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BK Squeeze - for Brooklyn Real Estate Buyers

We want that Brooklyn housing bubble to pop!

Monday, April 11, 2005

A bubblehead with a purchase plan

It has been a while since I made a personal post. I promise I will not rant. I just got through crunching numbers on how waiting to buy a house for two years might work in my favor.

First, there is the matter of savings. I will be living rent free at my inlaws (of course I will contribute to other household expenses). If I follow Suze Orman's advice and "play house" (i.e., pretend to spend a set amount of money on a mortgage and other house payments above and beyond my current rent), I can put away $2200 a month in one of those super-sized 3% APR bank accounts or CD's. Nice and safe, just like me! With steady payments and my existing cashola squirreled there, my down payment goes from $100k to $180k in two years. This will help improve my purchasing ability.

Second, there is the issue of how much monthly nut I can afford. Currently, we are comfy with at most $2200 (see playing house issue above). Conservatively, barring my bold schemes of worldwide capitalistic dominance, I can safely assume a 4% raise in my current position, based on history. This brings my monthly bearable nut to $2400. With a larger down payment and more cash per month to burn, the picture looks better already.

Now comes the first negative -- interest rates. The current 6% average 30 year rate will likely creep up to 7% and hang around, based on all those wonderful pundits that myself and others post to our blogs. In the $400-$600k house range where I am looking, that alone would buy me 5.5% less house dollar for dollar, as I would have to lower my price range to make the same monthly payment.

Now the kicker for all you bubbleheads -- price drops. That 5.5% might just drop on the seller's side. Hey, if the housing bulls out there can claim that low interest rates have fueled the boom, it can work in reverse too. Depending on what other pundits are predicting, we could see 20% drops in the NYC metro area. Keep in mind, I am focused on the suburbs. I am done for now with a Brooklyn search and will let everyone else argue whether Brooklyn is an anomaly. Certainly established neighborhoods are less risky for downside -- the Slope, Carroll Gardens, Cobble Hilll, Brooklyn Heights, Fort Greene. But Kensington, Ditmas Park, Midwood, W'burg, Greenpoint, Red Hook, Greenwood Heights, Bed-Stuy, Clinton Hill, and Sunset Park are more at risk.

Anyway, by my math, my revised target price would go from $400k to $460k based on my increased down payment and monthly allocation. If a $460k price on a house was the result of a 20% price drop, the current value of that house would be $575k. For a 5.5% drop, the current price would be $490k.

Last, I am making a lifestyle change from the City to the burbs. What I suffer in commute and "culture", I hope to gain in price and a few other things (quiet, backyard, no alternative side of the street parking, etc.). Married and with kids, I don't really take advantage of the city enough anyway. I also have lived here most of my life and need to breath a little more. Plus, the way I see it, there are so many retail and restaurant chains in NYC, that it is beginning to blur the difference between city and suburb for me. Heck, at least outside of the city, parking at Target is easier.

Let's visualize what I could get now vs. what I could get in two years under this total scenario:

For $400k under our past search here in Brooklyn, our good friends at Crockoran can offer this for my wife, two kids and I : a two bedroom, 1.5 bath, 900 sq foot condo in a sketchy but "developing " area. Thanks but no thanks. That's not going to cut it for me.

For $460k in two years, I could potentially get this great place in Westchester: 3 BR, 2 Bath, 1600 Sq Ft, 2 car garage, fireplace, 1/3 acre lot, good schools, and only 15 minutes more on my commute.

So what do you think? Feedback welcome.

- Mr Squeeze

32 Comments:

At 4/11/2005 9:07 PM, Anonymous Anonymous said...

If... if... if...

Sounds like the plan works, IF...

- That interest rate increase is only to 7%

- The same "pundits" that are calling for a point rise in interest rates are the same ones calling for 20% off prices

- prices don't rise any more before falling that 20% (this is the big if)

- you can keep from murdering your in-laws

You're banking on a lot of ifs, but the one certainty of your plan is saving a ton of money by living with the in-laws. If you can tolerate that, then of nothing else it leaves you in a better financial position (for buying a house or for anything else)

 
At 4/12/2005 9:07 AM, Anonymous Anonymous said...

A couple of things to consider:

The westchester property has a $10k/yr tax bill associated with it. Be sure you take that into account, I don't think your $2200-2400/month will cover everything when this is factored in.

As the other poster mentioned, prices may continue to rise before the fall you are anticipating which could bring things back to current levels, not reduced levels.

