A Broker's Search...Where to Buy (Part IV)
Today I visited 212 E 47th street and if you are looking for a primary residence and don't have a ton of money for a down payment, this might be the building for you. Here are the details:
Building Overview:
- Converted from rental
- 260 apartments; 35 floors
- Closings anticipated Nov '07 - Jan '08
- Market rate tenants are on month to month leases & have option to buy
- Only about 15 apts left on market now, more units coming available mid-July when market rate tenants decide whether to purchase
Amenities:
- 24 Hour Doorman
- Roof Deck
- Fitness Center w/ Yoga Studio
- Screening Room
- Library / Conference Room
- Laundry in Basement
Apartments:
- Three types of finishes; finish style depends on the floor you are on
- Sq footage measured to mid-point of the wall
- Approx 8'6 ceilings
- Customized closets, towel bars, toilet paper holders included (sounds silly, but some new developments have these in their model units and then you find out they aren't included in the apartments)
- Shower rod in baths (not shower doors)
- Kitchens have Jenn Air & Bosch appliances
- Some apts have windowed kitchens and/or baths
- Some apts w/ balconies
Pros: Good price per sq ft for a brand new apartment/building. For example, 25A is a 628 sq ft one bed for $680K ($1,082/sq ft). No two bedrooms currently available but 3 bed, 2 baths are $1,230/sq ft (18F is 1,160 sq ft for $1.427M. 1,160 sq ft is about the same sq footage as a lot of two bedrooms, though).
Cons: No tax abatement (you may wish to read the UrbanDigs post Noah wrote on why he dislikes the 421a tax abatement. In my case, I would find it helpful in keeping my monthlies low), no w/d in units
Assessment:
I loved 24H, a 642 sq ft one bedroom with an open kitchen and a balcony with a sliver of the river as well as Chrysler Building views for $743,000 (at the time of this post, someone else in my office has a contract out on this apt for one of his customers, so evidently I wasn't the only one that thought this was a great apartment!). Condo sublets of a similar size (also with outdoor space) are renting at the Highpoint, a condo building on 40th st with similar amenities (although it also has a pool), for $3,300. The Vanderbilt is also in this area. 800+ sq ft apts sublet for $3,600 but 650 sq ft one bedroom apartments there sublet for about $3,300. So unfortunately there are a LOT of one bedrooms in condo buildings for rent right now in this neighborhood.
With a 5/1 interest only ARM (lowest payment) and 20% down payment, my monthlies are $4,417. Yikes. After tax deductions (still undecided as to whether I will live there or sublet it out for a while, etc.), net monthlies are about $3,250. If this were definitely going to be my primary residence, I would buy this apartment because of the open kitchen, the balcony and the views. After tax deductions, it's cheaper than rent, and the price per sq ft is great for a conversion.
But I am leaning towards renting the apartment out, which means I will be losing $1,000 a month depending on how creative my accountant can get with depreciating the property. I almost crossed this off of my list of potential purchases, but then I checked the rental history for the building. Churchill (a short-term furnished rentals company) is renting out the 630 - 700 sq ft one bedrooms for $6,150 - $6,300, which would explain why some of the apartments are on a month to month lease. To get a company like Cort Furniture to furnish the apartment (renting furniture for a one bedroom is about $600/month), all I would need to make is $5,000/month to break even. Or I could furnish it myself, but I'd need to replace the furniture every few years, which could be a pain. There is more of a hassle dealing with short term rentals because you have more turn over and you have to include utilities, cable, internet, local phone charges, and sometimes weekly or bi-weekly cleaning service in the rent (this probably adds another $400/month). When I have rented short term furnished rentals to customers, there was this pesky hotel tax for anyone staying under 120 days, so I would need to look into that as well.
There is also a risk that once the condo board is formed, they might set a minimum lease period (some buildings have a 6 month minimum lease), which would kill the furnished rental idea. If I could rent the apartment to a corporation, the situation becomes more promising. Some condo boards will not allow corporate leases, but it's possible I could have a corporate lease approved before any of the "House Rules" are set. 47th and 3rd is very close to the UN and Grand Central, companies like JP Morgan at 250 Park Ave, and an easy commute for anyone on the E line (like all of those attorneys in Times Square)...
