Case Study: Rent or Sell in Manhattan?

[StuckinBoston]

I was hoping to get some feedback on whether to continue renting, or sell, my former home and now current rental property. The property is a condo located in Manhattan which has appreciated ~30% in value over the last 2 years.  I now currently live out of state. Any input would be appreciated!

Market Value: 475k-500k
Original Purchase price: 410k
Original Mortgage Amount: 357k
Interest Rate: 5.4%
Mortgage Term: 30yr fixed
Term remaining: 25yrs
Amount remaining on mortgage: 329k
Gross Rents: 26.4k / yr
Principal and Interest (the P&I of your PITI - should match with the above info): $2026 / month
Taxes and Insurance (the T&I of your PITI): $150 / year  (*The property is tax abated for the next 10 years)
HOA costs: $5052 / yr

[waltworks]

Jeebus. Sell it, sell it now. Good lord. It is a terrible, awful failure of every real estate investing rule of thumb. Best case scenario, you are slowly losing money. Worst case, you are losing it fast.

-W

[RyanHesson]

I'm no expert at this type of thing (literally never owned property, never really researched it) but here's how my intuition tells me to analyze:

Expenses:
1. Interest on Mortgage = .054*329000=$17,776/yr
2. Home Owners Association = $5052/yr
3. Opportunity cost of your equity = .07 (or another percentage as you like)*(487500-329000) = $11,095
4. Utilities? Management expenses?
5. Any taxes on the income?
So total is $33,923+whatever you pay for utilities and management expenses and taxes. Maybe 40K?


Income:
1. Rent = $26,400
2. Appreciation = (487500-410000)/5 = $15,500/year
So total is $42000

So, based on my estimation, you should be pretty damn near indifferent between selling it and keeping it. You might be able to fill in some better numbers that get you closer to the truth. It seems to me that, due to the illiquidity and difficulty involved in owning and managing property, I would sell the property and move the money to something else.

Just my uneducated take.

[StuckinBoston]

Walt:  Thanks.  If I listened to the "rules of thumb" two years ago and sold the property I would have lost over 100k in capital appreciation. Since the property has appreciated, ~15% annually since I began renting it, I have been okay with taking a small loss.  However, if that 15% changes for the worst it would certainly become a sell (if it isn't already).

Ryan: Thanks.
4. Utilities? Management expenses?  Zero.
5. Any taxes on the income?  Zero. But I am claiming depreciation which as I am sure you know will have tax implications when I sell the property if it has appreciated, which it has ~65-90k.  We did live in the property for 3 of the last 5 years and I know that affects how the state recoups taxable income lost to depreciation/appreciation.  I should know the details about that but I don't.

I pretty much agree with everything you wrote below your questions.

[Icecreamarsenal]

I was hoping to get some feedback on whether to continue renting, or sell, my former home and now current rental property. The property is a condo located in Manhattan which has appreciated ~30% in value over the last 2 years.  I now currently live out of state. Any input would be appreciated!

Market Value: 475k-500k
Original Purchase price: 410k
Original Mortgage Amount: 357k
Interest Rate: 5.4%
Mortgage Term: 30yr fixed
Term remaining: 25yrs
Amount remaining on mortgage: 329k
Gross Rents: 26.4k / yr
Principal and Interest (the P&I of your PITI - should match with the above info): $2026 / month
Taxes and Insurance (the T&I of your PITI): $150 / year  (*The property is tax abated for the next 10 years)
HOA costs: $5052 / yr

Your calculation should go like this:
A>b?
(26.4+5052)/2 > (2026+150)x12 ?

If not, then sell. If so, then keep. Based on back of the envelope math, doesn't look good.

The (/2) is accumulated wisdom from real estate investors about how much of gross rents go to maintenance costs, on average, over a long period of time.

[StuckinBoston]

The (/2) is accumulated wisdom from real estate investors about how much of gross rents go to maintenance costs, on average, over a long period of time.

I'm surprised you can find people willing to rent a property, and not buy it, with those numbers.  Do these same rules apply to major cities?  Using your metric as a guide there is likely a ~0% chance you could find an investment property in Manhattan.

[waltworks]

Professional real estate people are not interested in buying rental properties in markets like yours right now, in general. Go read the "rental properties that perform well" thread. It will be an eye-opener.

