Category: U.S.RentalProp

43R: focus@location,clean,warm !!size

Posted on by tiger40490

We as landlord want to provide a reasonable level of comfort inside the rooms and a clean bathroom, and don’t need to care about kitchens, stairs, living room, window, door, yard, balcony etc. Those areas are often run down and barely functional:

  • Flushing Ave — the least comfortable living space in my experience, even inside the rooms. The size of the living room didn’t really help relieve the discomfort.
  • Winnie’s place .. 423 Hart
  • 40 Wayne
  • 43 Rockledge
  • 4119 Fort Hamilton

It’s not uncommon to see tenants accepting a mobile partition (not a real wall) in a living room in Newport or JSQ.

If the location is safe, and not too far from transport, then I think most low-end tenants would be willing to pay for a clean, warm room, regardless of size. If we as landlord invest on renovating the interior to provide comfortable space, then we can charge a rental close to the market rate.

(1-NRY/NGRY) := haircut #JC~50%

Posted on by tiger40490

http://www.yourinvestmentpropertymag.com.au/mistakes/the-truth-about-rental-yields-148067.aspx has pointers on GRY, NRY (net RY), mortgage, vacancy cost etc but not NGRY. For me,

  • I will use purchase price + purchase transaction cost, not current value (I don’t know it) as the basis for GRY and NRY
  • mortgage cost is not in my NRY as rate is floating and the outstanding amount is unknown.
  • For NRY, I will estimate vacancy, pTaxes, maintenance, commission, non-payment. To compare with overseas rent income, I would need to consider income tax
    • Repair cost can be minimized if I’m in the city to manage it myself. In contrast, if I’m overseas and I promise to reimburse them they are likely to go for the more expensive repair option.
    • I had one tenant demanding a one-month rental waiver.

Advertised rental yield is usually NGRY (notional GRY, defined in another blogpost).

The “GRY – NRY” haircut amount varies greatly. I feel U.S. has inferior haircut. Below is a concrete example in Jersey City, where haircut can be half without considering income tax or mortgage.

In contrast,  my Peak Retail guaranteed 5.5% NRY after-tax ≅≅≅ pretax 12->13-16% NGRY. It becomes 14% once we factor in intangible costs like legwork + distraction to work + mental stress dealing with tenant issues.

Bridge/Peak has no capital gain tax, very low pTax, 14% income tax on rental, already paid by lessee.

— Overall, for residental rental yield haircut, U.S. haircut is higher than SEA due to

  • higher professional fees
  • wood and older : more repairs
  • taxes — restate + income

— 1st case study: CYW’s 400k 2FH in Jersey City

https://docs.google.com/spreadsheets/d/18fABeXl3vMKuakPV3mcM8MRpzbvh5yar6KIRmmc5J3A/edit#gid=1744686908 shows 3 scenarios including Bayonne and 43R (43 Rockledge), but let’s focus on a 400k 2FH in Jersey City

  • nominal income = $3400 * 12M i.e. 10.2% NGRY
  • vacancy 10% — can be reduced by finding long-term tenants at a discount.
  • 10k pTax 2.5% of 400k
  • handyman repairs 6% of  gross rental. See rental property wear-n-tear #index
  • major repairs 2k, assuming an old house
  • assuming $0 local management fee
  • assuming $0 mtg
  • assuming $0 litigation cost
  • —-result—-
  • $22272 assessable rental income, to be taxed just as salary.
  • pretax NRY = 5.57%

— 2nd case study — Dilip said if his white plains house generates GRY = X then 1/3 of X is mortgage payment and another 1/3 is pTax, so the haircut is about 60-70%,

  • assuming no vacancy
  • assuming no repairs
  • assuming no local management fee
  • assuming no litigation

— 3rd eg: See the real example in 389 Washington St #Newport

— BGC case study: BGC rental yield: local^foreign tenants shows SGD 6k/Y realistic rental income vs SGD 12k promised.

3choices if have cash4another property

Posted on by tiger40490

It’s highly imprecise (mostly gut feelings) to rank these choices, but at the moment here’s my tentative ranking.

scenarios
work]SG work]U.S. model mgmt legwork NGRY based@xp? quantum overall risk
bad choice #1 43R@JC by myself, but tough 10%+ 🙁 on paper USD 350k
#1 #2 HDB combo lowest maintenance 5% yes 🙂 SGD 200K lowest
#2 #3 khm/idn.. hopefully cheap local mgmt 6-10% 2 cases USD 50K highest
bad choice bad choice SG condo low maintenance 2% 🙁 on paper low

 

appreciation=less predictable than NGRY #YH

Posted on by tiger40490

In a given location, there’s uncertainty in both 1) rental income and 2) appreciation.

Some prime locations have very predictable appreciation;
Some good locations have very predictable rental yield.

I think within the tristate area, about 5-10% of the locations have predictable rental yield, but how many percent of the homes have predictable appreciation? i would say below 2%. This is because of hot money. Investors can bid up property prices very quickly. I believe many parts of Jersey City waterfront, Queens and Brooklyn Eighth avenue are overpriced, so appreciation over the next decade is unpredictable.

Rental yield is different. Take any rental tower in Jersey City waterfront (or Flushing). Entire tower is for rental not for sale, with 150 rental units. It’s managed as a business. This business model has been proven over 30 years. The rental rate almost never drops. When vacancy is too bad, the business would give discounts.

