Keep telling me

>> At this point he recognizes that it is in his best interest to reform building management because the apartment is awesome, but only much better-run coops (few and far between) are going to attract buyers at anything close to a break even point for the apt in question.

I don’t think that is ever happening. The apt just isn’t that great. The apt is incrementally better than the rest of the building, but not the 2x ppsf he paid / would need to break even.

When these new buildings were in the planning stages, there was SO MUCH slush $ floating around from government functionaries stealing from their respective countries, plus other criminal entrepreneurs looking to park/launder cash. A lot of that has dried up as a source for NY real estate.

@nada - agreed. I think he is into it with reno at 5.75 or so, and, truth be told, I can’t see it ever trading above 4 again. Given prices the apartments that size at 860 and 870 are trading, I think he’d have a rough time even getting 3.5 today. It will be interesting to see what happens. We are prepared to write the value of our apartment down to zero as we use it over the years, but we certainly hope that (foreseeable) worst-case scenario does not materialize. There are three apartments in the building that make his look modest; two of those three are owned by individuals whose heirs are not likely to want to live in them; our building will have a reckoning when those come on the market in the foreseeable future.

The third apartment that is significantly nicer than X’s is owned by a family that is not likely going anywhere and has enough money to buy the entire building. They are not engaged in building management issues at all because their apartment (they are largest shareholder in the building) doesn’t even register in their assets; the maintenance on that apartment that is unfathomable to mere mortals like me is like buying a cup of coffee for them. Our building has quite the mix, which is why I always say it is in transition. It needs to decide what it wants to be when it grows up, and the market will ultimately answer that question.

Re: X’s apartment; definitely saved money on renovations by basically leaving original kitchen intact. Painted the cabinets, changed the hardware and the backsplash tiles and countertops, kept all the original equipment, even the kitchen island with its original wood finish AND the island chairs!

Can’t tell about other usual major renovation expenses which are often associated with bathrooms as those weren’t shown on previous listing of the apartment.

https://therealdeal.com/2020/09/02/condo-board-cant-stop-sale-of-1mdb-penthouse-at-33m-discount/

Will this be the next bargain?
https://streeteasy.com/sale/452563

https://therealdeal.com/2020/09/02/wolf-of-wall-street-producer-to-forfeit-60m-in-1mdb-probe-settlement/

That thing is a turd. I’d rather use the $18K in monthlies and just rent something else.

NYT gets in on the ancient news.

https://www.nytimes.com/2020/09/04/realestate/iranian-princess-townhouse-nyc-sales.html

35% off 2017 sales price.
https://streeteasy.com/sale/783583

https://therealdeal.com/2020/09/21/related-asked-50m-for-this-penthouse-it-went-into-contract-for-25m/

Plenty of big hits downtown too.

https://streeteasy.com/property/1584921-105-hudson-street-11s - ask $9.25M since 2015, just sold for $5.5M

https://www.urbandigs.com/building/30-park-place/56a/ - ask $9.3M since 2016, just sold for $6.65M

https://www.urbandigs.com/building/260-west-broadway/11a/ - has been seeking $13-15M since 2003 (!!), finally let it go for $8.5M. Total gain in the decades since last sale was half of the corresponding inflation rate.

Side note, 260 W Bwy #11A might be the coolest apartment I've ever seen on here. #RotundaGoals

What does everyone think about the closing price of 260-west-broadway 11A? I don't follow that market at all, and even if I did, I have made clear that neither investment nor math are areas of excellence for me, but just based on what I do follow in NY, I am thinking the purchaser of that apt is going to be fine even if they decide to resell it in five years?

When I click on the link for 260 west broadway, it says that it last sold in 2013 for $11.5M, listed again in Feb of 2019 for 14.8M, and then finally closed Aug 25 at $8.5M (after a price drop along the way to $11.5M). I am confused.

"Total gain in the decades since last sale was half of the corresponding inflation rate" - is this finance speak for massive loss?

Never mind, all the math is over my head, and I am certain this is a dumb question as much of the subtle finance-related humor on here goes completely over my head.

It's a lot of 1 bedroom.

But I'm not sure it's the king of not selling in that building.

Please ignore the post 2 up.

My eye had been drawn to the sequence:

Aug 25, 2020 - CLOSED - $8.5M
Feb 28, 2019 - FOR SALE - $14.8M
Mar 21, 2006 - CLOSED - $7.35M
Jun 22, 2003 - FOR SALE - $13M

Although the price change between closings is a "gain" on paper, it's a loss relative to inflation. $7.35M in 2006-dollars is about $9.5M in today's dollars.

I had completely glossed over the 2013 closing. ("CLOSED" and "CONTRACT" are very similar colors on that website.) The fact someone actually ate the loss from the '13 to now, rather than just on paper, makes the swings even more tangible.

...still a super sweet pad!

So I just looked at the rest of the building and would definitely want to dig deeper to try to understand why these units are priced as they are.

That 1st floor duplex was owned by Cindy Lauper.

I’ll do some math for you, MCR.

2013-2020 owner bought for $11.5M and sold for $8.5M, so $3M there. Another $1M in transaction costs. An $8M loan at 4.125%, so $2.3M in interest. And monthlies that went from $6.5K at the start to $11.5K at the end (possible issue on sale price), let’s call it $9K, so $0.75M there.

So, just interest + mortgage add up to $3.05M, or $36K/month.

The $4M loss is another $48K/month.

