NYC real estate question

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baublehead
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Joined: Thu Aug 17, 2017 6:13 pm

NYC real estate question

Post by baublehead »

Hi Bogleheads! I am new to this forum and so far loving it! You guys give such great advice.

I'm hoping to ask for your opinion on whether we should go through with a real estate purchase. No contracts have been signed yet so we can back out anytime. The apartment is a co-op in Manhattan, an area with very stable real estate prices. It's a 2 bedroom in estate condition, priced at 1.4M with about 300k worth of renovations. Once renovations are priced in, the apartment is at about fair market value, maybe slightly less to compensate for the burden of renovations.

Our financial situation is: 5M in liquid net worth (cash, stocks, bonds) in a non-tax-advantaged brokerage. (We are looking into creating a tax-advantaged account but just got started with our tax advisor so we're still learning the ropes). My husband and I are in our early 30's with good earning potential. Our combined annual income is 700k before taxes. We have 2 incomes and no kids right now, with plans of having kids in our late 30's. We try to be pretty frugal, but it's a HCOL area obviously and we travel a lot, so I'd estimate our annual expenses at 200k after tax.

We will be paying cash on the property, and we're currently paying 3500 in rent. The maintenance is pretty low so we'd be saving about 2500 in after-tax income monthly. Though I see this as somewhat of a risk-free annuity, something doesn't sit right with me about the purchase, and I'm not sure what. It unnerves me to have 1/3 of our net worth in a highly illiquid, albeit stable, asset. The opportunity cost of stock/bond returns from a tax-advantaged portfolio seems very big to me. I feel like we could get a 1BR for ~1M with similar maintenance, the only downside being a worse quality of life. Also there's a chance we would move away from NYC at some point, probably not in the next 5-7 years though.

We both grew up very poor and therefore naturally paranoid, and we certainly don't have a rich uncle or whomever to give us financial advice. Any perspective would help.

Thanks in advance!
aristotelian
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Re: NYC real estate question

Post by aristotelian »

You have $5m in the bank and $700k annually. You could retire today and be OK. If you have no plan to quit working, the apartment could be lost in an Act of God and you would be fine. If you like the apartment, go for it.
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rmelvey
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Re: NYC real estate question

Post by rmelvey »

What is drawing you to the co-op instead of renting? I feel like in NYC you can do better by renting and keeping your money invested in the stock market. I don't think comparing 1.7M apartment with a 3,500 per month rental is apples to apples. You could afford a nicer rental and just keep your money invested.
Archimedes
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Re: NYC real estate question

Post by Archimedes »

The question comes down to how do you want to direct your substantial financial resources.

You could buy the co-op, enjoy living there, and sacrifice some financial returns in the stock market. However, if you buy the co-op for cash, your living expenses will be less cash out of pocket each month and you can invest that money going forward. Given your income, you are going to be building your portfolio in a substantial way every month anyway.

You could continue to rent, and keep your substantial resources invested in the market. You may end up with a bigger pot of money down the road, but if you don't spend some of that money on things you value, then what is the point of having so much anyway.

Life is a balance, with your income you should spend some, invest some, donate some, and you will be fine as long as you have stable jobs and want to continue working. Either choice works fine from a financial perspective. Think about what you value.
BruDude
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Re: NYC real estate question

Post by BruDude »

You have a ton of assets, you aren't going broke any time soon, and you only live once. Enjoy it while it lasts.
Topic Author
baublehead
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Re: NYC real estate question

Post by baublehead »

Thanks everyone! The reason we are looking at the co-op instead of renting is because we are trying to reduce our monthly cashflow. So we probably wouldn't consider a higher-priced rental. I agree with the YOLO statements here. At the same time, residential real estate in NYC and the Bay seem ridiculously overpriced and I don't understand the economics of why the prices keep going up. Hesitant to put my money in something I don't understand. I've read a lot about the rent vs. buy tradeoff but mostly those are for people taking mortgages; seems there's not much out there about portfolio allocation.

