I work for a commercial real estate company in New York. This is what we do: invest in New York real estate, mostly larger apartment buildings. We renovate, we raise rents, we beautify, we take out a bigger mortgage and get some of our money out, use that money to buy more buildings, rinse and repeat. It's a nice business if you have a long time horizon, particularly in New York, because transaction costs are quite high. (Even the mortgage recording tax, at 2.8% for mortgages above $500k, is pretty steep!) In other markets it is different, but in New York I would say NOT to get to heavy into your plan unless you have serious equity, i.e. lots of cash or marketable securities that can be easily liquidated if need be. You'll need a cushion - interest rates are so low and there is so much cash in the market that you will be buying a property without much cash flow after debt. Prices in neighborhoods like Bushwick, Ridgewood, Sunset Park have almost doubled in the last two years, anticipating higher rents and pricing in the lower cost of debt. Your property's income will barely cover the mortgage (a thin debt-service coverage ratio, in the argot of real estate finance). As such, it will be difficult to build reserves to pay for unexpected expenses. Like a new roof. Or a new boiler. Or whatever. The fact is, real estate cash flows are lumpy - they're not bond-like, at all. Some years you will lose money. Maybe a lot of money. One day the roof will leak and a roofer will say you need to repair it tomorrow, for $30k. And that will be half a year's rent. And because it's New York, the cost of services is going to be higher than elsewhere. But that's okay, you might say. You can sell it in 30 years and it will be worth a ton! Perhaps - but that is just property speculation. It's quite unclear that rents will rise faster than your expenses, and that your property will not require significant upgrades just to keep it sound and habitable. This is often the sign of a high point in a market - when people are ignoring cash flow in favor of appreciation and speculation. "But rents will rise 10%! But property values will double!" In the meantime, you are losing money every year, or at the very least not making much. Hmm. And none of the above even mentioned the significant expense of professional property management (or alternatively, the massive headaches of self-managing). Housing court. HPD violations. Unless you are prepared to make this a career (and maybe that's your plan, in which case, bravo!), consider investing in a NYC-oriented REIT. It's a stock that gives you a piece of New York City real estate, managed by professionals, often with healthy dividends, and you can sell it whenever you want for $7 commission.
@Jake Reinhardt I don't think that small retailers = poor people. I don't think they do either.
@Jake Reinhardt If you owned a building with a retail tenant on a month-to-month lease, and someone came to you offering to pay 3x as much, would you stick with the old guy out of principle? And what would that principle be? I guess I don’t understand why people re-frame this scenario as a David vs. Goliath battle. It tends to infantilize small business owners – helpless “poor people,” as you call them – and strip them of their agency. If you run a retail business, your location and your lease matter more than just about anything. If you’ve got a great location and no lease, that’s on you. Since when are local businesses not businesses? Finally, the true threat to small retailers is not gentrification, but online shopping. If we are going to worry about diminished retail streetscapes, consider your own shopping patterns, which if they are anything like mine have a significant online component. Storefront Y replacing Storefront X is almost a sideshow compared to the threat both of them face on that front.
@Josh Michtom@facebook Your final statement is true in the abstract, but in this instance do we really want collective action of government intervention? I think the answer is no. It's not clear to me that there's any advantage to having government try to curate a retail mix or set rental rates.
"Retenanting, it seems, is part of the bad aspects." When writing about gentrification, it's important not to treat small businesses like small children. If you run a retail business, and you plan on investing in the business for the long term, you need a lease (or you need to own your own building). Otherwise, your investment is completely unprotected. To do otherwise is to invite situations like the above. But this is neither the landlord's fault, nor the real estate broker's fault; it is the fault of a business owner unwilling to make a legal commitment to pay rent for years in the future. Just imagine if a hypothetical retail store owner had signed a 10-year lease with a 5-year renewal option a couple of years ago. (This is a very standard form of retail lease.) She'd have 13 years left of predictable rent increases, and if she wanted to close her business she could sublet the space at the new market rate and pocket the difference, or sell (assign) the lease to someone else. This is just business; if you are a business owner it is the kind of calculation you have to make every day. I don't weep for businesses who want the best of both worlds - low rent and no legal obligations - in desirable neighborhoods.
@jalmondale I agree that limits are necessary, but in general, these rules have some sort of ulterior motive. If you are going to allow people to build enormous houses as of right, then they should be allowed to fill them with as many people as they safely can. Otherwise you're just inviting waste. If you want fewer people, lower floor-area ratios and mandate smaller dwellings. I believe fire codes should be the only restriction of number of people per dwelling, with occasional exceptions for transportation and water/sewer infrastructure. There's something ridiculous to me about allowing people to live in enormous houses that require tremendous resources to operate and contain a massive surfeit of habitable space, and then to tell them they have to limit the number of people because of vague issues of "neighborhood character."
Phenomenal article. I grew up in the Northern Virginia suburbs, and when the economy really started to heat up there we saw the same thing. In that instance, the issue was single-family homes housing multiple non-related immigrants (and their families). The argument against it was always couched in the language of rationalism (too many cars means traffic, fire hazards, etc.) When I went to college, I saw the same thing again in my quaint little college town, this time relating to roommates in privately owned houses. The city council revised the zoning code to disallow more than 3 unrelated people from residing in a house. Once again, the justification was all about rationalism and good bureaucracy: safety, well-being, traffic. These justifications are dangerous. We have fire codes to prevent fires, traffic engineers and transit departments to optimize our roads, and noise ordinances to prevent disturbances. There is no reason that these issues should be addressed through bureaucratic redefinition of family and household.
@antheridia Thank you for the input! I love everything about it in theory. Great to hear it works in practice. Now to find a deal...
Quick, tangential question for those in the know: Do those combined washer/dryer units work? You know, the type that supposedly does it all in one machine, rather than stacked units? I am in the market and it sure would be nice to have the extra space. But I have heard they kind of blow. But then again, I don't do too much laundry, so perhaps it'll suffice?
Real estate fantasies...man. I know this well. I just wrote the largest check of my life to put down a deposit on a co-op in the city, and watching that money leave my bank account - surreal. And now I'm totally locked in. (Unless the co-op rejects me, in which case I think I'll probably feel a mix of anger/disappointment and relief.) And now that I'm locked in, every new listing I see brings a tiny pang of 'huh, that looks nice, could it be a better deal?' And when I see one out of my price range I think...should I wait? Should I make more money, save some money, hold off a little bit until some vague threshold in the future? And what about the housing market? Up, down, sideways? Am I timing the market right? But I must say, being a renter - even in my cheap rent-stabilized apartment - also gives me tons of anxiety. Shit breaks and it's not properly replaced, mice remind me that #3L is not a suite at the Plaza Hotel, and despite the protections of the lease I'm acutely aware that the apartment will never be mine, and that I don't want to live out the rest of my days in a 1-BR railroad apartment. I am interested to see what life will be like as a property-owning adult. We shall see.