An the cost of $3.5M is anywhere from $0 (if you are very mentally challenged w.r.t. finance) to $1M (if you charge 4.125%, same as bank, because you still mentally challenged w.r.t. finance and think equity capital subject to taking the loss first, as occurred here, should be charged the same as debt capital) to $2M (if you use a more reasonable charge) to $3.5M (if you use what S&P 500 did, which had a similar risk profile as this capital). So anywhere between $0 and $42K/month there.

Wow, that’s one expensive rental!

I love the American thread building. But was there ever a reason for 11a to be priced at over $3,000 a square ft?

@inonada - Thank you for spelling it out! I am getting better because that is about where I came out (FYI I used 3% as the opportunity cost of the capital that was tied up in equity because I fully admit that I am "mentally challenged w.r.t. finance"). Yes, massive loss. I can only imagine what they could have rented for that amount over the last 7 years.

Look at the historical listing data going back to 2014 on price per square foot.

I think $1 mm is a high estimate for transaction costs on 11A (mansion tax was lower when buyer purchased, and they didn't pay the brokers 6%) but Nada's general point still stands.

MCR, FTR I do think using mortgage rate as necessary rental yield is reasonable because in addition to that, equity position captures inflationary appreciation in expectation.

Regardless, $7M was definitely spent and perhaps up to $10.5M was spent. This sort of thing would have been rentable for $2.5M over those 7 years no problem. Based on my experience no such LL would “make” you move in the middle, and upon move-in they’d even paint it in that exact shade of white if you ask nicely so that it could feel like “home”.

I do like 11a, and that rotunda is pretty swell. It's rather a failure of imagination on the part of the owner that it's set up as principally as yet another place to watch tv, particularly as they have some interesting art works.

That 2nd BR off the LR isn't much, so I'd say, yes, it is a lot of 1 BR.

I think it’s a pretty spectacular space too, FWIW.

Keith, so you dislike the pricing on 11a specifically, or the entire building?

Speaking of Patrick Bateman on another thread, I cannot help but note that the art on display in 11a makes me think that the current resident is, in fact, a Patrick Bateman type.

Getting back to my original point of this thread, this is another "bargain" in terms of seller loss, yet actually just another reality of the current market.

I think the pricing on 11a is historically out of line when you look at price per square foot with any trades going all the way back to 2014. I'm not trying to make an argument that the seller isn't being clobbered here based on their purchase price. But I would say they significantly overpaid based on where trades were taking place in the building at the time of purchase. This fact greatly magnifies the loss.

Interesting note, I started a thread maybe six or eight months ago noting a positive experience for a seller. Crickets. Sort of demonstrates the psychological bias here : )

@keith - I viewed the 23.5% loss we took on our sale as a positive in these otherwise fraught times. I was expecting it to be worse! Does that help? :-)

Losses are part of the story, however it's not the whole story.

You could have went and bought this in 2013 at 260 West Broadway. It's either about $1,750 a square foot or 1995 a f2. I'm going to guess and say the larger square footage is correct since this is a combo, that would put it at about 1750 a f2

Many other units in the building trading at under 1400 a f2...

https://streeteasy.com/sale/502793

@MCR I never feel good when people lose money. Perhaps you would have done better with me as your broker trying to help balance the consumption with the quantifiable ; )

But I know you're happy! And that's what counts, especially since it sounds like you can shoulder the loss...

Hope you're enjoying your new home!

I don't understand (having done zero due diligence, not being familiar with the building or even really the neighborhood in general) why 1/2C is not trading (currently listed at less than $1000 per square foot). I feel like I have been in less spectacular apartments in Tribeca where the owners paid more.

@keith - Thanks. I just look forward to the day when we get back to NYC to actually enjoy the new place in NYC. With that said, we are very much currently enjoying the new home in Columbus.

Columbus seems to be going through quite a Renaissance of late.

1/2C was sold by the US Marshals for just under $9 million in 2018. I'm sure there's a good story there that 30 could fill you in on.

As a patron of fine apts, I’ll explain both 1/2C and PH11C for you kiddos. When you are spending an amount of money for shelter that exceeds what most families earn in a lifetime, pre-tax, there are some things you look for. I believe these are qualities that were responsible for half of mankind’s progress: the desire & yearning for a dwelling better than a cave. Those that had it thrived, while those who didn’t slacked off and died off through natural selection. As such, these anti-cave desires have been etched into our genes: light & height.

Does natural light make a space any less usable in our modern age of electricity? No. Do you need any more height than that which it takes to not hit your head on the ceiling? No. But is there not an innate yearning for both? There you have it.

The reason 1/2c does not sell is because most of it is a cave: ceilings a bit below 8’ on most of it, an entire floor underground, and little windows. What windows are there, you’ll notice, have been frosted (ground floor on a high-traffic street near the tunnel exit) or shaded in the pics. The kitchen might look great, but learn the standard heights of refrigerators and you will know the height of the space. The only space you really want to spend time in is one grand, beautiful room. And at $17K monthlies, all that extra dead space is revealed for the white elephant it is. Even the Keith Haring mural doesn’t make up for it.

(Treatise on PH11C to come shortly...)

PH11C is a much nicer space than. This link has the best pics, for show & tell:

https://streeteasy.com/sale/1436449

First, let’s discuss naming. Before it was “PH11C”, it was 11C/10G. Same apartment the whole time, different name. Meanwhile, patrons of fine apt know the best line is always named A. “Good work, you just got a C!” didn’t play in high school, it doesn’t play in RE.

