rent v. buy, or buy then rent in the loft laboratory of 448 Greenwich Street

small (loft) world
I don’t know why I was looking at loft rental data, but I know why the Manhattan loft on the 4th floor at 448 Greenwich Street caught my eye among that data. Buyers I was working with bid on this loft (unsuccessfully) before it sold on September 13, and I had a long back-and-forth with the seller’s (un)broker about how big the loft was, which determined which comps meant what. (More on that, below.) But noting in our data-base that the loft that sold last month for $1.46mm is renting this month at $7,200/mo got me wondering about the age old Rent v. Buy discussion. (This will prove to you that I don’t deal with rentals, so this will be the most rudimentary ‘analysis’.)

playing with numbers (still!)
No mortgage for the $1.46mm purchase has shown up yet on Property Shark, which I would think is more likely to be a filing delay issue than it is an indication that the buyer paid cash, but this buyer is a corporation. I wonder about this math:

(assuming 20% down)

common charges $470/mo
real estate taxes $753/mo
mortgage interest* $7,833/mo
$9,056/mo

(*on $1,168,000 at 5%)

With a 20% down payment, the cash deficit is $1,856/mo.

(assuming they put down enough to be cash neutral)

common charges $470/mo
real estate taxes $753/mo
mortgage interest** $5,975/mo
$7,198/mo

(**on $822,000 at 5%)

They would have to put down $638,000 (44%) in order to be neutral on a cash basis.

(Scratches head ….)

(again)

If, instead, the Inc. took no mortgage but paid cash, they paid $1.46mm (plus expenses) to ‘earn’ $5,977/mo, or $71,724/yr (less a brokerage fee). That’s 4.9% per year.

It is not my money but it seems like a business would have a better use of $1.46mm to directly support the business (whatever it is) to generate a 5% return. What am I missing here? (A lot, I am sure, so be gentle…)

“1,300 sq ft” or “1,148 sq ft”?
I mentioned up top that I had buyers who bid on this 4th floor loft at 448 Greenwich Street. They bid based on comps for ‘similar’ sized lofts, as this full floor loft has a floor plan that permits no flexibility (without substantial renovation and expense). It is a master suite plus office (nursery?). I hit the loft above this one way back on January 29, 2008, in a post whose title hits the problem with this (identical) floor plan: limits of the loft form / 448 Greenwich St. That was back in the day, when I hit still-active loft listings; given the 4th floor’s recent sale at $1.46mm you will not be surprised to learn that the 5th floor did not sell at (off of) $1.995mm even from late 2007 into 2008.

The tight floor plan and that second room of only 7 x 9 ft (I believe it cannot be a legal “bedroom” unless all dimensions are at least 8 feet) made this loft not very comparable to other lofts in the 1,200 sq ft range, at least  in the eyes of my buyers (and to my eyes). I had a fascinating back-and-forth with the seller’s (un)broker about the size of the space, with each of us surprised that the other had found a different measurement for the 4th floor loft in the offering documents. He argued “1,300 sq ft” was the appropriate size for comping purposes (that number appears on Schedule A to the Offering Plan); I argued “1,148 sq ft” (that number appears on Schedule B to the Condo Declaration). He argued that agents ‘always’ use gross sq ft; I argued that all my comps were based on various Condo Dec numbers, also noting that the interior dimensions of the space suggest a box that is 17’6” wide and about 68 ft long, or (only) 1,190 sq ft before taking out the elevator and common stairway space.

Long story, slightly less long: we thought the maximum value based on true comps and the smaller size was $1.4mm, so did not increase the bid in response to the no-counter-counter from the seller. (The ask was then $1.595mm.) Eventually, seller sold to that Inc. at $1.46mm, a price I simply cannot support based on $/ft comps unless one used the (to us, artificial) “1,300 sq ft”.

Obviously, this kind of dispute should never happen (a difference of ‘opinion’ about size, of 13%) and that it did not matter if the only questions were what was the seller willing to take and what is a buyer willing to pay. But it was unsettling to go through that process with those buyers, especially to find that someone else valued the loft enough to pay $1.46mm for it.

rent v. buy on Madison Square
All that buy v. rent stuff up top reminds me that I am aware of one more very recent set of data points, in a very different Manhattan loft neighborhood than 448 Greenwich Street in northwest Tribeca, suggesting a very different spread of rental values versus sale values.

The Manhattan loft #8F at 225 Fifth Avenue had been offered for sale for a long time at $1.9mm sale. The best and most recent comp (#8S) suggests that a successful sale could be had around that $1.76mm clearing price — a full $300,000 more than the 4th floor at 448 Greenwich Street sold for. #8F was then offered for rent (listing, here); and our data-base says it was rented for $7,300/mo — only $100/mo more than the 4th floor loft in Tribeca, with much higher taxes and common charges ($2,422/mo in the listing, though that is probably out of date).

I am not going to go too much farther in talking about these two lofts, except to underline how the spread between buy v. rent dollars is substantially different for these two lofts. Paying cash for #8F at $1.76mm then renting it out at $7,300/mo is a much worse deal for an owner than the arithmetic above for the 4th floor. Instead of ‘earning’ (potentially) 4.9% per year on a cash basis in Tribeca, the owner on Madison Square would earn on a cash basis only 3.3% per year.

(common charges $980/mo)
(real estate taxes $1,442/mo)
rent $7,300/mo
$4,878/mo

That’s it for today, folks!

© Sandy Mattingly 2011