My parents were super frugal savers who bought a 70k house on a 15 year mortgage and paid it off in 10 years, but after the housing bubble burst they lost at least 30% of their inflation-adjusted net worth. So maybe my hesitation is irrational.
lynneny
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Re: NYC real estate question

Post by lynneny »

Your home shouldn't be looked at as just an investment.
Since you can clearly afford it, the question is whether you'll be happier as an owner or a renter.
I've rented in NYC, and for the last 10 years I've owned a co-op here. For me, there's no comparison. I like being able to paint the walls (I hated renter's white), and do some minor renovations to make it the home I want. My neighbors are also owners, and we've all lived here for years and become friends.
Renting made sense for me when I was moving around a lot, but I really like having my own home and it's made a big difference in quality of life for me.
Valuethinker
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Re: NYC real estate question

Post by Valuethinker »

baublehead wrote: Thu Aug 17, 2017 10:25 pm Thanks everyone! The reason we are looking at the co-op instead of renting is because we are trying to reduce our monthly cashflow. So we probably wouldn't consider a higher-priced rental. I agree with the YOLO statements here. At the same time, residential real estate in NYC and the Bay seem ridiculously overpriced and I don't understand the economics of why the prices keep going up. Hesitant to put my money in something I don't understand. I've read a lot about the rent vs. buy tradeoff but mostly those are for people taking mortgages; seems there's not much out there about portfolio allocation.

My parents were super frugal savers who bought a 70k house on a 15 year mortgage and paid it off in 10 years, but after the housing bubble burst they lost at least 30% of their inflation-adjusted net worth. So maybe my hesitation is irrational.
OK Co-ops are harder to sell. That's an issue.

In your shoes I'd buy a bigger home because I can live in it longer. But life has a way of changing, so maybe a 2 BR now and then trade up (or out) when life hits you with changes.

You have more than enough financial capacity to buy this property or one considerably more expensive. Quit worrying about it and buy a place you can see yourself living for 5+ years (but see below). It may or may not be a good financial decision, but owning a place has its own reassuring sense of permanence and control.

The main comment I noted was "have kids in our late 30s". I apologize for my bluntness in the discussion below.

A look at the odds of successful conception would make you think about that (unless you plan to use donor &/or surrogacy arrangements, etc.)-- at the very least, you should look into making preemptive arrangements (pace Elle Macpherson, although I believe she is getting divorced again).

The stats are distorted by women who already have children, who have more later in life. Tony Blair's wife, Cherie, had their 4th child at 45 when he was Prime Minister ("worth at least 3 marginal seats" as an advisor crowed at the time, off the record). That's "survivor bias" in the data- -those women have already demonstrated their fertility-- some people are lucky, genetically (consider those with polycystic ovaries on the flipside).

For women who have not yet conceived, the odds fall quite rapidly after age 35. IVF clinics assign low probabilities over 35. I realize we (UK) have socialized medicine and in the US private clinics will "roll the dice" as long as your insurance pays, but that doesn't alter Mother Nature's odds. IVF is, in other words, something of a false hope.
Last edited by Valuethinker on Fri Aug 18, 2017 10:42 am, edited 1 time in total.
Valuethinker
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Re: NYC real estate question

Post by Valuethinker »

lynneny wrote: Thu Aug 17, 2017 11:20 pm Your home shouldn't be looked at as just an investment.
Since you can clearly afford it, the question is whether you'll be happier as an owner or a renter.
I've rented in NYC, and for the last 10 years I've owned a co-op here. For me, there's no comparison. I like being able to paint the walls (I hated renter's white), and do some minor renovations to make it the home I want. My neighbors are also owners, and we've all lived here for years and become friends.
Renting made sense for me when I was moving around a lot, but I really like having my own home and it's made a big difference in quality of life for me.
This is the nub of it.

If a home can be afforded, and one can reasonably expect to be there 5+ years, then it's worth buying.

I bought my first home expecting to be there 5 years. 15 years later I sold it (for 3x what I paid for it)-- it was an important part of my life. Had I moved more often I would have made more money, but it was a home-- good times and bad times there- career change, relationships, marriage, death of a parent etc.
casualflower
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Re: NYC real estate question

Post by casualflower »

From a financial perspective, I don't think you're going to see the cash flow increase you think you are.

Say you're earning 5% on your investments. On $1.7M, that's $7,100 a month. By buying instead of renting, you'll see a *decrease* of $3,600 in cash flow.

This ignores appreciation but also maintenance on the real estate as well as your enjoyment of being home owners. But from a cash flow perspective, you're not benefiting by buying.
knightrider
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Re: NYC real estate question

Post by knightrider »

Curious what kind of job pays someone in their early 30's 350k/year! As to your question, I disagree with those who say keep your money in stock market. Stock market is not guaranteed return. If it were, everyone would be putting money in it .. Diversify is key, and home ownership is a good way of doing that. The concept of coops sounds good, i.e all owner occupied, no rentals..
runner540
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Re: NYC real estate question

Post by runner540 »

Valuethinker wrote: Fri Aug 18, 2017 10:39 am
baublehead wrote: Thu Aug 17, 2017 10:25 pm Thanks everyone! The reason we are looking at the co-op instead of renting is because we are trying to reduce our monthly cashflow. So we probably wouldn't consider a higher-priced rental. I agree with the YOLO statements here. At the same time, residential real estate in NYC and the Bay seem ridiculously overpriced and I don't understand the economics of why the prices keep going up. Hesitant to put my money in something I don't understand. I've read a lot about the rent vs. buy tradeoff but mostly those are for people taking mortgages; seems there's not much out there about portfolio allocation.