The two apartments are the same size. And much of the apartments share the same wonderful light & height of the 11th floor. But in one place they differ. 11A’s bonus space is a magnificent 30’ rotunda peaking at a 25’ stained-glass skylight. 11C’s bonus space is 10G, aka a cave with sub-8ft ceilings. At least it has windows, but ask yourself this. How often, after finishing dinner are in the kitchen of 11A would you think, “Hmm, let me retire to the rotunda.” Every night. And how often in 11C would think “Hmm, let me retire to the glorified basement.” You put the TV room there so you would grow to love it for what it is, but really you would have been better off just not having the space and ridding yourself of the charade.

OK, it’s obviously not as bad as all that but you get my point.

Does the market agree?

1999 sale price on 11A was $4.35M. 2001 price on 11C was $3M. So a 45% premium back then. 2013 prices were $11.5M val. $7.15M, so a 60% premium. So a little rich, but perhaps 2001 prices were higher generally than 1999 prices? (30 or Keith or FP can say.). So equalish 2020 prices is more about pre- vs post-Covid it seems, though perhaps there could 10% here or there to argue over.

>> I think $1 mm is a high estimate for transaction costs on 11A (mansion tax was lower when buyer purchased, and they didn't pay the brokers 6%) but Nada's general point still stands.

FP, you might be forgetting mortgage tax, this is a condo?

1.875% mortgage
0.5% title (?)
0.5% mortgage points (?)
1.825% transfer taxes
1% mansion
5% broker (?)

So 10-11% on amounts that are either $8M (loan) or $8.5M (sale price) or $11.5M (purchase price). Maybe I’m off on something, I dunno never bought a piece of RE in my life, but I think that adds up to $1M within $100K or so.

30yrs>> Getting back to my original point of this thread, this is another "bargain" in terms of seller loss, yet actually just another reality of the current market.

Do you think it’s an actual bargain yet? Me, not so much. But another $3M would do the trick.

There are different and conflicting stories on 1/2C, here is one of them:
https://medium.com/@kosnyrev/a-hidden-keith-haring-mural-in-a-tribeca-loft-with-a-murky-past-223a780494ca.

As far as other units, the building is sort of U shaped. Everything facing the inside has zero view. Almost everything facing the blunt ends has a not great view. Everything facing the outside curve has a decent to good view.

I also thing any unit having a cupola gives it a certain X factor that is extremely difficult to price, but almost always gets overvalued by current owners because THEY bought into it at a price which was sort of the maximum value. Similar example Police Building, O'Neill Building, etc.

Re: bargain,
I guess I'm not being clear - I think it's only a bargain relative to past prices. The point of this thread is people were telling me a year or two ago that these sales weren't going to happen, but yet we are seeing increasing numbers of examples.

Nice digging, 30yrs. It looks like 1C/2C’s original purchase price was $2.4M combine across ~3 apts 1998-2001.

On 11A, at what price do you think it becomes an actual bargain?

11a is indeed a beautiful home, however my opinion doesn't change that previous buyers have overpaid for this particular unit. It's now come down to reality, and I think where it recently traded was a fair price considering the product. If you want a bargain, I think you're going to have to hope for deeper economic destruction to the city. 11a happens to be beautiful and unique home, and I'm sure this buyer purchased out of their love for this wonderful historic Tribeca building and home. Even though they could have rented a similar amount of space in a generic, highly amenitized glass high-rise at a significant discount.

And if the price of the apartment falls in lockstep with economic destruction, all things being equal, does it ever really become a bargain? Or does the valuation just line up with the present moment?

It's like paying six thousand dollars a square foot for a slightly better version of a similar $2,500 square foot home in a similar neighborhood. I've always viewed those Uber high-end apartment buildings as country clubs, trying to create an aura of exclusivity to ask ridiculous prices. You see the same thing with certain rental buildings. That's why you get no disagreement from me when you talk about renting an apartment for 20k a month that you have to pay 20+ million for! And why I'm also not surprised to see some of these overpriced condominiums trading 30% below peak ask.

Keith, it sounds like you disagree with 11A having a significant premium over 11C, something that the market has disagreed with consistently over 3 separate decades. The trajectory of these units followed the market pretty closely.

More broadly, you seem to have a disagreement with the market over the existence of $6K ppsf units. These cannot be developed at a “slightly higher” price compared to $2.5K ppsf. They cannot be developed even at $4K ppsf. That’s what it costs to build, but why would anybody build it without room for profit? You might think no one should want that product, but there are single buildings that are currently in the process of closing $1B+ of that product that show otherwise. So in what sense is it overpriced? What do you think the lawsuits between lenders & developers over control of a project selling at 30% discount is about? Clearly at 30% discount, they are dealing with losses: i.e., priced below cost.

Yes, I think buyers have consistently overpaid for 11a, just my two cents.
How has the 6k+ price per square foot market held up relative to the 2k per square foot? That market to me is consumption on steroids, if that's your thing then swing away... Look at the depreciation on Land rovers, Maseratis and some Ferraris.... It's pretty extraordinary, but there are plenty of people who buy them off the showroom floor. I'm not that guy and I'll never be that guy regardless of how much money I have, even though I love cars especially German ones. I own a 2010 911.. with low miles bought at a 50% discount from new ; )

Not sure if these analogies are spot on, but do you get the drift regarding my thoughts on 'ultra luxury'. Toilets flush the same, elevator takes you up and down....

On bargains and economic destruction, I think you & I have pretty different views.