I also really like the new Phillippe Starck building, The Gramercy. Let's compare (assuming $150K down payment on each apartment and an Interest Only 5/1 ARM at 6.125%):
25A at 212 E 47th St
$680K
628 sq ft
$1,082/sq ft
CCs - $514
RETs - $762
Total monthly - $4,075
Net monthly - $3,013
8F at The Gramercy (340 E 23rd st)
$765K
638 sq ft
$1,199/sq ft
CCs - $550
RETS - $65 (10 year tax abatement)
Total monthly - $3,754
Net monthly - $2,792
One bedroom apartments at the Post Luminaria, a luxury rental building right next to the Gramercy, are renting for $3,900 a month. Stuyvesant Town's one bedrooms rent for $3,000 - $3,400 based on how close you are to 1st Avenue. Despite the great price per sq ft at 212 E 47th street, I think the Gramercy wins out for my personal investment needs. Besides Crossing 23rd, there isn't much inventory in the way of luxury condos in the area.
However, look how this plays out for a first time buyer who doesn't have that much cash to put up front, but who makes a great salary:
212 E 47th:
$680K w/ 20% down - $136K down payment
Closing costs - budget 5.5% - $37,400 (in a new development you have to pay the sponsor's transfer taxes. Sometimes you can negotiate these but it depends on how quickly the units are selling)
Total cash up front = $173,400
The Gramercy:
$765K w/ 20% down - $153,000
Closing costs - $42,075
Total cash up front = $195,075
That's $20K extra cash up front for the same apartment. So you have to also look at a. whether you have the extra $20K and b. the opportunity cost of that $20K. Some buyers in this price point may need the extra tax deduction that 212 E 47th street provides because of the higher real estate taxes. The Alternative Minimum Tax (AMT) is killing some young traders and iBankers, so it's possible that they would actually NEED these extra taxes as another write-off. DISCLAIMER: I'm not an accountant. You should always consult your accountant (and don't forget your attorney and mortgage broker!) before making any real estate purchase.
I look forward to reading your comments!
Posted by Sydney
Wed Jun 27th, 2007 11:39 AM
We looked at 212 East 47th and decided to pass. We found that, on paper, it looked really nice and was priced right. In reality, it's an older building converted to condos. Finishes appeared to be less luxurious than we expected. We looked at the 1-bedroom configurations and were disappointed at the small bedroom and small kitchen. Common hallways were dark. Additionally, while located on a nice block, there isn't really much in the immediate midtown neighborhood. At your budget, I think you can do better.
Posted by anonymous
Thu Jun 28th, 2007 11:06 AM
I thought this was an excellent post - extremely informative and detailed. Thanks for breaking it all down, esp. the various rental permutations. Fascinating and very helpful. Good luck.
Posted by JW
Fri Jun 29th, 2007 09:44 AM
You wrote: "But I am leaning towards renting the apartment out, which means I will be losing $1,000 a month depending on how creative my accountant can get with depreciating the property"
Could you please tell me why you would want to invest in something that is cash flow negative?
Thanks!
Posted by Yan
Fri Jun 29th, 2007 11:39 AM
Most investors don't really look at the big picture before they invest in a property. I think that if you can afford it, its OK to have negative cashflow if after depreciation, expenses, and such, you may break even or be in the black.
In the NYC market, you make youre real money when you refinance or sell, not on the cashflow. The only people I know that are making good positiev cashflow are the ones that made their purchases a long time ago.
Posted by JW
Fri Jun 29th, 2007 01:43 PM
Thanks for the reply. However, with interest rates set to head higher and property values stagnating (at least for non-multi-million dollar properties in NYC), how do you see refinancing at higher rates or selling for near the same price as money makers? I guess you would need to hold the property for several years before selling? But wouldn't that mean taking a real cash flow hit to carry the property for so long? Sorry, as someone whose high yield savings is their main investment, I'm new to this and struggling to understand!