My parents were super frugal savers who bought a 70k house on a 15 year mortgage and paid it off in 10 years, but after the housing bubble burst they lost at least 30% of their inflation-adjusted net worth. So maybe my hesitation is irrational.
OK Co-ops are harder to sell. That's an issue.

In your shoes I'd buy a bigger home because I can live in it longer. But life has a way of changing, so maybe a 2 BR now and then trade up (or out) when life hits you with changes.

You have more than enough financial capacity to buy this property or one considerably more expensive. Quit worrying about it and buy a place you can see yourself living for 5+ years (but see below). It may or may not be a good financial decision, but owning a place has its own reassuring sense of permanence and control.

The main comment I noted was "have kids in our late 30s". I apologize for my bluntness in the discussion below.

A look at the odds of successful conception would make you think about that (unless you plan to use donor &/or surrogacy arrangements, etc.)-- at the very least, you should look into making preemptive arrangements (pace Elle Macpherson, although I believe she is getting divorced again).

The stats are distorted by women who already have children, who have more later in life. Tony Blair's wife, Cherie, had their 4th child at 45 when he was Prime Minister ("worth at least 3 marginal seats" as an advisor crowed at the time, off the record). That's "survivor bias" in the data- -those women have already demonstrated their fertility-- some people are lucky, genetically (consider those with polycystic ovaries on the flipside).

For women who have not yet conceived, the odds fall quite rapidly after age 35. IVF clinics assign low probabilities over 35. I realize we (UK) have socialized medicine and in the US private clinics will "roll the dice" as long as your insurance pays, but that doesn't alter Mother Nature's odds. IVF is, in other words, something of a false hope.
OP, congrats on building such a strong financial profile early in life. Enjoy the choices it brings, and yes, you should find and fund every tax advantaged account you can.

Valuethinker, I am sure your advice about conception is well intended, but that's not what the OP asked and veers into medical advice that's beyond the forum's scope. Please read this article https://www.theatlantic.com/magazine/ar ... by/309374/
The "age 35" cutoff is supported mainly by data from 18th and 19th century France.
financeguy88
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Re: NYC real estate question

Post by financeguy88 »

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Last edited by financeguy88 on Mon Nov 20, 2017 8:55 pm, edited 1 time in total.
Topic Author
baublehead
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Re: NYC real estate question

Post by baublehead »

All of this is incredibly insightful. I wasn't able to properly quantify the opportunity costs of tying up our capital but you guys hit the nail on the head.

You are right about the coop. It's in an old pre war building built in the 20's and even though it benefits from commercial income, there are serious risks of additional assessments to upgrade the plumbing, electrical, etc. That said it's also a great neighborhood in the upper east side close to the park where few rentals exist, so there are trade offs.

I think my husband and I will reassess and look more carefully into what returns we can generate and where else we can buy for a lower price.

Also to answer another poster's question, I am in tech and my husband is in finance and we have both been blessed with specialized skill sets that are fairly rare in the market and hence the high pay. We don't take it for granted at all.
Topic Author
baublehead
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Joined: Thu Aug 17, 2017 6:13 pm

Re: NYC real estate question

Post by baublehead »

Also about the children. I really appreciate the advice given here because it's easy to forget what life is all about and miss what's really important. We are planning to freeze our embryos even though we know that's not guaranteed to work by any means. We are also perfectly fine with adopting so it may not bother us much if we can't have biological kids, though only time will tell.

As a woman in a man's world, when to have kids is a really hard choice to make. Many of my colleagues have stay at home wives who pack lunches for them and can take care of kids full time. My husband doesn't have a single coworker whose wife works in a professional setting, literally. Why should they when they don't need to and it doesn't make sense from a lifestyle perspective. Our household is always a complete mess despite hiring part time help. Staying competitive in the job market for a professional woman requires immense sacrifices which so far we have made but as time goes on becomes harder and harder.
nyclon
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Re: NYC real estate question

Post by nyclon »

baublehead wrote: Fri Aug 18, 2017 7:18 pm All of this is incredibly insightful. I wasn't able to properly quantify the opportunity costs of tying up our capital but you guys hit the nail on the head.