The market has been providing bargains aplenty for a long time. They just happened to come in the form of renting. And the longer the charade went on, culminating with apts requiring $6K ppsf to develop renting at $2K ppsf -supportable prices, the bigger the bargains became. And that reverberated throughout the market. E.g., go see the “crappy rental yields” thread with $2K ppsf apts renting at $1K ppsf-supportable prices or less. That was already there before Covid.

The drop in prices started long before Covid, market-wide, with no economic destruction necessary. Will it become a bargain? Maybe, don’t really care one way or the other. Will further dropping create economic destruction? I dunno, a bunch of investors lose money, so what? Happy homeowners continue living in their homes at prices & cost structures they were happy with before, who cares?

Construction industry definitely takes a hit, but that cat was out of the bag long before Covid. Most of the Covid-related economic destruction I see around here is caused by people not being here. No people, no restaurant business, no people going to the dentist, etc. So if prices fall and that nets more people being here, then that’s an economic win. Hell, had prices been lower before Covid I bet the economic destruction would have been less: more renters would have been owners, and as lower-means owners they’d have no means to decamp to a second home.

Falling prices on bubbly assets without supporting fundamental valuations do not mean economic carnage. They just mean carnage for holders of said assets, who invariably skew rich since they actually have money to hold assets.

Look I get it, buying a house for you is intrinsically tied to a financial calculation regarding what you could rent the same asset for. But the majority of people are not buying a home simply based on a mathematical calculation.

You just don't get that warm cuddly feeling about the process of buying and creating a home you own. And since the Uber luxury Market is perversely out of whack versus what it costs to buy versus what it costs you to rent, you're happy a camper. Enjoy!

Life is short and very unpredictable, do what you like, be happy, be kind and be responsible. I'll say you do a nice job of remaining relatively polite, we all know you essentially think anyone that would buy an apartment in Manhattan versus renting one is a moron, lol.

I'm a simple person, regardless of my financial situation I'll never live in a 4,000 ft, 25 million dollar home, and I wouldn't pay 30k a month to rent it either.

There are many options in New York City including many reasonably priced co-ops. It may not be the best and highest use of your dollars, but over the long term it's certainly not the worst. Hopefully you get to live in it, enjoy it and make great memories there... And you can comfortably afford it. As I've said before and I see it every day on the financial statements I review, you can own your home and continue to invest in other assets classes.

Keith
TBG

Let's look at the sales history of 3D at 240 West Broadway:

Price History
11/01/2019 Listing sold $3,400,000
Sale recorded $3,301,000
07/19/2019 Listing entered contract $3,400,000
05/04/2019 Listed by Corcoran $3,400,000
08/30/2010 Stribling Listing sold $2,195,000
Previous Sale recorded $2,100,000
04/08/2010 Previously Listed by Stribling $2,195,000

The problem is that those "reasonably priced" Coops.... Aren't. When they are again you'll see me cheerleading buying again just like I have in the past. Just not when the numbers don't make sense in any other way than winning at musical chairs.

And I agree and I've said that on here and I've been telling that to my clients, the market began softening in 2015. As I remember it, not very perceivable until we got into 2017. I remember a number of my clients that had given up, started emailing me again as they noticed the listings they were following were staying on the market and not selling after a week or a month. We saw quite a few buyers that had taken a break after getting beaten up in 2014 and 2015 with calls for highest and best on almost every deal, come back into the market and purchase. No argument from me the market continued to soften. Although I don't really follow it and I don't participate in it, it seemed like starting in 2018 the Uber high end Market was really cracking, in the land where I play that wasn't happening . By December 2019 things started to pick up, I set personal records in January and February for deals in contract. And many of the brokers I was speaking with were reporting the same thing, they were seeing a significant improvement in the market. Not sure what Urbandigs numbers were saying about let's say November 2019 through February 2020?

Stock market was making new highs. Interest rates were competitively low. Then we got slammed with a global pandemic....

Just a bit of stream of consciousness from a foot soldier and what I was experiencing in the market.

30-I'm seeing some pretty nice co-ops trading in the 800-, 1000 price per square foot range throughout good neighborhoods in Manhattan.

Where do you think prices need to be for you to put out a buy signal? I know you've been a buyer at some point, but I don't recall a time since 2007 while I've been on these boards. Certainly correct me if I'm wrong.

Not trying to be cheeky, I think everyone has to follow their own path and make their own decisions. Who am I to judge?

>> Just not when the numbers don't make sense in any other way than winning at musical chairs.

Musical chairs is the operative word here. Warm & cuddly feelings about creating a home you own are great, but real people need to budget. You buy a car, you know what’s going to happen alongside those warm & fuzzy feelings: you pay X, 7 years later it’ll be worth 0.3X, so budget 10% of X per year on that spending.

What exactly should the owner of 11A have budgeted? The $36K/mo in monthlies, taxes, and interest paid? Another $12K/mo in transaction costs, making it $48K/mo? Appreciation at 5% per year as some on this board were assuming in 2013, meaning $48K/mo, making it “free” and really paid by the $3.5M capital invested? Depreciation at 5% per year, which is closer to what happened to the owner and this segment of the market overall, so $96K/mo under the assumption that assets whose yield is out of whack will get corrected eventually?

These swings of $0K/mo to $48K/mo to $96K/mo involve a lot of income. One requires spending nothing, the other the entirety of $1.2M in annual pre-tax income, the third $2.4M. How exactly should a warm & cuddly inclined owner do planning? There are very few people whose income / wealth are so vast where those levels of annual spend are immaterial.

