I believe I may already know the popular vote, but here is my situation:
I purchased a brownstone in Brooklyn in 2014 as a shell and the house underwent a gut renovation.
It is a 3 unit building that my wife and I occupy. We just had a little girl last month and I am kicking around selling. We are in a gentrifying neighborhood and the property values have went nuts but the market is starting to soften, the economy is showing signs of doubt (Dow down 800pts) and I am thinking now may be a good time. We have about 1.1M in equity in the house.
I saw an article a couple of weeks ago in the NY post about how Billy Joel purchased a townhouse for his first wife in the 80s for 4M and its now back on the market for 20M. I don't want to be that guy! :) https://nypost.com/2018/08/22/townhouse-billy-joel...
Everyone knows NYC is an appreciation play and I don't want to cut myself short. I signed up for Biggerpockets this year and @Account Closed caught my eye. Here was a guy who had the same story as I did and ended up selling it to buy a ton of properties in Newburgh. I jumped on the bandwagon and now own a few properties there myself. It blows my mind how my 100k investments cash flow more than a 2.6M brownstone in Brooklyn, and it got me second guessing myself. I know @InvestorLew is big on pointing out the fact other people are still paying down your mortgage (which is at 3%) and maybe the house is breaking even now (it would it I rented the entire thing) but if the rents increase down the road, the property that I sold because it was breaking even, then would cash flow 3-4k per month.
Ideally I would like more space but everything in my house is brand new. My wife and I are not 100% sure if we want to raise our kids here in NYC either. I LOVE Brooklyn, so its certainly a possibly. So I guess what I am asking the community is:
1. Cash out 1M by selling. I can walk away with 500k without any capital gains because it has been my primary for the last 4 years. I can also 1031 the other 500k since that portion is the investment side. Buy a house in the burbs or a bigger brownstone.
2. Keep it and rent it out. The property doesn't cash flow
3. Put an extension on the house and stay here. Would cost me at least 100k
My purchase price was 860k and I put in 600k worth of work (nuts I know!) I learned a TON on this project and I am applying those learning experience in Newburgh. What would you do if you were me?
Difficult to answer since you have no idea what you want personally. I also don't understand how anyone can have 1M of equity in a home. Boggles the mind to think how much that money could be generating in income. Sounds like you have more money than you have any use for so it really comes down to what you want personally. Money obviously is not a factor.
The one option I see no rational for is keeping it as a rental if you move. Whether it cash flows or not why bother with the hassles of dealing with tenants if you have no use for the money.
Hi @Thomas S. Thank you for your reply. I agree that money can be earning me more of a cash flow if it was invested elsewhere. I certainly do not have more money then I have any use for. We are all here for that purpose, right? I think money is a factor to all of us on Biggerpockets, otherwise why would we be part of this community? We have excellent tenants now and the area is highly desirable so I would expect to find another. Why hold? Appreciation? Holding onto my 3% rate? Certainly reasons to consider..As I pointed out, I would 1031 a portion of the profits which would obviously need to be rolled into new investments.
If you can't move out, hold it and cashflow then I would not keep it. Holding for appreciation is always a gamble but with the run up in values in NYC and surrounding boros... holding now and counting on much further appreciation is an even bigger gamble. If you plan on staying you could refi and pull money out, and expand your portfolio. The big factor though is, at what loan amount can you cashflow. Also, I know property values have gone crazy there... what about rents? They may be peaking as well which you need to take into account on future cashflow.
The one thing about appreciating properties is that people don't really realize that the rents tend to be the factor that causes Value appreciation.
Back in 2000, I bought a 2 family near Prospect Park for $140k. The apts were $500 per month.
Today, those apts rent just short of $2k each month.
I know many people here think that holding a property for break even seems ridiculous, but if after 20 years your property cash flows $3k to $4k a month with an investment of $21k down, $30k for renovations..... the Cash on Cash Return becomes something like $3,500 (average monthly rent roll) minus $1k expenses x 12 months = $30k per year / $50k invested = 60% CoCR........... that's pretty damn hard to beat.
This wasn't even the best property either and all 8 of my multi-family experienced the same thing.
Will it continue in the future? HA! I've heard the nellie naysayers tell me this every year for the last 21 years, all the while I keep buying and keep banking it.
If you ever read my past posts, I tend to talk about a friend who bought properties in a cash flowing City back in 2004, the same year I bought a 3 Family in Clinton Hill, Brooklyn.