Lastly, a 1% increase in interest rates will not result in a 20% drop in prices. You cite 5.5% which may be more accurate. I believe this is why people are anticipating a flat market rather than a drop. Housing prices rise a few % on average each year from a long term perspective. An interest rate increase of 1% may offset the standard rise in prices leaving a flat market.

There would have to be a major supply/demand shift that would be associated with a mass exodus out of the area or a significant hit to our economy. If the second happens, your 4% raise each year will probably not materialize.

I don't want to burst your bubble but I doubt things will pan out as you describe them. That said, I think you have 2 good options.

One is to take the free rent you are planning to take and save more, this is always good. I don't think there is some huge rush to get in on the market before it skyrockets so saving more and not having a housing payment is always good, if you can swing it.

The other option is to buy a place now that you can trade up in a couple of years. You have $100k (I think that's what you said you have now) and can afford $2200. Find a multi-family in a safe neighborhood and buy. 100k is a nice down payment. If you spent $600k w/100k down you would have a $500k mortgage. At 6.25% on a 30 yr fixed your payment would be $3078, of which $475 will be principle. If you go up to $700k your mortgage will be $3694 with $570 principle. Renting out 2 units will yeild an additional $2400 or so, maybe more, which when added to your $2200 results in $4600 to work with. This will be sufficient to cover your mortgage plus other expenses.

In a couple of years you will have paid down more of the mortgage, rents will contiue to rise and you may get some appreciation in the value of your property. Sell and buy a 2-fam which you can hold for a few more years until you sell to buy the 1-fam. you want.

It's often easier to buy and trade up rather than sit on the sidelines and try to save more to get into the game.

Good luck

 
At 4/12/2005 10:19 AM, Anonymous Anonymous said...

Maybe I'm missing something, but I don't see how $100,000 initial savings, plus $2200 to $2400 a month, all invested at 3%, gives you $180,000 after two years. $2200 x 24 gives you $52800 before interest. $2400 x 24 gives you $57600. Let's split the difference and call it $55,000, assuming you raise your savings rate along the way. So, $155,000 at 3% for two years (generous, since your additional $55K won't have the full two years to earn interest) would get you $1

 
At 4/12/2005 12:43 PM, Anonymous Anonymous said...

Property will probably appreciate faster in Brooklyn than Westchester, even after the bubble bursts. But then again Westchester will probably see great price drops than Brooklyn when the bubble does indeed burst.

 
At 4/12/2005 1:09 PM, Anonymous Anonymous said...

why not buy something like this:

http://www.corcoran.com/property/listing.aspx?Region=NYC&ListingID=783901

1000 sq ft for $310k and only right on the other side of Park Slope and Prospect Park?

 
At 4/12/2005 1:12 PM, Anonymous Anonymous said...

You want to move to White Plains?
WP = mall-land city. I know, I grew up in the area. Schools are so-so, taxes are high.
I think you're better off buying the cr*p apt now (pref a fixer-upper) and trading up in 2 years.

 
At 4/12/2005 2:28 PM, Anonymous Anonymous said...

looks like nice house (outside)

Other finances to use in comparison- what is the monthly maint/cc on house - taxes alone are $833. Repairs and upkeep in coop/condo covered by monthly fee.
How much will but in house reserve for replacement of roof, outside care- lawn, etc. And what are heat and a/c run on large place?
Then commute may only be 15minutes more - but if you use public trans. - how much more will that cost (train/parking at train).
But if schools are decent - you'll save lots of tuition up there.

 
At 4/12/2005 2:31 PM, Anonymous Anonymous said...

damn...i've recently been exploring home ownership (currently renting in pk slope) and its DEPRESSING.

good luck whichever route you go. you've got 2 kids so the white plains route makes sense.

 
At 4/12/2005 2:56 PM, Anonymous Anonymous said...

Corcoran Group is the evil empire profitting from this "boom" (I call it overpricing). Hmmm, let's see...let's take a bombed out neighborhood or any neighborhood for that matter, have a developer put up a nice building, be the exclusive seller for that building, make a bundle of money for the developer and ourselves off of each buyer and in few years we'll do it again when they move out. It probably won't take that long anyways. People are flipping houses because of the fact that historically residential real estate doesn't lose value. So let's buy high and sell higher!!! I don't really think the Corcoran group is opposed to this. If this housing market fails I'll be laughing real hard at those folks because for a change, they'll be the ones to recede and lose their money. STOP OVERPRICING BROOKLYN REAL ESTATE CORCORAN!!!!
If I made $100k a year I still could not afford some $650k-$1mil property. Tell me something isn't wrong here people. Who can afford a $4000/month mortgage....that's assuming you have $100k saved. Don't get me started on maintenance fees!!!