The reason I harp on rental yields is not to call anyone a moron for buying. But as long as rental yields are out of whack, ownership cannot be budgeted because it all depends on whether or not the game of musical chairs continues. The game has been going on for close to 20 years now.

NADA your brain is working in a gear I just don't have. My last thought on this, every listing, every building, every neighborhood is different. To paraphrase Morrissey, "some deals are better than others..."any Smith's fans out there?

I did post 3D at 240 West Broadway:

Price History
11/01/2019 Listing sold $3,400,000
Sale recorded $3,301,000
07/19/2019 Listing entered contract $3,400,000
05/04/2019 Listed by Corcoran $3,400,000
08/30/2010 Stribling Listing sold $2,195,000
Previous Sale recorded $2,100,000
04/08/2010 Previously Listed by Stribling $2,195,000

11a should have never paid what they paid for that unit. Regardless of what the guy paid for it that sold it to him. And if I was his broker I would have come to that conclusion, and let him know. That doesn't mean the buyer would listen to me.

FYI: I never post nor do I comment on active listings, other than my own. JS.

#gobrooklyn

The New York Times: Home Sales Surge in Brooklyn.
https://www.nytimes.com/2020/09/24/realestate/brooklyn-real-estate-sales.html

What is a "reasonable" rental yield in an age when 10yr Treasuries are 0.68% and the S&P dividend is 1.71%?

Picking on Keith because he's a good sport, his co-op listing on E 88th has a cap rate around 2% (figure $3900 rent against $2000 monthlies). Nobody's making money off that yield, unless they get lucky with timing their exit. But they shouldn't have a problem breaking even.

actually nada, I wasn't thinking about points! Of course I shouldn't question your math; please forgive; a quarter point on the loan puts you right at $1 million. (Listed commission was 4%; who knows if the brokers threw anything on the table after that).

1.925% mortgage tax on $8 million = $154,000
Owner’s title insurance = $36,571
Lender’s title insurance= $6,865
Mortgage points = 0.25% = $200,000
RPTT+RETT (1.825% * $8,500,000) =$155,000
1% mansion on $11 million = $110,000
Broker fees (4% listed) = $340,000

FP, the quarter point on mortgage would be $20K, not $200K, so it is indeed shy of $1M as you thought. I had my broker’s fee high: I didn’t think brokers bothered getting out of bed for anything less than $400K. Good news for brokers, I guess, is that the 4% looks like a drop in the bucket, particularly with the new escalated mansion taxes.

Keith, 3D did indeed do better. Part of it was a renovation (note missing pics / discussion of brands used in kitchen / radiator covers vs millwork (?)), part of I was hitting the timing perfectly.

As I contemplated these listings, I am left wondering what each buyer thought they were “spending” vs what was actually spent. If 3D buyer came to you and asked “Look, what am I spending in expectation annually if I pay $3.3M for this place?”, would you have / attempt an answer?

RichardBerg,
In order for leveraged Real Estate investment to make sense yields need to be above mortgage rates (and need to be calculated including real costs like vacancy allowance, insurance, capital improvements, etc).

Well yeah, part of the disconnect is that we're using "yield" (an investor metric) to estimate the cost of owner-occupancy.

One thing which has changed is that people used to do their calculations of whether they should buy on current numbers, and then taking future increases as a windfall. More recently people build in increases in their calculations to justify paying higher prices because that's the only way they make sense.

In some ways similar to how NYC has leveraged spending billions of dollars on capital projects in current dollars based on the possibility of increased tax collections. https://champ.gothamist.com/champ/gothamist/news/pandemic-economy-could-turn-deserted-hudson-yards-even-bigger-taxpayer-money-pit

Spurred by all the talk of $2 cheeseburgers, I went to McDonalds for dinner tonight. Normally I just order a cheeseburger. But tonight — for whatever reason, probably a StreetEasy groupie — the associate behind the counter, asked if I wanted an “investment-in-hunger” cheeseburger or an “owner-eaten” cheeseburger. I asked what I’d been ordering all this time, I was told it was the “investment-in-hunger” burger. I asked what the difference was between the two, I was told the wrapper. So I said, OK lemme have owner-eaten cheeseburger. Associate says “That’ll be $4.”

Yeah, but I bet with the "owner-eaten" cheeseburger you get to decide if the pickle slice is crinkle cut or flat cut, and you can frame the wrapper so all your friends know you eat "owner-eaten" cheeseburgers.

I love bearish banter as much as anyone, but c'mon. Owner-eaters do not have vacancy allowances or commercial insurance. They make capital improvements if & only if it suits their tastes, not slaving to the rental market's definition of trendy furnishings. They take different tax deductions. It's simply not the same equation.

Buyers hold a put option on debt: refi if rates fall, sit pretty if they rise. And they have a hedged (short put) position in rent: lost upside if they fall, sit pretty if they rise. In a volatile or uncertain market, options with low theta are pretty valuable.

There's a large cost to enter those positions, no doubt. But as we're discussing here, that cost is falling every day.

Sure. Yet despite any of those differences, they are joined at the hip and paying the same price for their cheeseburgers. When you eventually sell your half-eaten cheeseburger, your customer is just as likely to be an investment-in-hunger buyer or an owner-eater. OK, metaphor has now jumped the shark.

For Keith’s “success story” of 260 West Broadway 3D, lemme run the numbers lest anyone thinks this human calculator has bias.

So bought for $2.1M, I’ll say total price of reno was $400K between material, contractors, vacancy, and time of owner. Might be off, feel free to plug in your own number.

