Good Time To Trade Down?

Transaction costs will kill you unless you want to FSBO.

You'll have transaction costs whenever you sell. Yes, do it now.

We are still seeing a pretty hot $1 mm - $2 mm market, so if you have something to sell in that range, now is probably a pretty good time. (And, as a broker, I'd love to pitch that business.)

As far as moving to being a holder of two smaller apartments in two different cities, just take into account three factors:
1) someone has to property manage the vacant property, and, at minimum, it will be a hassle for you to ride herd on that person from overseas;
2) as you move farther into your retirement, the idea of bouncing around might become less appealing (for example, when you are at your London base, but have to come back to NYC at an inconvenient time for a doctor's appointment)
and 3) if demand for smaller, pied-a-terre units does increase, so will their property taxes.

I've been hit with this last as I have a smaller investment condo as part of my retirement plan. It's been a good long-term holding for me, but we're currently in a market situation where the rent increases that the market will bear will not cover the increases in the condo's taxes.

ali r.

Hello! I did this two years ago with the exact same intent, although my original apt was smaller. I don't regret it and look forward to a different life in about 10 years. I felt that no one can know what the market so I kept a very close eye on monthlies and financials. One of the key factors was a building that had good commercial income and low, stable maintenance (coop). To me that was key to a retirement/pied-a-terre strategy. I sort of regret not buying a condo for certain financing options if there was a retirement emergency, and possibilities of sublets, but for me what's done is done.

Yes, sippelmc, I forgot to mention that as part of my retirement plan, I want to reduce my monthly carrying charges as much as possible. Since I will not be living in Manhattan year round, I do not think I need to pay for a full-service building (doormen, health clubs, etc.).

300, like the proverbial "death and taxes ", transaction costs are inevitable. So are capital gains. That is why I want to make only one more home purchase in Manhattan to hopefully last my lifetime although I may continue to look at opportunistic, short-term investments on the side.

I am more concerned about stamp duty (transfer tax) in many overseas markets which are often used to damper over-heated markets. London stamp duty progressive and as as high as 12% of purchase price while Paris is around 5%.

Front Porch, what do you think of the pied-a-terre market? Buildings, even coops, appear to be loosening their policies in order to accommodate buyers including more favorable occupancy and sublet policies and it would be great if I could subsidize my retirement with some rental income.

>>>Buildings, even coops, appear to be loosening their policies in order to accommodate buyers including more favorable occupancy and sublet policies <<<

Not necessarily true. With the uptick in illegal, short-term sublets (through AirBnB and the like) some co-ops are actually tightening their pied-a-terre policy (in some cases banning them altogether) and enacting stricter bylaws regarding sublets.

Bramstar, you may be right that some coops are reacting in this way but that seems an overreaction if not a misreaction to what I believe are fundamental changes occurring in the Manhattan residential market. Smart buildings are changing their policies in reaction.

If you don't need all of your current space, it certainly makes sense to monetize some of it and re-deploy into another market or different asset class altogether. What is less clear is whether smaller NYC apartments will be more resilient in downturns or offer more upside in the future compared to more expensive apartments. More expensive apartments are definitely more difficult to sell though which is why I think it makes sense to invest in smaller units.

To correct myself, I believe the coop market may be bifurcating with the most elite coops becoming more restrictive and the other less restrictive. Obviously, there are still many coop shareholders who want to maintain a certain living environment and want neighbors of similar ilk. Buyers will gravitate to one type of coop or the other. But I see the trend as being less restrictive. for many reasons. Among them are aging demographics, buyer's need for flexibility, increase in foreign investors, and desire for higher returns.

Thanks Miss Leona. I agree its difficult to predict but you make some good points. I also think lower-priced units may have a bigger pool of buyers although that may not always be true.

Does anyone know if the number of "pied-a-terres" in Manhattan, however defined, is increasing? And does this mean that demand for such units is increasing and will continue?

... excluding the luxury market I mean.

Ximon, whether the number of p-a-ts is increasing is an interesting question and one that I'll ask a couple of mortgage bankers I know, since they may be the best poised to figure that out. I do know the last time I sold in my UWS co-op, other agents were surprised that the building didn't allow pieds-a-terre since we are not Park Avenue/white glove type of place.

If you're not buying into a new place with a full-time staff, then I would suggest that you meet the super before you commit, because -- especially if you want sublet flexibility -- you'll want someone on the ground to deal with your tenants, and that often becomes the role of the doormen in full-time doormen buildings. I'm not trying to discourage the two-city plan, just pointing out (and I've been a landlady for 15 years now) that tenants are a hassle, and the degree to which they are a hassle seems to rise with the square of the distance that you as landlord are away from them.

