Investor Condos

David Goldsmith

All Powerful Moderator
Staff member
How do you convince investors to buy new construction condos in a world where this is what buying them looks like:

And this is what leasing them looks like:
 

MCR

Active member
Ouch. There must be more to the story given that even the initial rent ask didn’t even make sense from an investment perspective. But your point is well taken that I can’t imagine any investor buying that unit at that price point and thinking they can make money off it.
 

David Goldsmith

All Powerful Moderator
Staff member

David Goldsmith

All Powerful Moderator
Staff member
I'm curious what return are investors thinking they are getting these days on all these New Development condos being sold? Or does it not matter because they are solely looking at an appreciation play?
 

David Goldsmith

All Powerful Moderator
Staff member
This unit closed for $681,000 on November 2nd

It was put on the market asking $3,800 for rent.

Seems to me even a 4% cap rate may not be achieved here.

What return do you think the investor was aiming for and what is the actual return they will achieve?
 

David Goldsmith

All Powerful Moderator
Staff member
I got an email describing the following listing as:
An Immaculate Gramercy Park Condo Perfect for Investors
Actual 3.1% CAP Rate (Unit is Rented)

1,280 SF | Currently Renting for $7,500 / Month
Actual 3.1% CAP Rate (Unit is Rented)
.

How do you feel about this?
 

inonada

Well-known member
1) Are peak rents gonna hold? Maybe they do, maybe the don’t — I’m not sure.

2) Cash has a cap rate of 4.7%, has no risk, involves no effort, and is fully liquid with optionality to deploy elsewhere at a moment’s whim. Why should I get excited something yielding 3.1% plus inflation when it has risk, requires effort, and takes 10% transaction costs and 2+ years to sell as your listing demonstrates?
 

woodside

Member
1) Are peak rents gonna hold? Maybe they do, maybe the don’t — I’m not sure.

2) Cash has a cap rate of 4.7%, has no risk, involves no effort, and is fully liquid with optionality to deploy elsewhere at a moment’s whim. Why should I get excited something yielding 3.1% plus inflation when it has risk, requires effort, and takes 10% transaction costs and 2+ years to sell as your listing demonstrates?
I will never buy an investment condo by myself even if the cap rate is 5%. It is just not a thing that I want to get into. I am trying to understand the thinking of the person who buys this condo for investment.

The no-risk cap rate of 4.7% may come down to 2% in 2024 when inflation is under control. The long-term no-risk cap rate is about 3.8% (with treasury bonds for at least five years) and the TIPS (at least five years) cap rate is only 1.7%+ inflation.

3.1%+inflation is definitely better than 1.7%+inflation.

The condo probably offers better inflation protection to the owner than TIPS as the owner will not be subject to whatever CPI the government is using.

It seemed the owner is happy with the 1.4% return for the associated labor and also other risks. The owner is probably also betting on the condo's price going up. Historically, housing prices go up 4%+inflation each year. Whether the 4%+ inflation each year is going to work out for this condo is another story.

This owner probably treats investing in a condo the same way as investing in a stock. When people are buying a stock, they are not focusing on the earning yield (currently about 5% for S&P 500) but focusing more on the price appreciation.
 

woodside

Member
Did anyone check their math?
I thought you already did the math. I went back to the list and the math seems to work OK with the advertised number

Using the advertised price of 550000 and rent of 7500 and property tax of 2079 and maintenance of 1380.
12*(7500-(2079+1380))/1550000*100=3.13

One thing in the descriptions about the property tax,
"Property taxes are currently $2,078.72 per month as long as the unit owners and occupants use it as a primary residence as stipulated by the State of New York"

Not sure how much the property tax is going to be for the investor? If the property tax would be 50% more for an investor, then the CAP rate comes down to 2.3%.
 

inonada

Well-known member
Woodside, that’s a fine analysis getting inside the head of an investor. On the yield side, one should probably subtract 1% for transaction costs and another 0.x% for misc costs. At which point, it looks awfully close to 1.7%+inflation.

But really, I think your final comment hit the nail on the head. Betting on appreciation, not yield, with no connection between the two.
 

inonada

Well-known member
Historically, housing prices go up 4%+inflation each year. Whether the 4%+ inflation each year is going to work out for this condo is another story.

Is 4%+inflation your view or the investors’ view? Because that is nutty IMO, both from a fundamental / economic perspective but also historical. I’m not even sure how ridiculously short a period I’d need to cherry-pick to get to 4% + inflation.
 

woodside

Member
Is 4%+inflation your view or the investors’ view? Because that is nutty IMO, both from a fundamental / economic perspective but also historical. I’m not even sure how ridiculously short a period I’d need to cherry-pick to get to 4% + inflation.

I agree with you that housing prices should probably have zero inflation from a fundamental/economic perspective.

With your question, I just checked with the inflation-adjusted housing price since 1880 from a historical perspective.


It seemed the inflation-adjusted housing price was very low during the great depression, I guess at that time, food is more important than shelter. The housing price becomes very irrational post-2000, even the valley around 2012 (with a value of 130) is probably higher than (or about the same as) any peaks before 2000.

I probably heard about the 4%+ inflation in one of the real estate news/blog a long time ago. Maybe it was talking about during one of the post-2000 bull markets. Maybe my memory was incorrect and the return should be 4% nominal. Screenshot from 2023-01-08 13-38-07.png
 
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inonada

Well-known member
I guess if you look at the past decade, cherry-picking bottom to top, it did do inflation+5%. Should one read into that as a trend that defines the new normal? I guess you could, although I personally wouldn’t bet on it. If anything, I would guess it came on the back of a decade of ZIRP and 2.x% mortgages that is no more, meaning a slow reversal looking ahead. E.g., inflation-3% for many years.
 

David Goldsmith

All Powerful Moderator
Staff member
What's the return on this one?
 
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