No loan off the bat, then $750K at ~4% after a year, then refi to $1M at ~3% later. So $2500 interest, plus $3500 monthlies on average, on a place that rents for $8000/mo. So net positive $24K/yr by utilizing $1.5M in equity, meaning 1.6% per annum there.

After 10 years & sale, an additional $500K windfall from selling at $3.3M after taking out $300K for transaction costs. So 33% return on the $1.5M over 10 years, which works out to 2.9% per annum.

All-in-all, a 4.5% return per year. So that’s better than an alternative of 0 or a negative amount. Compared to the much-lower-risk 4.125% owner agreed to pay the lender in 2011, that’s kinda sucky. Alternate investment with similar risk characteristics as the $1.5M could be a 60/40 stock/bond fund, driven by same factors of improving with economic activity & dropping interest rates. Vanguard shows a 10.5% annual return over the last decade on their version:

https://investor.vanguard.com/mutual-funds/profile/overview/vbiax

Taxes take out 0.75% if held, and a total of 2% if liquidated. Let’s call it 9% after-tax, which is double what happened to this owner’s $1.5M.

One way to compare is to ask how much would be left had $1.5M been invested in 60/40, with $2000 taken out monthly to pay the increment between $6000 in monthly costs to owner and $8000 rent. In that case, “windfall” at the end of 10 years would have been 3x as large: $1.5M, not $0.5M. That is the difference from the perspective of “investment”.

But Keith gets on my case about warm & fuzzy, about creating a home, etc., how there are other investments and life is not all about that. OK, I get it, let’s ask how much they “spent” by answering another question. How much would need to come out monthly from the 60/40 for the windfall to equal $500K at the end? Answer is $7600/mo. So from that perspective, amount spent was $6000+$7600 = $13,600/mo. That is the cost of a $2.5M well-timed 2010=>2019 apt served warm & fuzzy.

I added this row to my spreadsheet:
$2.1M purchase, with transaction costs using my "condo resale" model
$100K reno (anything more than that was for their own pleasure, not for resale value)
$1132 common fees

And tweaked global assumptions to match the 2010-19 period:
3% mortgage w/ 20% down
4.5% home appreciation
9% investment return
3% rent growth
2% inflation
35% Federal + 6.85% state + 3.88% local marginal tax rate
1.39% effective property tax rate
Misc assumptions about interior maintenance, relative cost of homeowners vs renters insurance, utilities, etc that don't matter at this price point

It tells me the TCO for 10yr is $1.58M, for an average of $13.1K per month. This is the sum of $577K upfront costs (downpayment, reno, and $47K buyer closing costs); $1.31M recurring costs (net of tax savings); $1.35M opportunity costs (each outgoing cashflow not being in the market for the rest of the term); and $1.66M sale proceeds (net of $195K sale costs). It has an initial monthly outlay of $11K which rises to $12.6K by year 10. The 2.4% cap rate stays pretty flat.

Using the same global assumptions, a $7500 rental has a TCO of $1.59M: $1.06M in rent + misc monthlies, $527K in opportunity costs, and a few bucks in moving costs. It has an initial monthly outlay of $7.7K which rises to $10.3K by the end of the period.

The following factors make the model overly conservative: using post-Trump Federal tax laws, using 2020 average property tax rates (on a building with unusually low assessment, at that), and assuming that market gains are perfectly smooth.

The following factors make the model overly optimistic: using the base inflation rate as the rate of common fee increases (in reality, they doubled over this time frame), assuming some broker discounts that remain surprisingly uncommon, and leaving out most of the hypothetical renovation as above.

On balance I'd say the conservative factors win out, making the purchase beat the rental, though it's close. And only then because 2010 was an unusually great time to buy stocks & bonds. I do not forecast market returns anywhere near 9% for 2020-2029.

And all you have to do is assume prices are going up.

RB, what happens if you:

- put in a full reno cost (is anyone paying $10K/mo for an apt with un-photographable bathrooms/kitchen?)

- Use a 15% investment rate of return, what SP actually did. At 3x levered, RE risk is comparable to stock risk; at 5x levered, it’s higher.

- Do 25% down. At this price point, I don’t think anyone was (is?) doing 20% loans.

Also on the reno, I doubt the 2019 buyers would have paid $3.2M (just a $100K increment) for an apt in such poor condition that the kitchen/bathrooms were not photographed.

Nada I get it you don't want to own real estate, that's cool. I don't care whether anyone wants to rent or buy, do what works best for your financial and emotional profile. However there are a percentage of people who prefer home ownership, I'm not standing on a corner or writing books trying to convince them they should do this. They call me after they've already decided they would like to purchase a home. And guess what, they own real estate, stocks, bonds and in some cases alternative investments. And at least from the balance sheets that I look at, they're are doing well. These are not lemmings, these are well educated people, a couple of them are actually colleagues of yours.

You're just so fixated on return and nothing else. But that's you and that's not the way everyone thinks about home ownership. It's like I've been eating a plant-based diet for 40 years, the financial outcome and the environmental outcome favors this decision. But I'm not jumping up and down and telling everybody this is the only way to live and here's why.

I think we're all grown ups here and even those buying real estate understand over certain periods of time stocks will outperform real estate in New York City.

And I never called 3D a "success story", it was more like this didn't turn out so bad... So not sure why success story was in quotations. And hopefully the people that owned 3d enjoyed living there.

Keith

And the 'warm and fuzzy' comment, that's my dry sense of humor. I hope no one took that as a quantifiable aspect to a real estate purchase.

