Affordable Housing Institute : US

As Henny Youngman said, “compared to what?”

 

 

Born in Liverpool, moved to the Lower East Side,

origin of the tenement …

 

With stock market yields flat and interest rates low, prices on income-producing property are continuing to rise, at least in supply-restricted markets like our endlessly entertaining experiment, New York City:

 

AS New York’s real estate juggernaut thunders on, with record topping record, it would seem that there are no longer any surprises in the market and, certainly, no longer any deals.

 

But the real surprise may be that, amid all the hype and hurly-burly, many New Yorkers are quietly investing their money in real estate in ways that are not speculative but adhere to a more traditional approach: buying for the long term, seeking properties that generate rental income and, yes, for those who know where to look, even finding the occasional good deal. These new old-style investors include stock market refugees still licking their dot-com wounds, long-time renters hoping for a retirement nest egg, and eat-sleep-and-breathe real estate professionals.

 

These amateur landlords are willing to take very low yields:

 

Ms. Corcoran likes to buy small buildings, “usually three- or four-story town houses with tenants in place.” In a typical deal she gets financing for up to 75 percent of the purchase price and seeks properties where she knows that she can cover her monthly costs, even if rents are low.  If there is a little profit left over after mortgage payments, taxes and other expenses, so much the better, but enhancing cash flow is not the goal.

 

In other words, zero current return on equity, everything depends on appreciation:

 

 

“I’m looking for a retirement fund so I can sell the building 10 or 20 years out,” she said.

 

Before the endgame, said the great chess player Dr. Tarrasch, the gods have placed the middle game. 

 

He would have wanted positive cash flow …

 

A break-even investment is O.K., Mr. Binder said, but “never buy a negative return; most real estate deals, you don’t get killed on the sale, you get killed on the bleed.”

 

These buyers are also willing to underwrite optimistically, even as sophisticated a professional as a real estate broker.  Let’s take a look at Ms. Corcoran’s projected P&L. 

 

And we all know pro-formas are always accurate, don’t we? J

 

No vacancy allowance.

No management fee. 

A very skinny operating budget (link in PDF).

No budget for turnover/ re-rental costs.

And 82% of Gross Potential Rent (GPR) pledged to debt service. 

 

“I’m a rather timid investor,” Ms. Corcoran said.  “I’m always trying to buy for a bad market.”

 

Having a small return means that the risk is inherently higher.  

 

Sherlock Holmes will come back to this in his monograph on cheap hard debt, The Powers and Perils of Gearing. 

 

 

 

Neil Binder, a founder of Bellmarc, the real estate company, said investors must be aware of that.

 

“People are buying things with no return,” he said. “If the market turns, that’s a big problem.”  It has become fashionable to buy condos in new Manhattan developments at high prices, with the expectation of flipping them at a substantial profit.  But that can be risky if the market cools off and it isn’t possible to resell quickly, but the rental income doesn’t cover the carrying costs.

 

“These are not good investments - it’s razor-edge investing,” he said.  “You’ve got no yield going in and you’ve got high risks.  I see a lot of this as fueling an over-frenzied market.”

 

Meanwhile, rent control (and its NYC analog, rent stabilization) continues its destructive effects, which are so internalized that they go unremarked:

 

Mr. Smolyansky and his wife own the apartment where they live in a co-op building on Grand Central Parkway in Forest Hills, Queens.  They also own another unit in the same building, which they bought from the sponsor last year.  They paid $44,000 in cash for the unit, which came with a rent-stabilized tenant who pays $725 a month, enough to cover the monthly maintenance of about $550.

 

Only $44,000 for an apartment in NYC?  How can that be?

 

Do the math: $175 a month in NOI is $2,200 a year, before taxes, insurance, capital improvements.  Rent control distorts property markets.  Rent control kills property values.  And it leads to over-consumption:

 

Josephine Hemsing is a lifelong renter who bought her first piece of real estate last August.

 

Along with her husband, Dan Cameron, she runs Hemsing Associates, a public relations firm that works with classical musicians. They live in a rent-stabilized apartment on the Upper East Side and also rent another apartment for an office.

 

Who benefits from rent control? 

 

Content for the time to live and work as renters, they still felt the time might be right to buy a condo that they could rent to someone else.  They reasoned that would allow them to build up equity in a property that, in the future, they might want to occupy themselves.

 

The couple looked at several apartments before finding a one-bedroom condo at the Concorde, a luxury building at 220 East 65th Street, which they bought for $590,000 last August.  Their broker, Lynne Roberts of Bellmarc, helped them find a tenant who pays $3,000 a month.  Regularly scheduled mortgage payments, taxes and common charges total about $3,500 a month, Ms. Hemsing said, and the couple have also decided to make additional payments on the loan principal.

 

So this couple, living in a rent-stabilized apartment, is using their below-market rent bargain to buy another apartment at such a high price they have to rent it at a loss.  What’s wrong with this picture?

 

“I realize there’s a frenzy going on but that’s not why I was involved,” Ms. Hemsing said.  “I felt that I had come to a point in my life where I had to take some money and invest it.”

 

And his money will soon be parted …

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