Why do people invest in downtown Boston?

Question

I understand buying older buildings and converting them to condominiums, I understand buying underpriced properties but why do people invest in market rate condos with negative cash flow? Is it just a bet on appreciation?

Joni Shehu · Answer

@Eric Girard there's many reasons.

One being, using it for tax benefits through cost segregation where one reallocates assets in a property to personal assets and it allows owners to take accelerated depreciation.

For example a $2m building with negative cashflow can mean a $500k depreciation (and tax deduction) on year 1. Pretty great deal for specific buyers.

Frank Chin · Answer

Our family invest in NYC and San Francisco, all with the same issues, and the same question comes up. The appreciation in these areas so far had been unbelievable, at least for us, though I avoided investing at market tops. In these areas, many are foreign investors seeking a safe haven for their money and pay all cash.

I recall some years back, I was looking at a few properties advertised at the window of a real estate office, a Chinese woman also stopped by and looked, and remarked she's looking for some relatives in Hong Kong. So I ask how are they going to see the properties. She said they don't have to as values in NY have always held up. Then I ask how they'll do mortgages, and she said they don't have to because it's all cash.

Reminded me of a trip to Canada some years back to visit relatives. We tried some local Chinese restaurants and remarked that these places are so fancy and gorgeous compared to NY. So I was told that Canada requires a minimum investment to emigrate, and one way to do it is in a restaurant, or maybe some real estate. That was 30 years ago, and I recall the minimum at the time was $500,000, so I'm told for a minimum of $500,000, you'll have a very fancy restaurant.

With all cash, there's normally positive cash flow. They are looking for a safe area, with  strong appreciation a plus. Cash flow is not the priority.

Eric Girard · Answer

Well that makes a lot of sense. I also see investors turn multi-families into single families, vice versa, renovate and sell as condos, as well as hold property and take the 2-3% cap rates. Foreign buyers were doing that for a while but it seems like that niche is all dried up now.