Keith, people can do whatever they like, I don’t really care one way or another. But this is a RE forum, what the hell else are we gonna talk about? Pretty apt, ugly apt. Spent too much, spent very little. Made a lot, lost a lot. Prices going up, prices going down. Rents going up, rents going down.

I personally don’t care much about returns in RE. The amounts I’d “make” or “lose” are trivial compared to my wealth / income from my day job. I am personally more interested in “spend”. I.e., how can I get the most RE for the least money. Getting the best value is just part of my MO, and if you want to say I’m fixated on something, that’d be it.

That said, I do like understanding what motivates other people w.r.t. spending and investing, and how they look at things beforehand and after the fact. If you read what I write and think I’m calling others an idiot, that’s on you. I fully acknowledge that my behavior and personal utility metrics should appear peculiar to others.

As an example, RB’s metric of TCO bakes in a full investment rate into spending. Not sure if you noticed this, but the cost of spending $1.1M on rent became a TCO of $1.6M, because you could have invested the money (and lived in a tent?).

It’s kinda a fascinating peek into RB’s mind. Most people would quote spending in nominal or inflation-adjusted terms. I.e, the $1.1M would have stayed $1.1M or so. But not RB, he’s looking at money in terms of what it could become. Which tells me he is likely going to end up dying with a big pile of money, as the cost of anything appears (by that calculus) super-expensive. I’m sure he’s aware of this and understands it, but it still indicates how he is inherently wired to think.

I just don’t want to be there for the conversation with his kids at age 45. “Dear daughter, I spend $25K on you between 1990-2010. Now you might think that was $500K in total, but really your TCO was $10M. My accountant will be sending the bill accordingly.”

Thank you for validating my "opportunity cost of renting????" which I was shy to post.

Opportunity cost isn't about stinginess. It's about comparing apples to apples. If you're going to discount today's cashflows against tomorrow's potential investments, then you have to do it on both sides.

You could build an equally valid model based on strict "cash accounting" instead of NPVs, but then you'd have to treat the "cash" parked in the downpayment/reno/etc the same as cash a renter might park in her mattress. Fair is fair.

Below I will switch to $400K reno, 15% CAGR, and 25% down to satisfy Nada's curiosity.

Buy: you have $982K upfront costs that are out of the market for 10yr, then $126K of year-one costs averaging** 9.5yr out of the market ($384K lost returns), then $128K of year-two costs out of the market for 8.5yr ($322K), etc. Summing those opportunity costs, then subtracting capital gains taxes, gives $3.79M. Given the unsustainably bubbly market I've been asked to model, they now make up the lion's share of the new $4.29M TCO. Modeling the 2010-era tax code would drive this down considerably, but still leave you with a very unappetizing total.

Rent: you have $93K of year-one costs (plus $281K lost returns over 9.5yr, pretax), $95K of year-two costs (plus $239K lost returns), etc. Total after-tax opportunity costs of $1.07M are once again the bulk of the TCO, which has risen to $2.13M.

Unsurprisingly, bull markets favor renters. To get TCOs into the same ballpark, you'd need to bump the year-one rent to around $15,500. (plus the 3% annual increases, which I've retained for both versions of this calculation, and honestly seems like a good fit for the past decade)

When running simulations for my own forward-looking amusement, I use globals in the neighborhood of:
2.5% mortgage @ 20% down
0% home appreciation
3% investment return
2% rent growth
2% inflation

I do toy with them to check robustness. While it's impossible to hedge (let alone optimize) against every outcome, I make sure my bids have a margin of safety such that I won't lose my shirt even if appreciation goes negative or inflation goes wild, etc.

**you can't actually "average" an exponential curve over the course of a year's monthlies, but I'm too lazy to bust out the logarithms

RB, thanks for running the calcs.

In these historical analyses, I personally try to hew as closely as possible to what actually happened. In my analysis, I did (a less precise) analysis of what the buyers actually did, with a guess on the alternative they may have done (but who knows, maybe they would have let $1.5M sit in cash for a decade rather than do a 60/40 with similar risk). The alternative I asked you to run was the alternatives I was facing in 2010, and I took the “put 25% down payment in stocks” route. Back then, inonada didn’t have the cash to both make the 25% down payment in a home that’d last him a decade AND be left with meaningful exposure in stocks. So that 15% (ridiculous as it has been) was real, and it’s important (IMO) to retain it in a comparison (for me, anyways). The same headwinds driving that 15% led to lower interest rates (owner of this place borrowed at 4.125% initially in 2010) and probably kept RE from turning into a loss.

I believe in 2010, you also made the decision not to buy. Where did your 25% down payment go into? I.e., was it 60/40 or more like 100/0?

BTW, on my TCO comment, I wasn’t implying that it was an unfair metric between the two. It was just a curious one, and one I am often attracted to myself, as I think we share certain proclivities. So whatever I said about you was really a mirror on myself. But I agree, on a relative basis, the TCO metric and the rent/spend-equivalent metric are the same exact thing.

I was 100% stocks from Nov 2008 - 2015ish. I've been letting my foot off the gas since then: partly from laziness, partly from sensing my dividends were getting reinvested into froth, partly from career starting to throw off more cash than my usual autopilot strategies could cope with.

Much of my current shopping adventure stems from having too much idle capital and nowhere to put it. Manhattan RE may still have deep flaws and ample room to cut deeper as I catch that knife...but it's still more attractive than today's stock/bond valuations.