 
At 4/12/2005 4:22 PM, Anonymous Anonymous said...

Whereas I can understand you leaving the city for the burbs with your family, I disagree that the city is becoming more and more like the suburbs.
It has become a bit more tame (that's a good thing - who needs the crime?) but there are many many things I still cannot get in the suburbs that I have access to in the city. The collection of restaurants is unmatched, museums, art galleries, etc. etc. Then of course there is that electric vibe that you get just from being surrounded by so many people.

The city has always had chains - McDonalds, BK, Kmart, etc. etc. So the fact that there are (relatively) newer national chains now coming into Manhattan is no surprise. They will not put the local boutique stores out of business.
And Olive Garden will not put Mario Batali out of business.

 
At 4/12/2005 4:30 PM, Anonymous Anonymous said...

I've got no special love for Corcoran, but...

Why is it overpricing if someone pays it?

What would a "correct" price level be?

What should a broker's criteria be for pricing a property? Should they intentionally ask less than they can get, based on their assessment of wthe best interests of society at large? You're lucky to find a broker who's smart enough to run an ad without typos, let alone make social-engineering decisions.

Sounds to me like your definition of "overpriced" is, "priced at a level I cannot personally afford." You've just discovered that it is very hard to buy a home in the most expensive city in the country, filled with people who have a lot of money. That does not mean there is something wrong with the world.

 
At 4/12/2005 4:45 PM, Anonymous Anonymous said...

I have done this "move to the burbs" analysis many times. And I already own a home in Park Slope. It usually does not compute. I would be trading a nice, cheap rapid commute, and low property taxes for a burb where I will need to DRIVE EVERYWHERE, OWN A CAR (make that two cars), and pay EXORBITANT property taxes.

Plus, I don't know how much looking you've done in Westchester, but I'm finding Bklyn to be a bargain by comparison.

By all means, you should save more money. BTW, does that $2400/month max housing payment factor in your tax breaks?

 
At 4/12/2005 5:01 PM, Anonymous Anonymous said...

I guess a capitalist society shouldn't care that most people under 40 can do better than their parents or baby boom counterparts. There's something wrong with a society that has no conscious. A "correct" price is hard to establish but why not base it on what people can afford? There's a bunch of property out there that is not affordable. There should be no reason why a person who makes (by himself) $100k/year cannot afford to buy a very well appointed condo or modest house in a GOOD neighborhood that's convenient to the city, shopping and transportation. Let me ask you something....can you afford a $5k-8K/ month mortgage (with these low rates)? If only a small amount of people can afford a place like that then how come the majority of nice homes on the market are priced over $600K. A fair price would dictate that it be priced accordingly. If you want to tell me that a 400 sq ft. studio apartment in a decent neighborhood is correctly priced @ $250k then you might be a fool to pay it. The value isn't there. To me the discrepancy seems to be baby boomer developers and owners squeezing the daylights out of the younger generations by raising the bar to something completely ludicrous and trying to continue being self serving and making that almighty dollar. Just like they did with the internet stocks. Let's all just make a buck and before you it, we'll all be screwed. Gee, I wonder if Barbara Corcoran is a baby boomer. She certainly seems to be.
Someone will always be there to pay the price. Have you noticed you've been paying more for gas lately? I guess that's correctly priced too? Has your salary doubled in the last 5 years? Probably not. Have home prices doubled? Seems like they have. Certainly a new homes average priced has increased like gangbusters over the last few years. I guess that way you can't make the argument that home prices have double....because of all the new overpriced constructions.

 
At 4/12/2005 5:45 PM, Anonymous Anonymous said...

Yes, gas is correctly priced. Well, I'd probably tax it more, but you can't have everything.

 
At 4/12/2005 6:06 PM, Anonymous Anonymous said...

To the anon poster which started with "I guess a capitalist society shouldn't...".

There is some funky logic to your post there. You suggest basing prices on "what people can afford". Gee, I guess you just don't buy into the concept of private property rights. In your world, who would decide the price for any given property. And if that property were artificially priced below market demand, then hundreds, maybe thousands of people would want to buy it. Who decides who gets it at the affordable price. Lottery? Then you'd be griping about how arbitrary that would be.

The thing is, for all your carrying on about how nobody can afford these homes, the fact is: SOMEBODY can afford them. That's why they're priced that way. And if nobody is willing to pay the extorionist price, then the home does not get sold and the seller has to lower it to a more reasonable price. That's how markets work. There really is no better system, certainly not a govt dictated one that would become completely corrupt.

