Ha you are a true real estate guy
**Long ass post alert**
I don’t know if we should call the pricing irrational. Even with these expensive prices, it is still cheaper to buy an apartment in Manhattan compared to renting a similar unit, if you plan on occupying the unit for 6 years or longer. So even though yields have aligned at levels unseen in most parts of the country, buying at these levels could still be a rational choice for many people.
With that being said, I do have major reservations about future price appreciation of NYC real estate. As mentioned earlier, rental rates have hit a plateau and even decreased slightly so far in 2017. Costs of financing real estate purchases have risen significantly. On top of that, USD has appreciated by 20% over the past 12 months. NYC has introduced new vetting rules for foreign investors, and the Chinese government has become more aggressive in prohibiting capital outflows. Both fundamentals and a major source of foreign investor demand have worsened. It is increasingly questionable to assume a high rate of price appreciation, often 5% to 7% or more, when buying an apartment as people have relied on in the past.
Since this conversation started, I looked up a few listings on StreetEasy to test the validity of my pricing assumptions. Let’s take this unit for instance, which sold for $2,245,000 a few months ago. Let’s be generous in our cost assumption by allowing a 50% deduction of property taxes; this brings carrying costs to $2123 a month after taxes.
http://streeteasy.com/sale/1225289
This same unit was listed for rent of $6600 last month. Therefore, by taking all these numbers at face value, we can solve for a cash yield over the purchase price of 2.39%, which is within the 2.0% to 2.5% range that I stated earlier. However, we have not taken into account additional factors that will influence this result. The apartment in question was listed as available for rent for 73 days (20% of the year). If the owner employed an agent to find a tenant, the fee would have been 15% of yearly rent on average. We have not considered the possibility that the rent was discounted from its listing price through “deals”. The past two apartments that I rented both gave one month of rent free per lease year, decreasing gross rents by 1/12 for that year. With all this taken into account, the investor’s yield has been at the bottom end of my range, or even lower than 2%, for this year.
http://streeteasy.com/rental/1905677
Here’s where it gets a bit disturbing. Mortgage rates have increased by about 0.7%, following the 10y Treasury rate, since this apartment was sold 4 months ago. Let’s say investors now demand an 0.35% higher rent yield compared to in 2016 (half of the increase in bond yields). this would require a 14.5% drop in purchase price, since rents have not increased. This is incidentally similar to the 14% drop in the price of TLT (20y Treasuries) over this period. Thus, it is possible to argue in theory that the investor who bought this apartment has lost about $300k in market price and is earning a sub 2% yield on top of that. Furthermore, he cannot liquidate his asset without paying 10% (another $200k) in fees and taxes.
https://ycharts.com/indicators/30_year_mortgage_rate
I am not saying that NY real estate is 100% comparable to Treasuries. However, it is clear that the fundamentals of this NY apartment transaction has worsened meaningfully, even over a relatively short time period. With price efficiency, we would see a significant decline in apartment prices. However, pricing is distorted and manipulated by realtors, as I mentioned above. To make matters worse, the spike of new developments that were started in 2014 and 2015 means an excess of new apartment inventory will soon be coming to market, providing even more competition for existing sellers. People who bought NY apartments as investments in 2016 have, in my mind, made poor decisions that will weigh heavily on their future returns.
The parameters would be different if you plan to be a long term resident of NYC, as rental savings accumulate over time. However, this does not remove my concerns about the deteriorating fundamentals of this market.
sounds like you’d need a strong view on treasuries over your your hold period to make a smart decision at these yields. i’ll stick to buying my 10 cap deals and leveraging them to 15-20% cash on cash. if treasuries go up another 200 bps, i’ll still do ok in the near term and i’ll have my capital back in 5 - 7 years just on the cash yield.
6 years based on what assumptions for home price appreciate and stock market growth rate? Or is that based on actual market data collected during 2016 in your research? If so, did you make adjustments for rent growth? Presumably, you can’t take advantage of rent concessions every year unless you move every year which would add to costs and just be a general pain in the ass, so I think you have to assume that your rent grows at a pretty meaningful rate if you stay in the same apartment for those 6 years.
That was just a ballpark number. Maybe it is 5 years. Maybe it is 7 years. Furthermore, it depends on the actual unit. My point is that it generally takes many years for you to recover the costs of the transaction. The things you mentioned will change the calculation slightly, but not the overall picture. I do take into consideration all the things you mentioned, plus other factors.
What you will come to realize is that the solution to such breakeven calculations, or others, is a range rather than a known amount. When I say “6 years”, I understand this number to be an estimate. I could be wrong by a little bit, but it would take a severe miscalculation for this number to be dramatically different (let’s say 2 years), compared to the estimated number.
Agreed, although I think my number would be significantly more years than that given my personal assumptions for home price appreciation versus my personal return on assets. Given how out of whack these numbers are right now and, as we’ve discussed, the likelihood that home prices are more likely to decline than increase at this point, it makes no sense for me to buy anything now, with the caveat that there’s some small probability that rates, including mortgage rates, spike significantly.
