What is a reasonable Rent to Sale Price Ratio in this market?

LOL NO!

New York's historic ratio is 12: http://money.cnn.com/magazines/fortune/price_rent_ratios

Well, I believe the stock market is about half that.

BBB corporate bonds (investment grade, safer than real estate in my opinion) yield 9% currently. That works out to an 11x price/cash flow ratio. That seems appropriate to me.

You don't pay property taxes and maintenance on your BBB corporate bonds.

By the way, applying the ratio to your specific unit would yield a purchase price of $936K ($6500/month x 12 months x 12) so if $6500/month is market rate then asking $1.95M is just irrational according to historic trends.

sticky--I looked up the Fortune article mentioned in your post. Where does it say that the historic ratio is 12? I assume that the ratio (historic or not) varies from hood to hood. Is there any information on the ratio for each hood?

Click "The P/R ratios" tab. It lists New York's ratio as 11.7 so 12. It does not specify by borough or neighborhood unfortunately. I think I've seen Steve allow up to 16 for prime Manhattan but never saw a reference cited for that high a ratio.

P/R ratios are "similar" to stock P/E ratios. (Although hardly the same as if you were to buy a condo today and rent it out, your net rent after paying carrying charges and taxes would me much lower, and thus the net P/R ratio a lot higher.)

Not all stocks should sell at the "market" P/E ratio. Some should sell at higher ratios and others at lower ratios. And it's not just a question of the quality of the company (or neighborhood). A key factor is whether the neighborhood is likely to experience future rent increases significantly greater than the general inflation rate - or less. Some neighborhoods are likely to get better and better while others move in the opposite direction - or just plateau.

Anyone can spot a neighborhood that has improved over time. It's much more difficult to spot one that will decline - or just plateau - just like the stock market.

All in all, I'd conclude that Manhattan today is richly priced...like the stock market was in 2000. Remember, the "new paradigm?"

I'm looking for a return of the 12X P/R ratio. (Keep in mind the 11.7 X ratio was the "average" for the the past 15 years. There were actually times when Manhattan real estate was selling at substantially less than that ratio - for example in the early 1990s.)

Patience.

Does this ratio hold at all price points? If I use this ratio of 12 to get a 'market or fair' rent amount for, say, a $3 MM apartment, I get $25,000, which seems pretty stiff. Is the ratio supposed to get smaller as the apartment size gets larger or the price (or value) gets higher?

18

By the way, is this ratio of 12 or 11.7 for Manhattan or all of the NYC? As sticky suggested, I looked at the ratios in the Fortune article, a lot of other cities have a higher ratio than NYC. Not that I know a whole lot of cities other than NYC and Boston, but does this suggest that I would be better off buying a hourse/apartment in those other cities from a purely economic perspective?

The difference between a PE and and PR is that you have to factor in the maintenance and real estate taxes. It should really be price/(rent - (maintenance/cc/tax)). The inverse of this is the cap rate, i.e. how much a hypothetical owner gets per year by renting out the unit to a tenant. Market cap rates for residential sales in Manhattan now are around 3%, i.e. 33 times. The comparable is apartment REITs that have cap rates of around 8.5 to 9.5% at today's prices, i.e. 11 or 12 to one.

Pay what you will, but paying a 3% cap rate when you can buy rental properties via a REIT with a 9% cap rate is a bad investment. Maybe its a "home", but its not a good financial investment when you can earn so much more.

(If you live in the unit, you rent it to yourself. The comparable is still the REIT and is roughly comparable to being a private landlord where all interest is tax deductable.)

"I'm looking for a return of the 12X P/R ratio. (Keep in mind the 11.7 X ratio was the "average" for the the past 15 years. There were actually times when Manhattan real estate was selling at substantially less than that ratio - for example in the early 1990s.)"

If you want a great investment, wait for prices to be no-brainer screaming buys - if you simply want to own an apt and don't really care about your investment return, buy if you can reasonably afford it. Personally, I would view it from the investment perspective - if there are more compelling investments out there, I'll save the 20% down and closing costs and put this cash in these other investments. But bubbles, when they burst, tend to overcorrect on the downside - it will take 3-5 years to reach bottom, though.

I assume you mean $250,000.

Seems reasonable to me.

Are you going to "net" $250,000? No. You have to pay property taxes and common charges. That could easily be say $30,000. So now you sort of net $220,000.

So now you're sort of netting 7.3%.

Big deal.

I can easily get that on an investment grade bond with no worries. No problem tenants. No broken dishwashers.

Bottom line: I think 7.3% is a reasonable expectation on a risky investment like this. (And yes, I would expect my rent role to grow with inflation over time which would add to my return.)

Of course, the New York market won't give you that $250,000 in income today on a $3 MM investment. But it did in the past.

Interestingly, rental rates do follow historic trends in NYC.

I found rental numbers on the Normandie circa 1992 and then compared them to the current CL postings and found a 3.7 compound annual return. It's on one of the recent threads.

Established NYC should be 12. You would expect up and coming neighborhoods to be higher -- like internet stocks -- but take into account that Cobble Hill may end up being google, but Ft. Greene could end up being Sun Microsystems.

The ratio should stay the same within in a neighborhood however, ue10021. So UES between 5th and park should be 12x ratio. Perhaps there could be an argument that the 2nd avenue subway creates a better long term potential situation for yorkville, justifying a 15x there (but that's an argument).

budda--interesting and thanks. Is ther any website about more on this?

Topper--if I assume other transaction costs such as transfer taxes, legal fees and broker fees (on the back-end upon sale), the net return would be lower. It would be still lower if the apartment is not continuously rented out. So let's assume that the net return would be 6%. If I were to own and rent out an apartment for a reasonably long period of time like 10 years and the appreciation is 6% per year, then the net return before income tax would be 12% per year. Is this more or less what I would expect from an investment in a Manhattan apartment? Obviously, I could make more if I leveraged my investment.

I think people are questioning that last point about the 2nd Ave Subway. Without funding for the true Second Avenue portion (they only have funding now to connect to Lex/63rd and 57th/7th) and probably continued delays constructing the dig itself (extending the time the street is cut up), it might be a negative in the short and intermediate-term valuations.

12 is generally too low. Unless you are discounting because of expected price declines, 12 just doesn't work. Run the numbers yourself on your particular example and see.

One big difference between an buying an apartment and investing in a REIT is that the Government will give you 95% loans to buy an apartment at very low rates and let you deduct the interest from your taxes. You can't buy $500,000 worth of REIT stock by borrowing $475,000 of it from the government and writing off the loan interest, and being able to walk away with no consequences if it goes bad. Not yet anyway.

Well, the REAL answer is all over street easy. When times were good, units rented for 5-6% of their value. Now they are renting for 3-4%. In EVERY NEIGHBORHOOD. Including Lenox Hill, Lincoln Center, Chelsea, and other "hot areas." There are hundreds of units all over the city for both rent AND sale on streeteasy, and invariably the owner or sponsor starts by asking 6% and has lowered it to 3%. And lowered asking rent by more than asking sales price. So if asking price is any reliable gauge of the place's value, the P/R ratio has actually gotten higher, not lower. But if you think 12 is the historical or correct norm, that means houses are WILDLY overpriced now.