 
At 4/12/2005 8:15 PM, Anonymous Anonymous said...

yeah i agree with some of the above posters. if you can put $100,000 down on a $310,000 appartment in kensington with 1000 sq ft, i would consider it. won't you mortgage payment be well below $2,000? then trade up in a few years. also, i don't know how old your kids are but it would probably be a lot easier living in less space with them while they're young. IMO, get your foot in the door and then trade up in 5 yrs or sell and move to the suburbs then.

 
At 4/13/2005 8:52 AM, Blogger Mr. Squeeze said...

Thanks for all the advice and feedback. Everyone here seems to have run through the same pros and cons that have bandied about my mind, so at least I know I am on the right track regarding my approach.

I haven't completely ruled out opportunities to take on smaller places to trade up. The part where I seem to get stuck is that I am looking at staying somewhere at least five years as a hedge against downside market risk (I know some of you disagree with the significance of this risk, but it ends up being a call one way or the other). When it comes down to specific places, finding a place to settle down for 5+ years is tough. Plus, we're planning on another kid in two years (god willing) and then the space stakes get higher. Plus the notion of having to move again just as I have gotten settled in is extremely unappealing and something I have done all my life as a NYC native.

Thanks again for all of the input. Keep it coming.

 
At 4/13/2005 9:39 AM, Anonymous Anonymous said...

Regarding "hedge against downside market risk" -- true, this is the $64,000 question (or, now, $640,000 question) whenever you buy. But one argument for buying is that you are (somewhat) hedged against upside and downside. If market goes up, you build more equity; if it goes down, so do the places you'd ultimately want to trade up to. Whereas if you sit on your cash and rent, you're betting all your chips on a down market.

Since you're worried about buying and the market dropping, your best hedge would be to buy a smaller place in a better neighborhood, which (if past crashes are a guide) would at least retain more value than a place in a still-gentrifying city nabe, or a just-"discovered" outer suburb.

Having kids, I know from experience it sucks to cram into a smaller space, but that is your better hedge, and if the market doesn't crash you can trade up all the sooner. This would hold true whether you buy in BK or the burbs -- tho I agree with earlier posters that you are being overoptimistic about the affordability of the burbs.

 
At 4/13/2005 11:03 AM, Anonymous Anonymous said...

Fillmore has listed a 2 bedroom condo for $399 - Columbia Terrace - if you don't mind other side of BQE - many have a backyard -not sure if this one does. At least not really leaving the 'hood. And more services are location there.

 
At 4/13/2005 11:34 AM, Anonymous Anonymous said...

The poster who commented on a near-term purchase being a hedge against both upside and downside risk makes an excellent point. And this is the way I have generally viewed ownership. Ultimately, it is a housing cost hedge. You lock in your housing costs. If prices go down, so long as you are not completely underwater (i.e. mkt value below mortgage amount), and so long as your housing costs permit you to continue saving and putting away some money, you can still afford to trade up. Conversely, if mkts go up... well we know that the value of that scenario. You can't predict the future. We've debated this over on CL many times in the past. I still believe that your insistence on finding the perfect solution is inhibiting you from making a decision (though I understand the family history that makes you so hesitant). But, it really isn't as much of a gamble as you think it is.

 
At 4/13/2005 11:37 AM, Anonymous Anonymous said...

Interesting points coming out here. I agree with the person that said those things about Corcoran and the greed that's out there. At the same time agreeing with the person that said that these prices are correct. What would also be correct is to see these prices dropping to a more normal level. Popular belief is these values never decrease. So will there ever be a significant sorting out of these prices? Or will we be paying 1 mil for a studio in 3-5 years? What are your opinions?

 
At 4/13/2005 1:32 PM, Anonymous Anonymous said...

I agree with the poster who said "your insistence on finding the perfect solution is inhibiting you..." I admire Squeeze's insistence on being financially conservative, unlike so many other buyers out there. But on the other hand, nearly everyone I know, myself included, who owns a house in Brooklyn started off in a smaller or otherwise less ideal place. It seems Squeeze had -- and has -- the option of doing the same but is/was unwilling.

From what I learned reading this blog, I guess that, Mr. Squeeze is in his 30s, a longtime resident of Brooklyn, a married man with a kid (kids?) and a reasonably decent-paid professional. In other words, it sounds like you were in a position -- personally, financially and geographically -- to buy a nice co-op, say, 5, 6 or 7 years ago, when you would have needed less money down.