Fast forward to today, the friend's property still cash flows $1k per month. HOWEVER, his rent in NYC went up over $2,500 per month from where it was in 2004. Really, he may be making cash flow from the property, but because he rents here, the increase in his rent versus the stability of the $1k cash flow puts him at a NEGATIVE cash flow lifestyle. Had he actually bought his apt with a fixed rate mortgage, he would have been better off.
My Clinton Hill property, however, went crazy. I bought it for $900k, it's now worth about $3 Million. The cash flow increase dramatically from break even to about $4k per month.
I do want to caution that not all properties in NYC do well. I know someone who bought an apt on Riverside near 60th Street. His Apt is priced almost exactly the same today as it was when he bought it 10 years ago. The problem was Tax Abatement. His expired and his property tax went sky high. That kept the value down.
Just for more food for thought, try reading the Price Waterhouse Cooper's Emerging Trends in Real Estate for 2019. Here is the link to the extensive report: PWC Emerging Market Report
Guess where Brooklyn ranks among the to 80 Buy and Hold cities? SECOND... that is 2nd.... Just below Dallas.
It's an interesting report.
I'm also putting my money where my mouth is and will be in contract for a 3 Family Bed-Stuy building VERY soon.
Something to think about.
@Account Closed always seems to point out. Its really a tough call.
I would hate for the value of my property in Brooklyn to drop by 400-500k and I could have sold it and sat on the sidelines with the money to come back in when the time was right and do it all over again. Its a gamble any which way you look at it.
That's a good News Article from your link.
It also indicates that House Prices also depend on the $/sqft of Condo prices. That makes a LOT of sense.
If you think about it, if your home has 4 Stories, each can be converted to a Condo, and each can sell for $1k per sqft, then you have a HUGE value add for the conversion.
If you convert at this price, which is pretty much where Condo prices are in the Bed-Stuy area, not even looking at where your particular areas is, for instance, Park Slope, it may be $1,400 per sqft, the value add can net you another $500k to $1 Million.
This is one of several reasons why I continue to buy.
The building I'm buying in Bed-Stuy is 2,400 sqft Gross. Can probably get 2,100 sqft livable. I'm buying it for $1.48 Million, but, if I convert and sell it today, I can sell it for $2.1 Million. So as long as the conversion doesn't cost me more than $600k, I'm already making a profit.
If you think like the NYC Developers, you have a different perspective on profit. If you think like a non-NYC Developer, then you will not want to own your property that you currently have.
Another thing to consider is if you think back, say, 10 or 20 years ago, you could have come to the same conclusion you have now. Sell your property, and maybe the market dipped and you were right.
BUT, if you failed to buy it on the dip, and the property probably doubled or trebled in Value from then, you may have won the battle, but you lost the over all war in the long run.
It's sort of like trading a great stock like Apple. If you try to time it because you think it will crash, and you failed to buy it again, it inevitably goes much higher than the last peak. How many people have kicked themselves when they sold out of Apple thinking that they would get back in and just never did, only to see Apple grow to where it is today?!
Real Estate is vastly different than that because the commission on both the buy and the sell is far greater than that to play timing the market.
For the readers of this post, I'm not trying to convince you to buy my way, I'm just offering a perspective of an Investor like me who buy ONLY in Brooklyn, a highly appreciating market, for the last 21 years.
If you don't think this is a strategy but is just dumb luck, then maybe you should think to yourself, how can I get so lucky?!
Remember, Luck has two requirements. 1) You must recognize the opportunity and 2) You must be prepared to buy that opportunity.
I see opportunity in Brooklyn's Future and I'm prepared, therefore I buy.
Most people are prepared, but they don't see that Brooklyn is an opportunity TODAY. I would probably agree with that if I don't include the Value Add Condo conversion to the equation. BUT I don't buy on today's value, I buy on tomorrow's Value.
How many decades of buying on Tomorrow's value will it take for the reader of this post to realize that if you DON'T, then Cities like Brooklyn, SF, a few others, is not for you.
That's fine, it's just a different strategy, but don't call mine a gamble when I have been successful for 21 years. There something wrong with your logic because even a Cash Flow Strategy can fail in 21 years. Mine has NOT. Maybe it's time for those that think Appreciation is a gamble to start to think that there may be some intelligent and calculable way to add it to your tool chest of financial calculations. After all, for the Professionals, we use Future Value (FV), Discounted Cash Flows (DCF), Internal Rates of Return (IRR), Net Present Values (NPV), etc. in our calculations. ALL of these calculations are about the future. You cannot get an IRR without already assuming what the future cash flows will be.
