FIRST POST!-Analysis of an OVERPRICED 4 Family Townhouse in NYC I just listed for $5mm

6 Replies

Hello BP,

While I have mostly perused this site for investor knowledge based on keyword searches, I've recently started to focus also on the many different forums. I am an associate broker with Exit Realty in Manhattan, and have been in the business for 6 years, however, still no investment portfolio...we're working on that! Basically like most New Yorkers I pay extremely high rent! So I acknowledged I need some start up capital before I can quit my full time job as an agent. My goal is to refocus on my real estate practice before I can start investing even on a small scale. My goal is to sign 6 exclusive listings in 6 months. With that income, I can be ready to start making offers on investment properties early 2016. Then possibly house hack my way into a multi family or do some flips or BRRRs in surrounding markets from NY/NJ/PA.

I kill fsbos! My business plan is simply based on cold calling and follow up through emails and direct mail. (I guess thats another post). I have rarely needed to create very thorough analyses for sellers of multi-family buildings in Manhattan because the demand is so strong and my pricing is normally so accurate that my listings are in contract with 30-45 days usually. 

However I just signed a multifamily and would like some validation on analysis I did to make sure I did it correctly. I would appreciate any advice on the analysis from both investors and agents....thank you!

When I found the fsbo, it was priced at $5,250,000. I called him this past Friday, we met on Monday and he signed my listing agreement immediately (again, another post on negotiating i guess, this was a great story). During our meeting, he admitted he was way over-priced. I asked what was the lowest offer he would accept and he said at least $3mm. This is now a situation where he's convinced he should work with an agent but he needs to have the satisfaction that we tested the waters at this asking price. 

I created an analysis using the property's numbers. Basically the four apartments have the potential to rent for $9660 monthly/$117,130 annually assuming 8% vacancy (HELP here, if I assume an apartment will be vacant for a month do I calculate 1/12=8.3%? And do I apply this same vacancy rate to the monthly as well as annual rental income?)

Expenses come out to $19,229 annually.

NOI=$97,901

Cap Rate @ $5mm= 1.96%

Cap Rate @ $3mm= 3.26%

Cap Rate @ $2mm= 4.90%

Then I created a scenario where the building is purchased for $2mm, assuming 65% financing with 4% interest (i know, very low rate).

Debt service comes to $6206/month; $74,472/year.

Cash flow= NOI - Debt Service

=$23,429

Cash on Cash= $23,429/$700,000 (35% down payment) 

= 3.35%

Total Return=

$23,429 Cash Flow + $140,000 Appreciation (7% in Manhattan) + $22,894 Equity Accrual

=$186,323

Total ROI= $186,323 / $700,000 = 26.62%

Again I would love to hear any feedback to make sure these numbers make sense. I honestly have been spoiled by being able to sell properties so quickly that I have to practice analyzing deals for my future endeavors.

Thank you

So the property has 4 units?  Are there similar properties in the area?  Generally properties with 4 or fewer units are appraised used recent sales on comparable properties.

At that price point with such a large potential range in values, it might be worth getting an appraisal first.  It may not be 100% accurate, but it should prevent you from listing at twice what the property is worth.

Has he gotten any interest as a FSBO? Did anyone mention a potential price? Do you know agents who represent buyers in that price range? Maybe they can help you get an idea of the proper pricing.

where in the Manhattan is it? Your not so far off on your number (cap rate wise) in Manhattan. I was a commercial broker in Brooklyn/Manhattan and but ppsf is a better metric. 

"have the potential to rent for $9660 monthly"

Appreciation driven markets are time bombs. What eventually goes up must come down again.

A buyer counting on permanent expected over market rent growth and appreciation to justify a purchase is setting up for long term failure.

I know some will disagree but just like Cali I do not like those type of markets. If you hold a really, really long time where you can cycle back again to sell when the market is strong it might make sense.

For other investors who hold for up to 10 years tops the short term might not work as they have to sell in an in opportune time in a volatile market. I have heard people up there getting rid of tenants in rent control units to up income higher.

You are claiming in your numbers only 16% annual expenses. I do not believe that is realistic.

I have a lot of clients from California and New York right now. They are selling off and buying in other states where you have more stability and much better yield for cash flow. Appreciation may or may not happen but cash flow is there.

For your seller if they will take 3 and you are listed at 5 that is really high. If they want to test the market have in the listing agreement where " You will try their price for 2 weeks and then there are automatic price reductions built in to the listing agreement ".

This way you are not begging for a reduction. When they say why did I list so high then you could say I said this way overpriced but you wanted to try it. Now that it didn't work we are doing the reduction to get serious in the marketplace where buyers will want to write offers on the property and purchase it.

Same thing in Cali in that I have clients getting 3 caps for their properties. Those markets are nuts.    

Originally posted by @Armando Ramirez :
$23,429 Cash Flow + $140,000 Appreciation (7% in Manhattan) + $22,894 Equity Accrual

=$186,323

Total ROI= $186,323 / $700,000 = 26.62%


Where are you getting 7% appreciation from?

According to this Forbes articles, the 10 year appreciation from 2004-2013 was under 4% (that's the best recent 10-year data I could find):

http://www.forbes.com/sites/erincarlyle/2014/01/30...

Taking another recent 10-year period (from 2000 to 2010) prices actually dropped:

http://www.millersamuel.com/change-is-constant-100...

If you take out the 20-year time period 1980-2000, the 100 year appreciation rate is about the same.

Now, you can argue that things will be more than 1980-2000 than the other 80 years, but it's just as easy to argue that the other 80 years are just as (if not more) meaningful. 

If you want to include appreciation into your formula, I'd stick with a more realistic number...of course, if you just want to make the numbers look good, I guess 7% is fine.  Though the numbers look even better if you say 10%...

Where is the property and what are the unit details (eg; bed/bath, sqft, recently renovated)?  Borough and neighborhood?  I'm happy to give a stab at my analysis (based on buying and selling several 2-4 family properties in NYC).