(I know from experience. At the time, my wife and I bought a Park Slope 2BR with no money from mummy and daddy and a $#60K income between us. And we thought we were foolishly overpaying.)

I'm not trying to gloat or rub that fact in or torture you with 20/20 hindsight. But it suggests that it's not just the recent crazy price spikes that kept you from owning. And it sounds like it's not just youth and being born too late. You might want to look at -- and share with us, since you're asking our help -- the reasons you didn't/couldn't/wouldn't buy back then. And that might help us give you better suggestions now.

 
At 4/13/2005 2:23 PM, Blogger Mr. Squeeze said...

To the last blogger:

Good questions. Here's my best attempt to answer:

1) Hindsight is 20/20. In my 20's I was focused on having a good time and not on the long-term advantages of owning real estate, particularly when planning to raise a family. Even though I had no down payment I had no knowledge of low-money down scenario, no knowledge of the rent vs. buy calculation, and certainly no crystal ball that BK prices were going to go up 30% each year. (Very few people had that insight)

2) I am fiscally conservative (some would say cheap) by design. Whereas my parents spent as if there was no tomorrow, there always was a tomorrow and it wasn't always pretty. I won't bore you with the details, but they fit the Boomer stereotype to a T. That means that I am not willing to devote more than 30% of my gross income to housing, regardless of the potential for return. I've had situations in my life (layoffs, family illnesses, etc.) where rainy day funds have come in very handy. I've already come to the realization that most of my savings will be tapped from a down payment and will need to be built up. Cash flow is king in my book. Should it not be?

3) Income - I only recently switched to a more lucrative career path and many of the opportunities I did see in my 20's when I was doing "poor but honorable" work were out of my reach at the time.

4) Student loans - lots of them between my wife and I (more her than me). Without them, most everthing I see would be within my cash flow range (I would get $1000 more a month).

5) Lifestyle - We could do a double-income full time thing and boost our income to bring more places in reach, but I don't want a stranger raising my children. Even then, it will only add a marginal amount more to our income after babysitting expenses. Adding more children to the mix makes things even more complicated.

6) Space sensitivity - I have lived in tight cramped NYC places all my life and want out. I've compromised my whole life on that issue and want to find other options (hence the burbs). When I realized that I could trade my 800 sq ft 1BR I am renting now for a 2BR co-op in a less enticing area just to get an additional 100-200 sq ft, well I just wasn't that enthused(would you be?)

7) Moving sensitivity - I have moved way too much in my life (16 times to be exact, with six of those before the age of 18). I look at some close friends who have a two and four year old. They bought a 2BR in Bay Ridge a year and a half ago. She is pregnant and now they have to move again. Yuck.

Now, I am not saying that everyone else is in this situation. I think I have a unique situation made of issues that (individually, not collectively) a significant number of people have. I'd be curious to see who else reading this is in that situation or close.

 
At 4/14/2005 8:17 AM, Anonymous Anonymous said...

BK,

You've got quite a laundry list going there. Your dilemma is fairly clear. You are a mature (meaning over 35) professional (meaning upwardly mobile "yuppie" and all the baggage), with at least one kid and another anticipated soon, with a SAM (stay-at-home-mom) spouse, needing/desiring at least 2-3 BR's, in a nabe with decent schools, amenities, etc.

All good and well, HOWEVER, you are also a 1st-time homebuyer!!! And there's the rub. Seems that while you are relatively high income - I back into about $100K based on some things you've said - you are not making Wall St. kinda money where you could easily catch up in this game - especially with those killer student loans (how did you guys rack up so much educ debt but fail to generate the income to show for it). The obvious bottom-line is that your income and savings simply don't add up to your desires and needs.

To be honest, I'm not sure they ever will. You want what EVERBODY wants. Only a small segment of the population (certainly the NYC pop.) can have what you want. This lifestyle you desire is right out of the 1950's. Most families need TWO incomes, have to let other people care for their kids, have to accept cramped living quarters in exchange for being in the right nabe, etc.

Anyhow, I'm not trying to rag on you. If anything, I am just identifying the issues and I agree, they are unresolvable without some intervention from outside (parents, inheritance, lotto, etc) or change in strategy.

Have you considered the option of simply renting - period. For $2500/month you can still rent a nice family-worthy 2BR/2Bath duplex in South Slope - a bit more than you want to spend, but not really when you consider all the cost avoidance vs. owning (no regular maint. & upkeep, transaction costs, repairs, etc.). No, you won't benefit from the investment qualities of ownership, BUT, you would keep your savings in the bank as a nice cushion for rainy days, keep building on those funds, keep paying down debt, etc.