That is the difference between those of us who use the more sophisticated Financial calculations and those that don't really. If you don't take into account the future cash flows, you really left out a LOT of analysis that you COULD have done. HENCE why those that don't do the future financial calculations think that Appreciation is a gamble. It's because they don't really use the future value calculations.
i am in the process of selling my property in brooklyn. the market is still doing very well... the rise of interest rates will only be a short term cooling period but will not prevent this market from staying hot.
i am selling because of other business opportunity. if you do decide to sell remember money loses value over time. have a plan to invest somewhere else. newburg is starting to heat up!!! i know of an architect who moved out there and was telling me investors are flocking there.
whatever you decide good luck!
@Llewelyn A. Do you think any areas of Brooklyn is not worth looking at? Like East Flatbush, is it overpriced?
The way I look at Investing is not about today's cash flow, it's about tomorrow's cash flow.
When I buy a building, I want it to be in an area which will give me higher RENT appreciation, which will translate to higher Value Appreciation and a higher Cash on Cash Return.
For those that only calculate the current cash flow, that would assume that the Investment's cash flow tomorrow would not be of interest to you. BUT to me, many Investors miss the real diamonds because they are not shining right now.
There are definitely areas in Brooklyn (I don't know much about the other areas) that have future Rent Appreciation. But there are others that don't.
I'm not really sure about some areas because I don't know them well, but Carnarsie, Brownsville, would be two that I don't think will have much future rent appreciation when compared to other areas like Bed-Stuy, Crown Heights, Ocean Hill and Bushwick, even East New York.
The Flatbush area has become hot and is in the process of Gentrification. I would not look so much as what it is today, meaning "Over-priced" until you say to yourself, what will the Rent of a 2 Bedroom apt be today and in 10 years from now?
If that 2 Bedroom apt rents for $2k now but it will be $4k in 10 years, and you can lock in a 30 year fixed Mortgage for 5.5%, you will do fine.
BUT, if you look at that same property without taking into account the future, then you might as well buy outside the City.
I've been doing this for the last 21 years. Every property has seen rents triple and quadruple. For those that think Brooklyn has peaked forever, I've heard that many times before and unfortunately for those that thought that way, they did not take advantage of the huge Value increases.
Something to think about!
Thank you all for your input, you have convinced me to hold. @Account Closed , are you the same guy who keeps on positing questions on Brownstoner by chance?
@Moshe Aharoni if your properties are still on the market can you please inbox me the details. I have buyers and investors looking in many areas of brooklyn.
One more thing to consider. If you have a 30 year fixed rate Mortgage at a really decent Interest rate, especially if it's sub 4%, you need to consider the effects of the rising interest rates and the value of the Mortgage Note.
The Bank is the owner of the Note, you are the Borrower. As Mortgage Interest Rises, the Value of the Mortgage Note decreases.
That is a loss to the Bank. BUT it is a gain for YOU, the borrower.
When the 30 year Mortgage Rates fell super low several years ago, I was lucky enough to lock in a 30 year fixed rate Mortgage on one of my properties at a super low rate of 3.75%, after buying a few discount points.
TODAY, that rate seems crazy low, which it was! But since Investors tend to have a narrow focus such as with Current Cash Flow, they may have failed to understand to buy your properties and lock in those incredibly low Mortgage Rates back then.
Since the time I locked in the rate which was in 2013 to now, the 30 year fixed rate Mortgage Interest rates increased to where it is now, around 5% to 6% for super jumbo Investment Portfolio loans on average.
Now that the rates moved up so much, what do you think happened to the value of my property from 2013?!
Many Investors who don't really understand the relationship between Rising Interest Rates, Inflation and Inflation Adjustable Assets would really have predicted incorrectly that property values DECREASE with rising Interest rates.
My property ROSE in value from 2013 by more than 50% as the Interest rates rose.
The reality is that Real Estate is a Inflation Protected and Adjusted Asset class, if you buy the RIGHT real estate.
I am sure you experienced the same thing. This is NOT some dumb luck. This is the phenomenon of buying an Inflation adjusted Asset.
Another concept that Investors don't get is the difference between NOMINAL and INFLATION adjusted Prices.
To us Investors that lock in 30 year fixed rate Mortgages when we can, the most important inflation number is NOT the CPI because it's Inflation Adjusted. It's the NOMINAL Inflation number that's more important to us.