Now forget the prime locations. Look at other parts of Jersey City or Queens or Brooklyn or Bayonne. There’s a healthy and robust demand for rental property. (Bayonne has a few new multi-storey buildings under construction in prime locations, and I think they are rental apartments, not for sale)

In my observation, property valuation can overheat and then stagnate for years, affecting the predictability of appreciation. Rental market operates under a different model. The demand comes from renters, not investors. Less volatile, more predictable.

rental properties: SEAsia can beat U.S.

Posted on by tiger40490
As I wrote in 2017.. Here’s another Attractive proposition — Suppose there’s a U$200k overseas property with high appreciation potential + 8% NGRY, much higher than mortgage rate. Would you invest that amount and delay your U.S. home purchase? You would remain a tenant in U.S. and rent out the overseas property – rent/rent-out, earning a positive “lease spread”.
Hi Susan,
I haven been thinking about buying a rental property in the U.S. Then it struck me that it’s harder to remotely manage a U.S. property than a SEA property. The U.S. rental market is more complicated with the law protecting the tenants. I will only consider it when I’m local.
There are other advantages investing in SEA rental properties:
  • 🙂 quantum — If I have some modest amount of spare cash, I can more easily afford a rental property in SEA (except Singapore) … a fraction of a U.S. home price
  • 🙂 exposure — is smaller in a pessimistic scenario
  • 🙂 repairs — U.S. repair labor cost is a few times higher than Singapore … Let alone other SEA markets
  • 🙂 wood — U.S. homes are usually wood structure .. higher maintenance.
  • 🙂 appreciation — Most U.S. locations don’t have real appreciation, but the SEA prime locations appear to be emerging, with upside potential. I can’t afford any prime location in the U.S.
  • 🙂 agent cost — I can rely on SEA (including Singapore) local agents to manage for me at a lower cost.
On the other hand, I am aware of the drawbacks in SEA:
  • Not feasible to get 10 rooms to rent out in a good location.
  • 🙁 currency risk
  • 🙁 less developed, less proven, less known
  • 🙁 political and legal risks. I think many Singaporeans burnt fingers in Malaysia.
  • The BridgeRetail experience is by far my most successful property investment, so I’m probably over-optimistic due to that experience.

43R model #17% NGRY

Posted on by tiger40490

For my Bayonne plan, see 250k 1st buy#YH”hotel”

Guang’s 43 Rockledge house was bought for 512k, but total gross rental is 75k/M or 90k/Y ~ 17% GRY. Most of her 11 rooms collect $800 each. Mine has a slanted ceiling.

(I believe her other unit is 140 Church, bought for 325k in 2013. 10 small rooms, probably similar rental ~ 27% GRY)

Much higher GRY than Youwei’s.

I think such a house is often very old and cheap, so my mtg/tax burden is hopefully lower.

  • if GRY high, I can consider a family rental home in a good location, for 2k, and earn a lease spread.
  • if GRY high, old house and maintenance cost is tolerable. You can afford to have professional handyman to relieve your pains. Suppose annual repairs costs 10k, you still have 14% GRY.
    • Hopefully this becomes a passive income.
  • if GRY high, 2.5% tax tolerable
  • if GRY high, poor appreciation is tolerable. Guang paid 512k in 2012 but it has depreciated in 2019
    • rental income is more important to me than windfall

— to improve profitability

  • I would need to avoid a dilapidated house as I can’t afford the risks in renovation
  • 2FH is more valuable for this model, but a SFH is more affordable for my first buy (risk-averse .. when unfamiliar,prefer tiny investments,like$200k property)
  • find locations with rental demand
  • sign 6M leases
  • check renter background .. risk@tenant delinquency
  • install separate meters
  • get professional inspection to identify weak spots in advance and replace/reinforce them.
  • agree with tenants that small repairs are their responsibility, given the low rental I charge.
  • #1 valuable tip — The more rooms, the higher yield.
    • Some renters just need a bed and don’t mind partitions in a living room!
    • prefer small living room. It’s completely useless in a hotel model
    • small, clean, well-located rooms are very popular with renters. If there is only one big bed room on 3rd floor, you could probably get $1000, but she earns $2000+ with 3 rooms.
    • Compare the 2nd floor unit in 40 Wayne. I think total rent is $1k, but it’s big. If divided into 3 rooms it can fetch $2400 !
    • prefer 3-storey, often cost the same as 2-storey, but 2 rooms on 3rd storey can generate $1500/M
    • You can even divide the basement into rooms if there are bigger windows and stairless back entrance. It would feel like a ground floor.
    • attic and basement are very important to this model. They are often ignored (by other buyers) like storage space

## friends cast doubt@43R NGRY level

Posted on by tiger40490

I told my friends that 43R generates 15k/M gross rental. All of them seem skeptical. I think they are used to 2FH PGRY of 10%. Their doubts include

  • feasibility of dividing into 10 or 11 rooms. I will look for a house with that many rooms.
  • legality
  • maintenance duty to support 22 tenants
  • vacancy rate? Nobody raised that.

reduce U.S.rental income tax

Posted on by tiger40490

Tip: Prefer to receive rent checks payable to “Chase” or Citibank”

Itemized deductions can show repairs, depreciation, mtg cost, pTax etc, so you can’t hide your rental income.

Standard deductions show none of these and hence provide a loophole to avoid paying tax on rent income.

Wallace said you can write off many expensive renovations against rental income to reduce your tax, but I think IRS may pick you for audit.