Sold for $20,207,500 - original $50 million ask.

https://therealdeal.com/2020/10/01/fortress-investment-chairman-buys-steeply-discounted-zaha-hadid-penthouse/

If you don't feel like clicking on the link at least check this part:
"Despite the steep discount, the deal wasn’t a wash for Related, though some could argue it’s a race to the bottom. The sale is the largest residential deal to close in the West Chelsea submarket in two years, according to The Real Deal’s analysis of data from OLR. It surpasses the previous record holder, a heavily-discounted penthouse at Walker Tower, which sold for $18.25 million in August.

The building’s other two penthouses have yet to trade, but one appeared on the market in January asking $13.95 million.

Other West Chelsea properties have absorbed major price reductions of late, including the Getty condominium and the Andres Escobar-designed townhouse at 357 West 17th Street."

This area isn't clicking. I think it's too remote.

So I just checked in on my "watched listings" and noted a number of 10% price cuts, which struck me as signaling a change in the little market I watch because I typically only see price cuts of 5% after units have been sitting for 3 mos. or so.

I love looking at real estate the way some people like looking at shoes, so it's something I do for fun regardless of whether I am seriously in the market. I just change the market of focus now and then to change up the game, but I am riveted to NYC market these days, in large part b/c I am dying to see whether 30yrs predictions come true or whether the market proves itself to be relatively recession-proof (stress on relatively).

The only thing that will get me to quit this focus is if/when I see a place that I think Mr. MCR might prefer over our current apartment at a price point below the amount we've put into our current apartment to make it "just so."

So far so good, but this recent round of 10% price cuts suggests there might be an end in sight for my ability to remain focused on NYC because self-torture is not in my DNA, and if I start seeing any of these 2/2 Penthouses with outdoor space in my neighborhood appearing at price points that suggest we could have had one of those for less than we've put into our current place, I will have to turn away.

MCR, while I like watching prices as much as anyone, I'm also frustrated at how slowly they adjust down. Every time I check prices, I'm reminded that sellers and brokers still think it's 2016... SMH. The 10% price chops are on properties that are already 20% overpriced.

There's no fun in a down market. Might as well go hibernate in Nowhere or Columbus.

30,000 agents don't help that. There's always someone willing to indulge the fantasies of unrealistic sellers. It also doesn't help that even when you see agents for the last few years in videos decrying "aspirational pricing" and then you see where those same agent's listings get priced. And of course seeing "influencer agents" who still think bullshit can trump a down market.

It is crazy. In the little niche I am watching I have not seen anything go into contract in the past few weeks, but I am seeing new listings come on at a regular clip. However, nothing is on the market at a price point that either tempts me to trade up or makes me feel bad about how much we paid for current place, including renovation. My personal emotional reaction to it all is interesting to me and I suspect is in line with that of others who put a premium on living in the city - if prices come down, I will consider trading up, but if prices hold, I will feel good about what I have.

Don't mind the increasing inventory. It's a sign of market health that people are willing to transact. There is huge pent-up demand for Manhattan real estate for those sellers. A broker told me so!

I do wonder what these sellers are thinking, particularly one I am watching where I know sellers NEED to sell, but have not lowered the price despite the apartment’s “sitting” for almost a year now. I feel like the 3/3’s in our neighborhood would move at 1,500,000, but many just continue to sit at $2M/+/-, which would deter me from even making an offer were I in that market.

@George - I am curious as to whether there is any price point that would entice you to buy a 3/3 renovated coop in midtown east? Would you be tempted at 1.5 or is the neighborhood and/or coop ownership structure a non-starter?

Coop is a non-starter for all the reasons we've discussed (which do not include being barred by my race, religion, or other factors that coops routinely discriminate against). It's just a terrible way to own real estate.

Totally understand. Fair enough.

Speaking of delusional brokers, here's an email I just got. Broker babble like this is why sellers have spent the last 4 years chasing the market down.

--------

Do you think the NYC market is dead? Well it's not.

With new contract highs and a slew of luxury sales, Manhattan’s residential market is showing signs of life.

What is driving this rebirth? Certainly adjusted prices, record-low interest rates, and a successful reopening of the city are among the big contributors.

Here are some key things to know:

One bedroom sales are sluggish with prices down about 5%
Two bedroom sales prices are up about 7%, along with increased sales volume
Three plus bedroom sales gained 4% in market share
$3MM to $5MM properties are showing the biggest market share growth.

What is the takeaway? Not only are people looking for more space (as well as more perks such as in-unit laundry, room for a home office, and building amenities) but they are spending more for it.

"One bedroom sales are sluggish with prices down about 5%
Two bedroom sales prices are up about 7%, along with increased sales volume
Three plus bedroom sales gained 4% in market share
$3MM to $5MM properties are showing the biggest market share growth."

Absurd/criminal without a reference point. How stupid does this broker think the audience is?

As if anyone who's not a broker cares about "market share"

It shows how desperate brokers are grasping any statistic that could justify unrealistic seller expectations in hopes that they somehow land one of the few big sales still happening.

https://streeteasy.com/building/altair-18/ph12ab

This is the owner of the property above. In keeping with the thread's theme, I don't think he is bankrupt or being foreclosed on.

https://www.blackstone.com/people/neil-simpkins/

He did pay $9.4m for it in 2007, which may be more like a 2005 price since it was new construction, so is almost certain to take a loss. Hopefully he's better as a private equity investor than real estate investor.

Pricing in that building seems...pretty reasonable actually? Both historically and today.

My only question is who paid to outfit it as a single unit - him or the sponsor? Depending on the original build-out timeline, it may not have required a demo & rebuild.