay for it with.

hvd_free, please explain this:

"For an apartment with price/annual rent ratio of 20, the current yield from rental income is 5% per year, which will also grow with inflation."

"This is applicable to owner occupied housing as well, because without owning the house the owner would have to pay the same rent to live in a comparable house."

Absolutely false. If market rents are below imputed rents, then the renter will pay far less than the owner to live in a comparable house.

Which is what we see today in Manhattan.

Did I forget 0% down = infinite leverage?

Steve, I believe price to rent ratio is calculated based on market rent, not imputed rent. Interesting link here:

http://bigpicture.typepad.com/comments/2008/05/buy-vs-rent-red.html

If price/rent =20, annual rental income is 5% of the house price. It's that simple. According to the link above, during the 1970s, ’80s and ’90s, the average rent ratio nationwide was between 10 - 14. Therefore, rent yield was 7%-10% during those years.

What I did forget to include is the expenses associated with owning the house: maintenance, RE taxes, etc. These will offset a percentage of the rent income and reduce the net income of RE ownership.

All the above assume 100% down = no leverage

"Covering your costs doesn't mean you aren't losing money. If you can sell for more now than later, not having to lay cash out doesn't justify ending up with less money"

Eddie_Wilson, so you feel that in seven years, the property will be worth less than the purchase price - 7 years of principal payments? Okey dokey. Maybe you should sign up for that finance 101 class you keep bringing up?

"I'm not shocked by what the dumb people are recommending. This ass is telling folks to buy in the Toren."

I have nothing good or bad to say about the Toren because I know nothing about it. What in the hell are you talking about?

"All the above assume 100% down = no leverage"

Realistic.

JM: "Maybe you should sign up for that finance 101."

Maybe. But if you go to the chelsea stratus thread, maybe you'd see that the per-floor premium has increased to $250,000. That's a SHITLOAD of rent, no?

my point steve (without starting an argument) is that you can make the results say anything you want based on the data you choose. based on per capita income from 1929 to 2003 it increased 2.5% per year on average. if we look at the data you chose, it is less than 1%. i can choose other time frames and data sets and get different results. in addition, the difference between metropolitan areas is dramatic - it could have increased significantly in some areas and decreased in others.

the point is to say that there is no appreciation is just not true. technically from a marco perspective, maybe. but in reality since we invest at the micro level not the entire market there will definetly be appreciation or depreciation.

btw - if i look at the census data for new york, for 1959 to 1989 the growth in income is about 2%

again, it all depends on the data and time frames chosen

that's 2% annually

steve, are you Eddie_Wilson? I'm not sure I understand your post. I know nothing about the Chelsea Stratus, but I agree a $250k per floor premium seems silly.

""All the above assume 100% down = no leverage"

Realistic."

Ok, forgive me for being conservative. Let's add leverage and use the OP's example.

$100 apartment purchased for $20 down, $5 upfront renovation expenses, i.e., $25 spent in total.
Rental income covers monthly expenses, i.e., zero cash flow for 30 years.
After 30 years, what would be the price of the apartment? Let's say infaltion is 3% per year, plus Steve's 0.7% real annual appreciation rate ==> nominal appreciation rate = 3.7% per year. So apartment is expected to be worth 100*(1.037^30) = $297.4

If the OP's morgatage is a 30yr fixed rate, he will own a $297 apartment free of debt. The IRR over 30 years is (297.4/25)^(1/30)-1 = 8.6% nominal annual appreciation. Subtract 3% inflation from this rate, the real return is 5.6% per annum.

wait, maybe the OP managed to borrow 30yrs interest only to keep monthly expenses low. Then his equity will be just $197 after 30yrs. (197.4/25)^(1/30)-1 = 7.1%, or 4.1% real return.

Hmm, somehow that 0.7% per annum doesn't look that bad after all.

Interesting that steve assumes a hypothetical future 50% decrease in values to make his argument work. Why not assume a 90% decrease steve, your argument will seem even better? It would be just as fake, but it would sound better.

daisy, go away.

hvd_free, where do you include the cost of the mortgage, i.e., interest expense in your equation. I don't see it.

LICC: do it that way, with a 90% decrease. You're a savvy investor and financial something-or-other: do you ever calculate the potential downside risk when you make an investment?

It doesn't make it real or fake. It's a scenario.

"hvd_free, where do you include the cost of the mortgage, i.e., interest expense in your equation. I don't see it."

Well, the OP wrote that his rental income would cover his monthly expenses. Do you seriously think he would forget to include mortgage interests in monthly expenses?