-W

The (/2) is accumulated wisdom from real estate investors about how much of gross rents go to maintenance costs, on average, over a long period of time.

I'm surprised you can find people willing to rent a property, and not buy it, with those numbers.  Do these same rules apply to major cities?  Using your metric as a guide there is likely a ~0% chance you could find an investment property in Manhattan.

[Icecreamarsenal]

The (/2) is accumulated wisdom from real estate investors about how much of gross rents go to maintenance costs, on average, over a long period of time.

I'm surprised you can find people willing to rent a property, and not buy it, with those numbers.  Do these same rules apply to major cities?  Using your metric as a guide there is likely a ~0% chance you could find an investment property in Manhattan.

I'm born and raised Manhattan. 33yo now.  There's a lot of information on these forums, as well as on biggerpockets.com, which is the go-to referral site for the people on these forums actually making money on real estate.
I think I had the same exact question as you did a month ago. So continue to read up!
As a small-time investor, yes, it's unlikely you'll find anything hitting the 1% rule in manhattan proper.  That is if you want buy and hold rental income.
You'd have to travel to the outer reaches of the outer boroughs, even.

[StuckinBoston]

I think I had the same exact question as you did a month ago. So continue to read up!
As a small-time investor, yes, it's unlikely you'll find anything hitting the 1% rule in manhattan proper.  That is if you want buy and hold rental income.
You'd have to travel to the outer reaches of the outer boroughs, even.

Indeed, quite a bit to learn.  Thanks for pointing me in the right direction.

[rmendpara]

I was hoping to get some feedback on whether to continue renting, or sell, my former home and now current rental property. The property is a condo located in Manhattan which has appreciated ~30% in value over the last 2 years.  I now currently live out of state. Any input would be appreciated!

Market Value: 475k-500k
Original Purchase price: 410k
Original Mortgage Amount: 357k
Interest Rate: 5.4%
Mortgage Term: 30yr fixed
Term remaining: 25yrs
Amount remaining on mortgage: 329k
Gross Rents: 26.4k / yr
Principal and Interest (the P&I of your PITI - should match with the above info): $2026 / month
Taxes and Insurance (the T&I of your PITI): $150 / year  (*The property is tax abated for the next 10 years)
HOA costs: $5052 / yr

Properties all around the country have been appreciating a lot since 2010, as they have pared the big losses during 08-09.

Over the long term, RE barely keeps up with inflation, so the lion's share of your long term gain will come from income. Places like NY/SF will probably see somewhat above average appreciation, but it should not be significant.

I have a condo in Atlanta that also appreciated significantly since 2012, which I purchased for $90k and Zillow values at $145k now. My point is, you didn't do anything magical... there was a lot of undervalued RE over the past few years, but the next 10 years are not likely to see the same kind of spike... at least, not IMO.

The reason NY real estate is seen as a "good investment" is primarily for rich folks. If you had $500k sitting around, your condo is a much better investment as it is very likely to hold its value well over a long period of time and will provide a bit of income to pay you to wait. $20k net earnings on a $500k property is 4% cap rate, and relatively safe compared to other investments available.

This is my long winded way of saying: Sell, unless you plan to move back, or wish to keep property in the city for some other reason. Just know that it will cost you a few $ grand per year to hold onto it in cash, but if you can afford the hit to your cash flow, then it's not likely to hurt you in the long run.

[Icecreamarsenal]

Right. If you're ALREADY well off/financially independent NYC may be a good move in terms of RE for an inflation resistant wealth transfer vehicle.
If not, it's time to start looking elsewhere, preferably where the monthly rent will gross you 1% of the purchase price, at least.
Wait, so a $100,000 place will get you $1000/month gross??

Yes, exactly. As you know by now, the place described above does not exist in manhattan proper. But it does exist elsewhere.

[StuckinBoston]

This is my long winded way of saying: Sell, unless you plan to move back, or wish to keep property in the city for some other reason. Just know that it will cost you a few $ grand per year to hold onto it in cash, but if you can afford the hit to your cash flow, then it's not likely to hurt you in the long run.