Basically, if our value of the property moves up by 10% because the Rents rose 10% because of inflation, the inflation adjusted number will say that since both increased the same therefore it's a wash.
BUT, that's NOT true. If you are paying a fixed rate mortgage AND your mortgage payment is the same while your rents rose, you are making MORE cash flow!
So CPI doesn't work for this scenario. Nominal rise in prices mean the ACTUAL rise in prices where you do not adjust for inflation.
So the rents rise, the value of the property increases, and my Mortgage payments stay the same.
It's a Win-Win situation.
I think there is a point where Investors just can't absorb the full economic theory and think about it to the point of truly understanding what is the complete scenario. It is incredibly difficult when you are so busy in life that it's just easy to read a bunch of books but very difficult to spend time to try to make sense of all the reading and look to see how it really works in the specific scenario you are getting into.
The more we become sophisticated in our knowledge, the more we can have a fuller understanding of the sophistication of predicting the future.
Interesting conversation. I was contacted about an off market property in Brooklyn through a broker. It is priced at market but needs likely $150k-200k of work. It is not a screaming deal but I know the rental numbers it could bring and I can make it work. I was thinking of offering about 10-15% under asking but you guys are making me rethink this.
You have a very professional business approach to investing in your unique market however unless I missed it I do not see any mention of your return on equity. What do you value your equity at and how do you earn that return. Do you deduct it first off of your rental income or do you simply place a value on it based on the mortgage interest rate.....with the mortgage at 3-4% is that the return on your equity as well. Seems like a very poor use of money if that is the case.
With your present business approach it would seem that liquidation is your only route to material profit. When do you intend to sell. If values have increased steadily over the past 200 years at what point do you decide enough is enough or is accumulation of perceived net worth your only goal.
For myself speculation on appreciation is not a consideration however I do understand it in markets such as yours keeping in mind that although it may continue indefinably economic collapses, minor dips, are inevitable. Hopefully other factors do not force a liquidation during those time periods.
Hi Thomas. Not sure these personal replies are a good thing for a forum or is just better off as an exchange of emails.
Either case, the basis of any of my calculations is that the components of those calculations change all the time.
For instance, you mention equity. So if I were to calculate ROE, over time, ROE will change. What I hope will happen is that ROE will get smaller, which means that the Equity is Growing. You may call that a bad thing because the ROE diminishes over time, but the overall cause of it is a higher Equity.
Every single cash flow calculation should be thought of as a moving target, RoE, Cash on Cash Return, GRM, Cap Rate, etc.
HOWEVER, there are a few calculations that will take into account all of these moving targets. The one that I use all the time is Internal Rate of Return (IRR).
What I do is project out the next 10 years of the Investment and determine an IRR based on certain assumptions. I will use conservative assumptions, such as 4% Appreciation Rate, 2.5% Rent Appreciation, 5% Expense Appreciation, etc. to come up with the cash flows throughout the 10 year holding period.
If the IRR meets my target number, usually over 10% IRR, I then look to see if there is any way to add value either now or in the future.
Although this is an extremely complicated spreadsheet to build, every one of the Investment Properties I have bought in the last 21 years have done PHENOMINAL.
I would say it's all about the numbers. But the reality is that I was WRONG. The Conservative models were WAY TOO Conservative and we had made a HUGE killing in the Brooklyn Market. But then again, the models were designed that way. It lowered the risk on the downside and there was NO risk on the upside.
As far as Economic and Market risks are concerned, I have been investing since 1997. You already know the Crisises that occurred during these period, and especially in NYC (think of 9/11).
I often ask people to tell me the difference between a good Investor and a Lucky Investor, because it's very difficult to tell them apart.
Both will make MONEY.
HOWEVER, the time when BOTH make money is when the economic tide is rising... meaning when everything is doing GREAT!
When the tide falls back, that's when you can tell the difference.
The Lucky Investor is much like a Gambler. He tends to continue his bet as he keeps winning, mostly doubling down as he goes. But inevitably, this Lucky Investor will lose, and may infact lose it all.
The Good Investor will make money in the good times. When the Bad times come, a Good Investor will NOT Lose money or very little.
A GREAT Investor will not only make money in the good times, but will also make money in the Bad times too.
My Investing History tells me who I am. I have been through enough crisis to know.
Either case, if you are really good at one thing, it follows you can apply that same motivation and discipline to other things as well.