You are right about the coop. It's in an old pre war building built in the 20's and even though it benefits from commercial income, there are serious risks of additional assessments to upgrade the plumbing, electrical, etc. That said it's also a great neighborhood in the upper east side close to the park where few rentals exist, so there are trade offs.

I think my husband and I will reassess and look more carefully into what returns we can generate and where else we can buy for a lower price.

Also to answer another poster's question, I am in tech and my husband is in finance and we have both been blessed with specialized skill sets that are fairly rare in the market and hence the high pay. We don't take it for granted at all.
Many older coops in NYC test high for levels of lead due to the antiquated plumbing. A good friend of mine found out the hard way a few years after they purchased a home - their baby tested high for lead.

Just another consideration.

You have a lot open questions and decisions over the coming few years in your life - it may make sense to stay liquid, rent, and therefore retain flexibility.
sophie1
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Re: NYC real estate question

Post by sophie1 »

Speaking as the owner of an NYC coop apartment built in 1925...

A redone prewar apartment in a well run building can be a real gem. If you do a good job with the renovation, you may well end up with an apartment worth more than you spent. And, 1.7M for a 2 bedroom in some neighborhoods is actually on the low end. If you are planning to live in it long term and expect to have kids sometime in the next few years, you may be very glad you got the 2 BR instead of 1 BR. The overhead of selling then buying in NYC is pretty steep, especially if the building has a flip tax.

The first thing you have to decide is whether you like the apartment's bones. Does it have good light, ample space, good layout etc? Are there signs of leaks? Are the windows ok, water pressure good, is the water coming out of the faucet clear. In my case, I went for an apartment with a few negatives but with positives that were high on my priority list: excellent light with tons of huge north and east facing windows that open wide, great air flow, tree views and overlooking a park on quiet street, and a nice versatile layout. If you don't absolutely love the place, then I would let it go and keep looking.

Second thing to look at before making an offer is the building's financials, and also any info you can pick up about how the place is run. A touchstone for me is whether the coop board publish the meeting minutes. If they're secretive about those, or if information like names of contractors are not mentioned, it's a bad sign. Another bad sign is a high percentage of rental/sponsor units. That means the building is run for the benefit of the sponsor, not for the owners, and also that it may be difficult to refinance the underlying mortgage. Check the financial statement to look for level & type of debt, size of reserve fund, upcoming planned work, and whether the coop has a long-term plan for upgrades and infrastructure repairs. My building did a complete engineering survey to identify infrastructure priorities, and used that to develop a 20 year plan with corresponding monthly reserve contributions. A low maintenance can actually be a red flag that the building isn't putting enough into reserve, and relies on assessments instead to fund capital projects or is just plain underfunded and delaying important repairs. You can check on the DEP website for the boiler permit, to see how old it is and whether they've installed a dual fuel (gas & oil) unit.

Finally, you want to consider whether you really want to take on a renovation. Estate condition means you are looking at a gut renovation, and if your $300K estimate doesn't account for the inevitable surprises behind the walls in a prewar building, you'll want to up that estimate to more like $400K. The work will take at least a year, given that you'll spend the first 3-6 months going through the board approval and building permit process. It'll be very time consuming for you also. Jobs that pay as much as you guys are earning probably don't involve a lot of free time. On the plus side, at the end you'll have a pristine apartment set up exactly how you like it.

Last question, are you considering a cash offer or a no-contingency offer? You might opt for the latter and then get a mortgage, if you're concerned about cash flow. With $5M in taxable I wouldn't expect you'd have a problem though, and a cash offer usually can bring down the price some. One possibility is to ask whether the coop would approve a home equity line of credit, which you can then use for renovations and then either pay it off at the end, or refinance it.

Good luck with the decision! It can be daunting buying in Manhattan (be sure you have a good lawyer), and prewar apartments certainly have their drawbacks, but I felt that the benefits outweighed them, for me. I absolutely love my place and I don't regret buying it for a second.

Also a note to financeguy: don't hold your breath for prices to come down. I think that's highly unlikely. The Manhattan averages aren't necessarily reflective of what's happening in the low end of the market (sub-$2M), where there's a shortage of apartments, and prices are going up accordingly.
remomnyc
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Re: NYC real estate question

Post by remomnyc »

With a $3500 rent, it will never make sense for you to buy. This home is not an investment. Since it's estate condition, you can really make it your own. You can afford this home. Even if you have children, you can stay in this home with two kids until they start to hate each other. If the value of the apartment drops 20%, it will still provide shelter until the value recovers. If I were you, I would buy it. I think there's no issue with buying a pre-war as long as the building and its financials are in good shape. Money is for saving, investing AND spending.
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