The number of pied-a-terres is increasing, but largely in the sense of parked money. As far as the loosening of coop rules, one thing that you have to be careful of is that can largely be a function of the market. If the market crashes you have people who can't sell their units so they want to rent them out. At some point, the owner occupancy becomes an issue obtaining mortgages and buildings tighten up their rules, sometimes even capping the total number of sublets (lets leave aside whether this is even legal because it creates 2 classes of stock). While it would be hard for them to force you out as a pied-a-terre user, they could make it impossible for you to recoup any of your cost by renting it out when you were not using it.

30, agree completely. We saw exactly that scenario in the last recession. I am only asking whether actual rules are changing to accommodate pied-a-terres and subletting. I have been looking at coops for sale recently and it seems like every listing makes a point of discussing how flexible the rules are. I don't remember that 10 years ago.

Front Porch, good tip to get more info on super in a non-doorman building.

Ximon - there are so many personal considerations that could into whether this is prudent, even when considering whether it is a wise investment decision. E.g., how much space do you need? Do you have family or a group that you intend to leave your estate to after you die such that you care about the value of your estate? etc.?

Is your question essentially whether you think the potential appreciation for a 1200 sq ft 2 bedroom at $1500 per sq ft sufficiently low while the upside on a 600 sq ft apt much higher?

I tend to agree with 300 that transaction costs make this trade particularly hard to assess. If I were you, I would simplify the decision tree to whether or not you think now is a good time to own your 2 bedroom - if you think that it is not, I would consider selling and renting rather than buying the smaller place, and then assess your retirement living situation at the appropriate time based upon your wealth, desires, health, etc.

Team, I deliberately omitted the personal considerations in my initial post in order to concentrate on what we can surmise from the market. Yes, I am basically asking whether a smaller apt. would appreciate more than a larger over the next 10-15 years. I am also asking whether a pied-a-terre would appreciate more than a simple owner-occupied apt. Lastly, I am asking if my retirement plan is to buy a smaller, more affordable home, when might be the time to do so?

I admit I do not understand the comments about transaction costs. Seems that I (or my descendants) would pay commissions and capital gains taxes in any case. Also, reducing my exposure and moving to a permanent home would also require me to incur these costs.

I don't want to speak for 300, but my view on the transaction costs is that you are accumulating significant costs for brokers, taxes, recording, moving, etc., in connection with this trade down, and you need to overcome those costs before factoring whether the appreciation (or diminished depreciation) between the two assets is worth it.

There are also other complexities in the situation that only you can know (e.g., do you have alternative invests for the cash difference that improve the investment profile holistically?).

There's also the challenge that its tough to tell what you'll desire in your retirement lifestyle such that you could be setting yourself up for an additional sale in the future...

Assuming price appreciation in either condo and zero return on cash.

Trade down:
Sold at $100. Transaction cost $7. Net $93. Assume no taxes due - primary residence $500k exclusion.
Bought 1 bed room at $60. Transaction Cost $2.
Net assets $60 in real estate and $31 in cash.
Heirs sold. $60 sale proceeds less $4 in transaction cost.
Net proceeds $56+31 = $87

If no trade down: Heirs sold $100, Netted $93.

Taxes will only make it worse as without sale, you can delay paying taxes.
The analysis does not work if you think you can make good return on the cash elsewhere while reducing your monthlies.

300, what your analysis excludes are the potential losses incurred if there is a major market correction in the next 12-24 months. So is it better for me to sell for $1500psf today or $1000psf in 2 years? In that scenario, I think it makes sense to absorb the transaction costs and preserve my gain. But you are correct that transaction costs (plus real estate taxes and renovation costs) are not always accounted for by many investors.

That the last disclaimer I have about alternative returns being higher. If you have strong view about prices going down, you should not trade down. You should sell and rent. And hopefully you will not put money into SPX and bonds which in my opinion are a lot more overpriced than Manhattan non new development.

are we looking for correction the next 12 -24 mo or not?

300, but my strategy is to trade down to a long-term hold investment. Otherwise, I would agree with you. Manhattan residential has always bounced back at higher levels than past peaks. Little risk if held for long-term hold IMO.

muromec, my 2 cents is that we are already at the beginning of a correction. I give it two years tops but depends on overall economy. Over-supply of luxury product is the least of my worries.

I am looking at 1 br @ harlem @ 830-850K Kalahari and Adeline. Buy now or hold?

I agree with those who are recommending you sell and rent if you feel the market is headed towards a downturn. Transaction costs are approximately 7% - 7.5% of sale price (unless you are attempting a FSBO). If your goal is to be global, I do not follow the basis of pursuing a coop, which allows pied-a-terres? Why not pursue a condo with low monthlies instead? I advise my clients to target larger condo buildings with commercial/retail components. Pursue a building with amenities (avoid swimming pools as they increase CCs significantly). Even though, you might not use these amenities while in Paris/London, it will attract more tenants and buyers when it comes time to rent/sell.