Owning simply isn't for everyone and I am starting to think that you might just be one of those people. But what if rents rise you say? It's possible - not likely over the next year or two. But look at it this way - the cost of owning will rise too. Taxes will increase, heating costs will increase, cost of repairs will increase, etc. I've always been a big advocate of owning. But, I recognize that it simply isn't for everyone. Just because you don't own, doesn't mean you can't save and invest in other ways. Sometimes, people just have other priorities. For you, location, schools, lifestyle, having money in the bank... those are all reasons to keep renting and perhaps permanently delay owning indefinately.

Seriously, think about it. I believe you may have been barking up the wrong tree all this time.

 
At 4/14/2005 9:37 AM, Anonymous Anonymous said...

I would add to the above that you're going to need to recognize that the problems you are facing (esp wanting a home with all the trimmings in a pleasant neighborhood with amenities on one salary) are not unique to the big bad Brooklyn housing market or uniquely blameable on big bad Corcoran. You're going to find these financial hurdles EVERYWHERE: in Bklyn, in the NYC burbs, and if you should move across country you will probably find them in your new home, where you may find a cheaper house but, likely, have a reduced salary. The suburbs have their own vast compliment of expenses, and the comfortable, single-income family lifestyle is becoming out of reach everywhere. You might want to read The Two-Income Trap if you haven't yet. There are all sorts of culprits you might want to blame -- the deterioration of public schools (and thus increased prices in the remaining good districts), ratcheted-up consumption, increased burdens of saving as public-university costs skyrocket, pensions shrink and Social Security looks more tenuous...

Bottom line is, sure, move in with the in-laws, save up money -- anything you do to lower expenses and build a war chest helps. But you're also going to have to accept that you've made certain choices, which go against the grain of materialistic society -- admirable certainly, but it comes with the responsibility of accepting material sacrifice. That's not going to change no matter where you move. (At least, it sounds like, not anywhere that you would actually want to live.) Good luck.

 
At 4/14/2005 9:59 AM, Anonymous Anonymous said...

The more I think about it the more I think a 2 or 3 family would be perfect for what you want. The key reason is the flexibility.

You mention you might have another kid on the way and you are very sensitive to moving. So you want to buy a place that is big enough to meet your future needs. Problem is, this is too pricey.

With a multi-fam you have the flexibility of taking over another floor in a few years when your financial situation picks up.

Also, a couple of other comments:

Regarding the 30% of income on housing and the rainy day funds. Be sure to view the complete situation here. Each month of making a mortgage payment builds up your equity a little bit more. Also, at the end of the year, you'll get a tax refund based on interest paid. So at the end of the day, you might be able to spend 40% of your income and get 10% back in the form of a tax refund and principle paydown meaning you only spent the 30% you are targeting. Also, one great benefit of owning is that you have an asset that can be leveraged if needed. Even if you wiped out all of your savings purchasing a home, you would still be able to borrow against it in case of emergency. You won't be in the situation you describe with your parents where there's no money available when the sh*t hits the fan.

It's scary when first buying. Money is really tight initially. There's extra work to be done, in some instances it's like a second job. However, it's easier to bit the bullet and go through this tough time now rather than later. Within a year or two you will acclimate and the money situation will get better as savings are rebuilt, rents on your rental units go up, you get a raise, etc.

 
At 4/14/2005 10:44 AM, Anonymous Anonymous said...

To the poster who thinks a 2-3 family building is the answer... I don't think you've been listening to our friend. Mr. Squeeze is abundantly familiar with all the advantages of owning. He simply is not willing to make certain sacrifices or take certain risks. At least he understands his own comfort level.

I would say (as a 2fam owner myself) that purchasing such a property carries a great deal of risk. First of all, any building in Mr. Squeez's target nabe zone is going to cost at minimum $1MM. With only $100K DP, that would mean some frightening leverage. Even at those prices, these buildings are usually fixer-uppers. As well-intentioned as your advice may be, I think for this guy, it is just plain wrong.

I still say, that if Mr. Squeezes priorities are lifestyle, location, saving, limiting debt, and having a nice financial cushion, that permanent renting is a viable option. hard to believe in this buy-crazed climate, but for him this could be the answer.

 
At 4/14/2005 11:32 AM, Anonymous Anonymous said...

I agree that renting may be a good option for him but I don't think it would have to be a $1M house if he did find a 2-3 fam.