Posted by uwsider
Sat Jun 30th, 2007 12:26 AM
To Yan,
If you dont consider cashflow then you are NOT an investor... you are a speculator. Speculators are usually the ones that loose their shirts during a downturn (and deservedly so..).
Posted by YL
Sun Jul 1st, 2007 12:08 AM
...keep in mind rents in NYC have been increasing 10-15% a year for the past 5 years consistently...a negative cash flow can turn positive after 1 year of ownership (after raising rents), not to mention all of the tax advantages (depreciations deductions and such) and assumed appreciation in the property (Lord knows NYC is an unparalleled real estate market in terms of resiliency). The bldg. sounds like a good investment!
Posted by tl
Sun Jul 1st, 2007 06:56 PM
Is the real estate tax truly deductible as stated when you mentioned this would be a good idea for a young investor with AMT on their back. I read that only the interest on the mortgage is deductible, and not the real estate tax. Thanks
Posted by anonymous
Tue Jul 3rd, 2007 02:34 PM
There is something between an investor and a speculator. I think of it a person new to investing in a certain asset class who has learned as much as possible and is prepared to take some calculated risks. UWSider, I think your comments are a bit negative. Not everyone can go from dead stop to up-and-running investor and I think Yan was pointing out that not having an immediate CF is not a death knell or a reason to do nothing. Because, after all, doing nothing is usually (in the long run) a lot more expensive than getting out there and started,
My first two properties did not cash flow but now they have appreciated to the point where they cash flow tremendously and have financed two more properties and a 50% stake in a medium sized rental building.
My advice is to inform yourself as much as possible and then just do it. And keep doing it. Once you start a whole new mindset will kick in and if you keep at it things will spiral upward if you're patient and have good nerves.
Posted by Anonymous
Wed Jul 4th, 2007 11:14 AM
I recently purchased one of the A line units at 212 East 47th. My unit is on one of the lower floors, so the price psf came out to around $915 psf -- an incredible value in this market in my opinion. All the other new construction or conversion condos I looked at were $825k+ (albeit they are larger), and if they weren't that much, they were located either in an undesirable location or far from the subway. I mean, look at Chelsea Stratus -- it's not even technically in Chelsea and prices for one bedrooms are $1M+!
I also considered Gramercy but was concerned about its proximity to PCV - Stuyvesant Town. It's also a long walk to the subway. And yes, I will be the first to admit the bedrooms at 212 East 47th are on the small side. But again, there is a price for everything, and I wasn't willing to fork up another $250k just to get a bigger bedroom.
In any case, if you're thinking of buying to rent out, I'd wait until they release more inventory on the lower floors (although, keep in mind there might be price increases come July). You can probably charge the same rent but will be less cash flow negative since your purchase price will be much less. In general, though, as a nod to Yan's comment, I wouldn't recommend buying for investment purposes -- in my opinion, the upside is not that high in light of the runup in prices to date, and the chances of being able to refinance (given that interest rates are at historical lows) are not that high. In the meantime, you'd have to absorb the negative cash flow and transaction costs. Your decision of course depends on your take on the market and stomach for risk.
On the other hand, to your point, if you were going to live in the place, it makes sense -- your monthly payments after tax deductions would be much lower than market rate rents. The only thing you'd have to worry about is a downturn in the market, the sunk transaction costs, and the opportunity cost of your down payment/transaction costs, which again depends on your tolerance for risk and your investment time horizon. In the end, I was okay with these risks/costs -- given what I consider to be the under-market price psf I paid, I felt my downside risks were minimal.
Good luck!
Posted by Anonymous
Sun Aug 26th, 2007 09:28 PM
I also bought into 212 E 47th St and plan to live there. I have not been able to find 1 bedroom condos for under $700k in midtown Manhattan in the condition that these are in. Granted that the bedroom is extremely small and the square footage on mine is similar to a converted 1 bedroom but I think that it serves our needs in terms of location and proximity to the subway lines.
Posted by Gabrielle
Mon Sep 10th, 2007 10:59 AM
Thanks so very much for taking your time to create this very useful and informative site. I have learned a lot from your site. Thanks!!