Apologies for any confusion. Let me try to rephrase my issue. Thanks to all for their helpful responses.

1. I own and live in a large 1,200 apt. in a good but not prime area of Manhattan.
2. I do not wish to retire in this apt. and would like to pull out some equity to help fund my retirement plan.
3. I am therefore looking for a smaller apt. in a better location to be my permanent retirement home.
4. As part of my retirement planning ,I would like to save on monthly expenses by trading down to an apt. with lower carrying costs.
5. With the equity I receive from selling my existing apt. I hope to purchase something overseas to use as a second home.
6. Since I will be living in Manhattan only part-time, I would like to find a pied-a-terre that I can either a) keep vacant at relatively low cost or b) sublet and earn some additional retirement income.
7. As part of justifying my trade-down, I wonder if smaller apts. might appreciate better than larger ones over the next 15-20 years.
8. I also wonder if pied-a-terres might appreciate better than standard apts. over the next 15-20 years.
9. In trading down, I feel I am reducing (although not eliminating) my exposure to Manhattan residential which I feel is peaking.
10. By buying a smaller apt. that I would keep indefinitely, I feel I am further reducing (perhaps even eliminating) my exposure to the current market because I will be be holding it long-term and therefore riding out any short-term corrections.

karanc, I understand your strategy with clients but I see other ways to achieve the same result. Yes, buying a unit in a large condo project with commercial income can lower carrying costs. But the trade off is a unit that may be located in a heavily trafficked area. I could achieve the same results by buying a unit in a mid-block, non-doorman walk-up on a cozy quiet street. Also, there are far less choices with condos especially if a quiet location is one of your needs.

Also, I think that location and layout mean a lot more to buyers than amenities, at least for native New Yorkers but that's only my opinion.

Ximon, I appreciate your clarification. Yes the buildings I am mentioning are usually perched on the corner of busy intersections. Taking a step back, I wonder if your personal preferences might conflict with your investment goals. It sounds like your target property is located in a boutique coop building on a quiet tree lined street, which allows pied-a-terre and has an open/flexible sublet policy. 20-unit buildings in UWS (70s, 80s) between CPW and Columbus Ave immediately come to mind. I think the analysis to pursue is do these buildings typically have a reasonable sublet policy and allow pied-a-terre? Do resales in these segment of the building have a longer DOM? If it isn’t a full service building, who will address your tenant’s needs? Does the super live in the building or is he responsible for four other nearby buildings? If he isn’t able to address tenant’s issues in a timely fashion, what is the tenant’s course of action? You might be setting yourself up for painful scenarios which you cannot address when you are in a different country. If the game plan is rather to use as pied-a-terre and the priority is your own lifestyle, then that is a sound approach. Will studios appreciate more than one bedrooms or two bedrooms appreciate more than one bedrooms? Will pied-a-terre appreciate more than non pied-a-terre? These topics are up for debate and I imagine you will hear both sides of the argument. Given your replies to previous comments, it seems as if you are leaning towards downsizing. I would consider the inherent risk in investing in a boutique non-full service building as an investor. Hope this was helpful and best of luck.

Yes, karanc, your comments are very helpful. What are the inherent investment risks of investing in a non-boutique, non full-service building? Defaulting on the underlying mortgage? Unforeseen assessments and maintenance increases? Competition from newer projects?

As for pied-a-terre and sublet rights, I am seeing pretty flexible policies even on coops such as renting 3 out of very five years after a one-year period. Anyway, if I buy a coop and agree to use as my primary residence, I do not see them evicting me if I decide to leave it vacant 6 months of the year. Has anyone seen a coop sue for eviction on such grounds?

Should have RTFF and researched this earlier. Interesting SE article on pieds-a-terre. Apparently, I do not meet the standard definition. Even if I live in my prospective apt. for only 6 months of each year, it is my legal primary residence and therefore not technically a pied-a-terre.

http://streeteasy.com/blog/what-is-a-pied-a-terre/

hijack to get crowdsourced thoughts. Say I am selling a unit in a co-op that does NOT allow pied-a-terres. I am approached by potential buyers, a married couple. This is a second marriage for them, and they each have a minor child or children from their first marriages. Custody of the children is, of course, split. One half of the couple wants the co-op unit as a primary residence, with that person's child to also be in residence during the weeks that that person has custody. The other half of the couple maintains a separate primary residence, and will live in that primary residence with their kids during their custodial periods. However, when this half of the couple is kid-free, they plan to live in the co-op.

Is this unit a pied-a-terre or not? Should I expect that the co-op board would approve such a sale?

ali r.

How could it not be? The intent is that it is someone's primary residence right away (one of the couple). As long as they are on the shares/prop lease what else is there to say? Telling that story would be long and confusing to any board and not worth telling ... kids have a right to be there anyhow ... I'd just say one is moving in now and the other is in process of selling their old unit and waiting on [random excuse].