I disagree on the risk aspect, I think a multi-fam is less risky because of the stability the rentals offer.

If he's looking at $400k to buy an apt. or single family, with the extra rental income from a unit or two this can easily be raised to $6-700k. This can get a nice 2-3 fam in a nice safe family neighborhood in Brooklyn. It's not going to be carroll gardens or park slope but could be kennsington, sunset park, bay ridge, etc.

I didn't get the impression that location was a top priority other than being safe, i.e. not a fringe "up and coming area" like the place on Classon mentioned.

It will be additional work but that's part of the game. However, this work may be something that his wife can participate in from home while raising the kids. Nothing comes for free, you have to put in some work and effort to increase your quality of life.

 
At 4/14/2005 12:31 PM, Anonymous Anonymous said...

Your price referecnes are somewhat out-of-date. At any rate, Mr. Squeeze has considered multi-fam options. For example, this was posted by Squeeze a couple months ago:

Quote:

"I am in retreat
I am so depressed and disheartened. I haven't been posting much over the past three weeks because I have been working on a bid on one of the houses that I mention in my "Lucky 7" post. For all my whining about the market, I was really committed to buying something before our self-imposed deadline of April 1 (April Fools Day fittingly).

The house we got hot and heavy on was the "3-family Ft. Greene Gut Rehab" (it was actually in Greenwood Heights, that's how protective I was of that lead!) As I mentioned in that post, the only other person at the open house was an investor type who thought it would make a good deal for me. He softshoed me over the rehab part, assurung me that it could be done for under $50k and I could get $1600 a month each for the two rentals. The owner was asking $865,000. I was hoping on using the rentals to get my net monthly payments (including mortgage, taxes, utilities, maintenance, etc.) down to around or under $2,000. Making this place work would take a lot of effort and aggravation, but I hoped that for a good deal, the aggravation would pay off.

I went to see the place twice after that, made numerous calls to the broker, and just about tore out what little hair I have left on my head putting the numbers together to make them work. In the end, they just didn't work. Here's why:

* Size: the listing said the bulding was 20x50, when in actuality it was really 17.92 ft x 47 ft. I had found this data on www.propertyshark.com (a great resource!). And that was just the outside dimensions. Measuring inside, the width was actually 16 feet and the depth was 45 feet. So basically, visions of a 2,000 sq ft owner's duplex was reduced to a little less than 1,500 square feet, with half of that in a basement that had a few tiny windows to let light in.

* Rehab: despite the square footage, I trudged on to make things work. I wanted the basement for two bedrooms, a playroom, master bath (with double vanity, whirlpool, etc.), laundry and storage closets. The parlor floor would serve as an open layout with kitchen, dining room, and living rooms. Currently, both floors were separate apartments -- the basement an illegal 1 BR and the parlor a rent-controlled 1 BR. I didn't have much expertise in doing drawings like this and actually used powerpoint and its "ruler view" to try and get close to scale. My brother-in-law, who is a real contractor type, eyeball the layouts as well as the building and had given the place a thumbs up. The roof and rentals were in great shape. The boiler was new. Electrical was updated. Rentals needed painting and plastering. Bro-in-law thought $50k was a good number too (well within my $100k budget). Everything seemed great until I got my actual contractor in, who saw it more like $105k. And that didn't include any structural supports I would need to add to knock down a parlor floor support. All said and done, I could have easily been in for a $120k rehab

Financing: This is where the hammer really fell the hardest. Initially I thought I could get 5% for a 7/1 Adjustable Rate Mortgage. Turns out that even with my near-perfect credit, a three-family house at $865k would probably require a large, non-conforming jumbo loan. That hiked the rate up to 5.75%, increasing my monthly mortage payment by $340. On top of that, part of my down payment funding fell through. My mother (bless her kind soul) offered $50k and I somehow finagled her into promising another $50k. She was going to extract these funds out of her IRA, which she said she didn't need because her principal's pension was more than enough. But when it came time to step up to the plate, moms got cold feet and was only willing to do $60k because the tax hit would be too large for her when taking out the funds from the IRA. This increased my net monthly payments even more, as now I would have to borrow more (less than 20% of the purchase value) and pay even more of that delicious 5.75%-rate interest.

Rental value: The $1,600 a month rentals were pretty aggressive according to the locals and to the listings on Craigslist and realtor websites. The apartments were renting now for $1,300 and I really wasn't going to do much to them except paint and plaster (which was all I could afford). I earmarked $1500 a month per rental. Plus, counting on rents coming in year round was a little dicey, so I assumed for ten months of the year, making the average total rental income I was pulling in each month go from my original $3200 estimate to more like $2500.