So I guess my point is that if you think home prices are likely to decline short term but you are still bullish on capital markets, the payback period right now could be significantly longer as it would take longer to recoup your unrealized loss on home value versus the opportunity cost of gains in your investment portfolio.
Net, we’re in violent agreement about all of this at a high level, but subjective assumptions to inputs in the equation will drive just how bad of a deal it is to buy something right now.
I think you are wise to err on the conservative side, in any case. It is hard to value liquidity and the option to change your decision later, but it is definitely very meaningful. It’s amusing to talk to realtors who feed you lines about the “benefit of knowing where you will live in a few years”, when this is more like the removal of your option to not live there if you choose to in the future.
This tread made me curious what it would cost to rent an apartment in NYC that I would consider at this point in my life. I think I’ll pass.
didn’t read the post so my post may be useless or a repeat. I live in the upper west…not a big shot like CFAvsMBA who live at 15 CPW…bought mine in dec 2011. I think the real estate market in nyc is already taking a hit right now. too many apt going up and less foreign money coming in. chinese were buying left and right literally. there are so many of these investment real estate PE funds aimed exclusively at chinese…the investors from china put money into the fund, the fund buys couple units and hire several workers for full renovation that lasts a year or several months. then the investor receives their visa, EB5 or something similar for hiring Americans for certain period of time, and moves in. But lately, this has been in decline and lot of these funds have been downsizing.
having said that, rental yield is quite low in NYC because people just buy it. not worth it imo. just buy the house and live for +10 years and don’t worry about value fluctuations
Pretty sure this isn’t even relevant to the thread (place to live vs pure investment) so I’ll keep it brief as possible. Speaking purely to the lower market investment area, it’s pretty easy to say it’s primarily propped up by people who don’t know what they’re doing. Real estate families that have auto-pilot mindsets of blindly recycling all earnings back into local market expansion, HNW individuals being convinced to buy by people with misaligned interests, internationals just looking to park money, etc. Not only are cap rates ridiculous, the rents they’re being applied to are just as bad imo. If your hold is long enough you’ll probably be fine as any potential hole will be climbed out of given a long enough time horizon. But if it’s anything remotely short-term, I wouldn’t be at all surprised to see BOTH cap rates and NOI move away from you. SF is probably the only market I’d be more reluctant to invest in as I think its wagon is far too heavily hitched to the tech bubble. Just my $.02.
haha EB-5 is a shit show. I spent almost a year working on getting $60 million of debt through an EB-5 fund and spent about $250k in legal trying to structure the damn thing. the conduits for these loans are soooo sketchy. it’s literally like the wild west or gold rush. people that used to sell linoleum in West Texas now out trying to roll Chinese citizens into these deals where they make like 0.5% interest after fees. But they get a green card and permanent residence as long as you follow the RIDICULOUS regulations. The whole thing is a scam that siphons the market value of a green card into the pocket of these fund managers. Then half the time, the venture doesn’t do everything exactly right and the immigrants get rejected. Bunch of class action suits came out of it.
So slimy, I cut bait and ate the $250k.
yeah i really don’t know too much about this…I do know a girl who runs this type of fund with her husband. They are chinese and seem to have connections with deep pocketed chinese. matter of fact, i know these couple bc they live next to us. smart folks and great way to make money is what i hear from them. but i am sure like you said there are some shadyness to it.
Ohai, why do you say you expect to lose 5%-11% upon sale? Seems high and also a big range. Does NY State charge a tax when you sell a residential property? Normal transaction costs would be 2%-3% I’d have thought.
seller pays 5% to the real estate agent plus other nonsense. I think if you buy a house with the proceeds within a certain time frame, you will avoid paying taxes.
6% agent tax is standard. There is a 1% “mansion tax” for units > $1 million. NYC has a 1.5% ish transfer tax. You must pay staging costs and might have to vacate the apartment of tenants for showing, losing rent. You might have to hire a lawyer and appraiser. Other unexpected costs will also arise. When I first talked to an agent about costs and I saw all this, I literally projectile vomited on his face. Ok not really, but I felt like it.
6% agent fee is standard? That’s outrageous. How is the market so inefficient? Couldn’t a new entrant come in and say they’ll charge 3% (still high in most markets) and clean up?
Commercial property transaction fees are like 1%-2% tops. Most resi I’ve seen in 2%-3%. And that would include solicitor and incidentals. 6% is crazy money.
^ The 6% is negotiable, but buyers’ agents are less inclined to show properties that aren’t paying a “full” 3% to the buyer’s agent. Knocking them down to 2.5% won’t have a huge effect, but going lower than that is likely to reduce showings significantly.
Foxtons was here briefly doing 4% listings, but they couldn’t survive the crash.
The US real estate market is such a racket in the form of fees, especially for residential buyers who have a mortgage and therefore can’t escape the BS cash grabs like escrow fees, title insurance, etc.
Real estate agents serve so little purpose in an internet world. I can find houses I want to look at myself.
^ You can find them, but few sellers will let you inside unless you are with a realtor.
Never happened.