Real Estate is just one of the areas I use to grow my wealth. I think we all have multiple things we are all doing. Some they have their careers, other businesses, etc. and RE is just another vehicle of investment.
The Great thing about using IRR, is that it doesn't matter what the Investment is that you are using. All that matters is the Cash Flows of that Investment.
My real skills is in the understanding of the Cash Flows of multiple Investment vehicles and coming up with a comprehensive IRR Based Business plan.
I know this has been a very boring post! But if you read this far, I congratulate you!
@Jay Hinrichs - Would love to get your thoughts on this. I see a similar discussion started recently on dead equity.
Here is my dilemma. I never intended on renting the entire house out. It is a legal 3 unit brownstone but I went a little too nuts with the renovation of my space in the home. Its super high end and I am afraid of renting it out. I also don't love the idea of having this kind of equity trapped in the home if we do experience a recession in the next couple of years which there are major talks of. Prices are flattening out in Brooklyn without a doubt. Lets just say I could walk away with 1M if I sold my house. I could 1031 500k and take the other 500k and park it on the side and just buy another building in the neighborhood that isn't so high end and rent it out. Thoughts? The only down side of this that I see is the current interest rates compared to what I have now. If I were to do it all over again, I wouldn't have done such a high end reno. Someones security deposit wouldn't put a dent into the potential damage they could do.
High end custom cabinets, real marble counter tops, extensive woodwork, staining, painting and skim coating, built ins, quarter sawn white oak flooring. Lots of risk here for me LLewelyn. Curious to hear your take on this. If I rent my unit at top dollar, which I am sure I would get, I break even but have 1M sitting on the bench. No current cashflow.
First, CONGRATs on having a Successful person's problem! haha!
I think the argument would be whether or not the profits for your portion of the Sale meets $500k. That might be determined by what percentage of the building you occupied. I'm not that familiar with that calculation.
There are a bit of questions that are not addressed to know if you would qualify for the full $500k Home Exclusion on Capital Gains, which is why I mentioned Dave Foster on here. He can address them for you.
If you can qualify for the $500k exclusion, it sounds like a good strategy which you can continue to do every time you qualify for it.
You may have inadvertently stumbled on a really good strategy!
I used to know an Architect that bought several properties. He lived in them while renovating them at different times. He was able to take the Capital Gains Exclusion several times and I think that's a really good way to do it!
I'm going to do something a bit similar as I would actually convert my buildings into Condos and sell them at the right time.
For higher scale renovated apts, especially in the new developments along Atlantic Ave and Vanderbuilt Ave, these apts have been listed around $1,400 per sqft.
There are so many ways to make money in your situation, you will just have to pick one.
Either case, that's a problem for the Successful person!
@Llewelyn A. , Thanks for the shout out. There's so much meat to this discussion. And every individual participating has some very good points from their perspective and goals. The problem is that @Justin S. you need to decide what and where you want to end up. There are a ton of paths.
Honestly though I can't even imagine this discussion except for the fact that you live in one of a very small handful of places where appreciation is almost a guarantee. Otherwise the idea of renting for 0 cash flow is a non starter from the beginning.
So do you leverage and take on risk (the school of @Thomas S. ). Or do you follow @Llewelyn A.s path of letting rents speak as they catch up but trap your equity. Both paths will work.
I'm feeling very zen today so give me some license - I'm not sure I wouldn't want to be "that guy" who got $4 mil in the 80s for that property. $ 4mil over 40 years to invest???!!! I'd take that portfolio. Didn't our president start out with a "small million dollar loan" from his dad 40 years ago?
I envy your thought process because there's so many good paths. But from the 1031 perspective make sure you'll get the full $500K of primary exemption. I'm going to guess that your property is worth around 2.4 and you're into it for 1.4. If all three units are equal then you'll only be able to take 1/3rd of that profit or $300K tax free. But if you actually haven't rented the other units and are living in the entirety then you could indeed take the full $500K. But you could not 1031 the remainder since none of the property was used for investment.
If you've got any desire to move then the most lucrative path (financially) is a combination of sec 121 and 1031 so the entirety is tax deferred/tax free. To do that though you must have rented part of that property out.
A blended approach would be to keep living there if you love it. And rent out the other 2 units. You'll have your rentors close. You can be choosy and nosy when needed. And after a period of time if you can take the entire $500K and also defer the rest in a 1031. Now that's the play to make! Then go be "that guy" who sold the empire state building for a dollar but owns most of Hawaii!