Let’s talk about risk.
There’s always going to be price risk when you’re investing in New York City residential real estate. There’s the risk the values will go down, the neighborhood will fall out of favor, and/or the building you buy will lose its value due to poor management or construction problems. Currently, I’m hearing a lot of conversation from my clients about the fear that the market is going to sour, the value is going to drop, that prices are going to go down resulting in a sub-optimal time to purchase. On a daily basis, I’m asked what my thoughts are on the market over the next six months, 12 months and 24-month time horizons.
Is it going to go up? Is it going to go down? Is it going to be better for what I’m buying or is it going to be hard buying what I’m buying? Truthfully, I always have conviction around an opinion but that opinion will always have caveats. I answer that question usually with facts, talking about certain quantitative and qualitative factors in the market that could lead to market improvements and weakness but I don’t have the answer. No broker does. No one truly knows when the markets are going to go up or come down.
What I do know is that today’s market is one of the best markets to buy in that I have seen in my 18-year career. Prices have gone down anywhere from 5% to 20% in the last 12 to 18 months depending on the sector. Outside of a few small neighborhoods in Brooklyn, the market has dropped in value but unlike other similar markets, additional outside factors aren’t affecting the market. We still have very low-interest rates, it’s relatively easy compared to other markets to get financing from both national and regional banks and the job market and the stock market is strong providing equity to invest in real estate.
All these factors usually lead to an upmarket but we’re seeing the opposite with values going down, which in my opinion, makes it a great market to purchase. Is it the best market? Is it the best market that we’re ever going to see? Is it better than the market we are going see in 12 months? I don’t know that. I do know something else about risk. There’s the risk both ways. If you buy and if you don’t buy and most people don’t look at the risk of not buying residential real estate. This is most acute with buyers who are purchasing a home as a primary residence and the risk anxiety keeps them from buying real estate in today’s market. If they don’t buy, they have to live somewhere so they end up paying rent. That takes on a risk of its own, as well. You have risks that the property that you rent goes up in price each year, the owner decides not to rent any longer, your family may change in size and when you decide to flip from renting to buying the market is at a higher level. Bottom line, the cost of owning a property is almost always better than the cost of leasing a property. The rent versus buy analysis in today’s market is pretty close to breakeven but if you own that property for five years or more, the analysis swings in the favor of owning as rents move higher and mortgage payments remain fixed for the life of the loan. The tax savings will also accrue to the favor of ownership and also allow the owner flexibility if they need to borrow against the equity in the property.
I very, very rarely hear buyers talk about that risk of not buying and it should be part of the conversation since it’s a significant risk. I have worked with hundreds of clients who’ve chosen not to buy and regretted it later on, wishing they bought at a better time, knowing that they would have made tons of money or at least bought something that was unavailable to them at a time when they finally did invest. Only on the rarest of occasions have I ever spoken to one of my past clients who bought a property and regretted buying a property. I can count that on one hand. I feel that buyers are taking a more severe view of the risk of buying compared to the risk of not buying and I think it needs to be weighed evenly.
There’s always going to be a risk. You’re not going to know 100% when you buy the property. You’re going to do your due diligence, you’re going to do your research and you can uncover 98% of the risk and you can make an educated decision and there are lots of properties that you should not buy based on your financial situation and your needs. A lot of times, I see people hold off just because of the overall daunting task it is to buy a property in New York City and they use that slight 2% risk to hold back on making that purchase and they don’t analyze the overwhelming risk of not buying the property and not making that investment for their long-term portfolio or their long-term property needs. People need to look at that because that really is a risk.