Interested in New York Investment Real Estate?

Interested in New York Investment Real Estate?

New York Investment Real Estate

     Are you interested in Investment Real Estate? The choice of investing in real estate verses other financial assets like stocks and bonds can be a difficult one. It is easy to have your broker buy a stock, a mutual fund or an ETF today, and easy to liquidate if you think that the market is not so promising. And there are a lot of other differences too. Your tolerance for risk, your ability to borrow funds, to bring in investors if need be. All of these are considerations when choosing between a real estate and a more conventional investment. But there is one major difference in my view, and thinking of the investment in this manner might make one stand above the rest…..That diffierence is that: No one NEEDS those instruments. There are over 7 billion people living on the planet today with 8.3 million of them living in NYC. Approximately 300,000 people will be born today and less than ½ of that amount will die today. (A really cool website with running totals is Worldometers   http://www.worldometers.info/world-population/ ) None of those people need to own a stock or a bond to exist. However, people do need a place to live and until we colonize outer space, earth is all we have. So while a stock or a bond can and in some cases will go to zero, the odds of that happening to your real estate are much less likely.Which makes an investment in real property, properly structured, the safest investment you can make.

     OK, real estate investing can be complicated, but it also can be understood by breaking the process down. In my experience as both a real estate agent and more importantly as a real estate investor, there are a few factors that rise above others in importance. Here’s my take:

    1)      Location.

Location, location, location!

     You’ve heard the phrase before: Location, location, location! And yes, it is THE most important factor when it comes to valuing real estate. What makes a piece of land worth more than others? Is it located in Manhattan, NYC or Manhattan, Kansas? Does the zoning of that lot in Brooklyn allow for a new building to rise 3 floors or 30 floors? During the real estate crisis, prices of homes in some areas of the country dropped by70%, while some areas in NYC dropped a small fraction of that. A prudent question to ask yourself regarding a particular property would be: Even if there were a downturn in the real estate market, would I still be comfortable owning this property 10 years down the road?

2  2)      Price.   

How much?

     There is a price that can make any real estate investment a good one. And conversely a price that also can make it a poor one. I will go into the different methods of valuation in a separate post but a simple way to look at it is purely value. If it would cost $500 per square foot to build a structure and you can buy it for $400 then you are buying an undervalued asset. And since you usually will be purchasing your real estate with a long term view in mind, that will allow time for that value to become apparent.

3  3)      Leverage (Debt): 

 

     Real estate can be purchased with cash but usually there will be debt attached to the transaction. Debt in and of itself magnifies both the rick and the reward attributed to an investment, and the amount of the debt raises or lowers both respectfully. A typical real estate deal might be structured like this: Equity of developers and/or investors 35% Debt $65%. So a lender would normally be willing to provide about $2 in a loan for every $1 of capital that is invested. Sometimes (think 2002-2006) lenders throw caution into the wind and at lend higher ratios. Let’s look at some different ratios:

                                              75% financed = $3 loaned for every $1 invested

                                              80% financed = $4 loaned for every $1 invested 

                                              90% financed = $5 loaned for every $1 invested

     If you had $1 million to invest you could purchase a $3 million property with 65% being financed. Or a $4 million property with 75% financed, a %5 million property with 80% financed or a $10 million property with 90% financing. Without looking at income or debt service, a 10% rise in property values would give your investment returns of:

                                             65% financed = $300K or 30% profit on equity

                                             75% financed = $400K or 40% profit on equity

                                             80% financed = $500K or 50% profit on equity

                                             90% financed = $1 million or 100% profit on equity  

     You can see that applying leverage is like applying a steroid crème on A-Rod’s biceps. The production literally flies out of the park. Unfortunately, leverage is a double edged sword. It cuts both ways and it can hurt even more that it helps. Let’s look at the same results if the market hits a downturn and the value of our investment property declines by 10%. 

                                             65% financed = -$300K or 30% loss of equity

                                             75% financed = -$400K or 40% loss of equity

                                             80% financed = -$500K or 50% loss of equity

                                             90% financed = -$1 million or 100% loss of equity  

     So you can see that excess leverage can wipe you out on just a 10% decline in value. That is unacceptable risk. In fact, in my humble opinion a real estate investment with more than 80% financing is acting like a gunslinger. You may win a few gunfights but sooner or later you will be faced with the inevitable loss and they will carry you out of the arena. There is absolutely no way that you should allow yourself to be put in that position. Back on Wall St. we used to say “Risk not thy whole wad”. The same holds true in real estate.

4  4)      Quality of the Housing Stock.

 

           This is almost as important as location. You want to make sure that the building you invest in does not make you regret investing in it. High quality buildings are well constructed and this will pay dividends over time (you are investing for the long haul, right) as inferior construction will require ongoing maintenance and expense. They also tend to rent out faster and bring in higher rents.

  In Summary.

   This is far from an exhaustive look at the investment process. It was a look at some of the major concerns when considering a real estate investment. Other concerns like financing terms, investor payouts, vacancy rates, inflation and others were not even touched on. But don’t worry, I’ll get to them in future posts. And if you need to know the answers before them just give me a call and we can discuss anything you like.         

   


     Disclaimer: This is not a recommendation to invest in any instrument. It is only the opinions of the writer. Any and all investments should be analyzed by your own financial professional.