Thanks for your input.  Moving back into the property in ~1.5 years is a possibility which I didn't mention, however, if after that time we remain out-of-state we will likely not move back to Manhattan.  So in 1.5 years we would need to make a decision on whether to keep or sell it. Based on the feedback and numbers, it appears that I am probably losing a little bit of cash each year by keeping the property.   I am okay with that temporarily, but it was helpful to determine that it isn't a "great" investment property.  Now I view it more like a forced savings account.

[KingCoin]

Sell.

I'm guessing this is a studio? I feel like the market is getting toppy, especially for this kind of property. Are you really going to find someone to take this off your hands for $750k in a few years? Anything's possible, but by holding you're really betting that we head well into bubble territory (if we're not there already). That's a bet that seems especially tenuous if interest rates are set to rise over the next few years or there's a material economic disruption in a place like China. The condo market had been buoyed by foreign buyers recently, and the risk/reward is starting to get skewed to the downside IMO.

When valuations aren't supported by the fundamentals (in this case rent), it's best to sell if there's any doubt in your mind. You can easily move this money into other investment properties that don't require price appreciation to realize high single digit returns.

[StuckinBoston]

Kingcoin: Appreciate the input.  The apartment is a two-bedroom in Harlem.  We love the property/neighborhood and, if you're not aware, Harlem between the park and 125th has really come along.  Some people liken it to the new Williamsburg.  We are a few blocks outside of that zone but we have noticed quite a bit of commercial development.  We expect our area to continue to develop, and property value to appreciate, over the short term.

I agree the 500k studios in desirable neighborhoods likely won't continue to appreciate at the current rates.  I wouldn't spend 500k on studio anywhere in Manhattan....

If there wasn't the possibility of moving back into the property in 1.5 years I would likely list it.  However, I'm in a bit of a holding pattern until we decide whether or not we will keep our current jobs in Boston. 

[KingCoin]

Kingcoin: Appreciate the input.  The apartment is a two-bedroom in Harlem.  We love the property/neighborhood and, if you're not aware, Harlem between the park and 125th has really come along.  Some people liken it to the new Williamsburg.  We are a few blocks outside of that zone but we have noticed quite a bit of commercial development.  We expect our area to continue to develop, and property value to appreciate, over the short term.

I agree the 500k studios in desirable neighborhoods likely won't continue to appreciate at the current rates.  I wouldn't spend 500k on studio anywhere in Manhattan....

If there wasn't the possibility of moving back into the property in 1.5 years I would likely list it.  However, I'm in a bit of a holding pattern until we decide whether or not we will keep our current jobs in Boston.

Yeah, a two-bedroom probably still has some upside.

While it seems like Harlem has been the "next big thing" for the last 40 years (and failed to deliver), it wouldn't shock me if its time has finally come. Affordable neighborhoods with easy subway access to midtown are quickly growing extinct.

I'd still lean toward selling because I think you can do better elsewhere, but it's not as obvious as I initially supposed.

[escolegrove]

We do not follow any of the "rules of thumb" 50% or 1%/2% rules. Our goal has been to have the rent cover mortgage (including escrow fees) and an oshit fund. We have found that rent prices are going up increasing our revenue. We bought these houses with little down that were principle residents (my husband is active duty military so we move alot) and some investments (that follow more of the rules). While our houses are certainly run on the "south west airlines model" we have not lost any money. This allows us to build other "baskets"

At the same time I recommend you to sell. You are losing money each year. Unless you can get your condo to break even soon on rent. Now if you plan on moving back to the area I would maybe keep it as a place holder. The only issue is you are losing money each money so you need to be able to cover the distance.

[Icecreamarsenal]

We do not follow any of the "rules of thumb" 50% or 1%/2% rules. Our goal has been to have the rent cover mortgage (including escrow fees) and an oshit fund. We have found that rent prices are going up increasing our revenue. We bought these houses with little down that were principle residents (my husband is active duty military so we move alot) and some investments (that follow more of the rules).
...

Perhaps you are without meaning to; the letter of the law may sometimes clash with the spirit of the law, but that's pretty much the point, to not underestimate the 'oh shit fund'.

Point being, that a George burns anecdote of owning 3 properties over 15 years may not properly account for the oh shit fund compared to thousands of engineer types owning thousands of properties pooling their wisdom. Kind of like an index fund for wisdom.

At the end of the day, I'd see if your property comes at least close to 1%. Relying on appreciation may be similar to counting your chickens before they hatch.