Market value: to add insult to injury, the owner wanted an insane amount by market standards. I punched the property (348 19th Street) into the propertyshark website and found comparable sales (i.e., nearby 3-family attached houses sold since October). There were three properties I honed in on and they each sold for an average of $275 a sq ft (note: square footage did not include the basement). This meant that by market standards, this house should have sold at around $660,000, not $865,000. Given all that I had to do to the property, why would I pay a 30% premium over the market price?

Post-script: I offered $780k based on what I though I could do (10% off asking) and got a counter-offer of $840k (barely 3% off asking). His rationale was that he had to pay off the rent-controlled tenant $100k to move out.

This experience has left me drained and despondent. With the fact that I can get a nice rental in the area for under $2,000 a month, this is just too much of a hassle. I don't anticipate living in the place more than 7 years, and by then I am likely to barely recoup my investment with the anticipated market downturn. This is my story. Any comments or similar stories are appreciated. I'll post them all.

- Mr Squeeze(d) "

 
At 4/14/2005 4:10 PM, Anonymous Anonymous said...

Maybe you're right, Mr. Squeeze doesn't have what it takes.

With the amount of time that he's put into researching options and the market he should have been able to see that this 3-fam was not a good deal right off the bat.

He did do the right research in the end, propshark, comps., rental comps, multiple construction estimates, etc.

At the end of the day the property would have worked at the price it should go for which is around that $700k mark. The seller didn't want to do it so it's time to move on.

If he gets flustered by going through this process and not closing the deal then maybe he's not cut out for it. It takes this level of research on 10+ properties before you find the one that works for you.

BTW, my prices aren't off, check the comps yourself. There are plenty of 2-3 fams going for under $700 in the areas I mentioned. You won't find them on corcoran but they are out there. Oh, wait, there is the one on 18th st that corcoran has for $650k

Let's take a quick moment to run the numbers here: Say the property can be had for $600k, $100k down leaves a $500k mortgage. 30-yr fixed at 6.25% is $3078/month. Rental unit brings in $1100 which brings the outlay to $1978/month. $500/month for taxes, utilities, insurance, repairs (property is recently renovated) and he's close to the $2400/month number. Each month, $500 of that payment is going towards principal, not to mention any tax benifits.

Yes it's small but the owners duplex isn't any smaller than his current apt. plus it offers a backyard for the kids. Over time the 3rd floor can be added.

And this is in a hot neighborhood, a bit further out gets more space at a cheaper price.

 
At 4/14/2005 6:08 PM, Blogger Mr. Squeeze said...

Wow. You folks are great. This has been a really good, civil discussion with my best interests at heart. For a bunch of anonymous people on a blog, you've put out some very thoughtful personal suggesstions. Thanks

That said, I think I am going to do several things. I am definitely doing the move, to save $$. That plus the fact that my mother-in-law runs the place like a B&B and my wife will be comfy until the baby comes in the summer.

I will look at trying to improve our mix between expectations and what I can get. Resetting expectations has been a continual adjustment, particularly living in Carroll Gardens. It took me about two months of haranguing my wife to convince her that we could not get a place there.

I also realize that renting is still a viable long-term option. That won't stop me from looking hard, as there are deals to be found even in this crazy market. That post that you re-quoted really was as close as I got to getting a match (and I came close a few times) and it left me drained. That plus my wife and I started working crazy hours that limited our search potential.

If I had my druthers, I would invest in a bigger place in the BK (Kensington, Ditmas, Sunset Park, Greenwood Hts, etc.) or somewhere in Queens, Nassau, Yonkers, White Plains, Mt Vernon, Upper Westchester, Putnam, Dutchess. That is a big territory to search, so I am going to have to get going. Still, it will make for good blog material.

 
At 4/14/2005 6:30 PM, Anonymous Anonymous said...

Hey man, you're welcome. On some level, we are all trying to figure it out. Most of us don't quite know exactly how we are going to reconcile our expectations with what's possible. And many of us find the future to be a troubling and intimidating place. Even though I'm one of those people, you'd probably say has it made, I assure you, that I am not 100% certain exactly how I am going to save, retire, etc. in the manner I'd like to. And for all the investing and whatnot, who really knows what will become of any of us. We take our best shot, that's all we can do. And we can all appreciate the enormous amount of effort and consideration you've put into your own planning.

Good luck with the latest plan. Certainly, chez MIL sounds like as good a plan as any for the moment. Hope you return to the BK someday.

 

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