Here is the true story of one man, a client, who bought and sold apartments that he lived in, and probably ended up turning $49,000 into $499,000 net of all expenses. Some of the details have been filled in using reasonable assumptions.

First Purchase: Small Midtown East Co-op

Its the year 2000. Prices per sqft in Manhattan have generally been rising since 1995 or so. The average price per sqft in 1995 was about $294 in Manhattan, and now in 2000 its around $543. Al Gore and George Bush are already campaigning to determine who gets to succeed Clinton. Earlier in the year, the dot-com bubble burst and the Nasdaq has already dropped some 40% since peaking around March. In this context, our mystery man buys a small one-bedroom apartment for about $135,000. He probably puts down 20% which would be $27,000, but for the purposes of our case study we are going to bump it up to $49,000 since the next purchase has a high minimum down payment. Mortgage rates around the time of his purchase are about 8% which historically was pretty average. So his monthly mortgage payment, assuming a 30 year fixed, might have been about $633/month excluding taxes. Our man is young and establishing his career.

A few years later, its 2004 and the average price per sqft in Manhattan is around $778. Our man sells for a tidy $249,000. He’s paid off about $2,847 in principal. After closing costs and a broker’s fee to sell the place, he’s left with about $141,000.

Second Purchase: Upper West Side Co-op

Its 2004 and Bush is running for re-election, and Michael Bloomberg is in the middle of his first term as our mayor. The Nasdaq is even lower than it was in late 2000, down roughly 60% from its peak. But Manhattan prices per sqft have continued to March higher every year. Perhaps they were helped by mortgage rates, which are now a more palatable 5.8%. He trades up to a larger apartment and a swankier address. But while his building faces Central Park, the apartment that he purchases for $282,000 does not. Its a more generously proportioned 1 bedroom, with a second bathroom. This is a 50% down co-op which is why the $141,000 in proceeds from the previous apartment fits so neatly. So at the new mortgage rate his monthly payment is about $831 not including taxes.

Less than three years later, he sells for a tidy $500,000. He’s paid off about $4,674 in principal. After closing costs and the broker’s fee he nets a little more than $308,000. Its 2006, Bloomberg is in his second term (probably plotting his third already), and the average price per sqft is now $1,025.

Third Purchase: DUMBO Condo

A year later, our man hears that Brooklyn is getting hot, and he invests in a beautiful new condo apartment. Two beds, two baths with sweeping views of the New York Harbor. Somewhere in the building is a neighbor named Brooklyn Decker. He pays $1,015,000. With average prices per sqft in Manhattan around $1,099, he’s only paying about $805/sqft. Mortgage rates are around 6%, his payment is about $4,281. Its 2007, and in about a year the real estate market and just about every other market is going to take a serious nose dive. On an interesting side note, he never moves into his new pad. His employer sends him to Asia, and he proceeds to rent out the apartment probably around break even.

Its five years later and its become clear that he is staying in Asia, so its time to sell. He has paid down about $56,000 of principal. In reality, rates have since dropped under 4% and he probably would have refinanced at some point which would have turned him comfortably cash flow positive. In any event, he sells for $1,299,500, has about $562,000 left which includes $63,000 in principal he paid off. So his original investment of $49,000 has become $499,000 net over the course of about 12 years or a cumulative return of about 918%.

A few thoughts:

  • Thanks to the capital gains exclusion on primary residences, he probably never had to pay taxes on his gains. Its seems likely that he recognized that he was approaching the maximum exclusion and that may have informed his decision to sell each time. However, his final sale may have been subject to FIRPTA since he was living abroad and probably could not claim it as his primary residence anyway.
  • He did better on his two co-ops then he did on condos. Granted, his condo purchase overlapped with the financial crisis of 2008 which was devastating for the real estate market.
  • Past appreciation did not seem to scare him off. Even though prices per sqft in Manhattan had risen some 84% in the years preceding his first purchase, he went ahead with the purchase and it worked out. By the time he made his third purchase, prices in Manhattan had risen more than 100% from when he started, and 274% since the bottom around 1995.
  • His purchases spanned two recessions. His first purchase coincided with the dot-com crash, and was immediately followed by 9/11 and the recession that followed. His third purchase preceded the financial crisis and the collapse of Lehman and Bear Stearns which froze the credit markets.
  • Every purchase he made seemed to outperform the broader market. The broader market would include all properties, so maybe there is something being averaged in that was a drag on the broader market. However, here is the side by side unlevered performance. Hard to argue that he’s not just a skilled investor:
 Property  Years Held  Cum. Apprec.  Manhattan Market
 Midtown    3.58 84.4% 43.3%
 UWS    2.50 77.3% 31.7%
 DUMBO    5.67 28.0% 8.9%