Architect trying to get into RE

[Brittany H.]

Hey everyone!

I'm going through the moment I'm sure everyone has gone through that encompasses the phrases "what am I doing with my life" and "how can I feel the freedom I need?" Quarantine has been the fuel but the fire started a while ago...

I have always been interested in RE. My grandfather started a home building business and my dad continued it on when he passed. I grew up in construction sites and visiting model homes. Although I can't imagine myself getting into the home building business after seeing the stress it put my dad through, I found my love of real estate during these years. 

I went to school for architecture. Got my masters, moved to NYC, where I am now. I work at a development firm, doing the architectural side but now I've also been getting into the acquisitions side and taking RE classes at NYU. I'm in my late twenties, and I am super eager to start my first project. But NYC is so expensive that I really don't know if it makes sense to put all my savings towards one crappy apartment. 

This is why I joined bigger pockets... NYC is a big scary town and is so competitive and expensive, I either need to have the best deal and the best plan, or look elsewhere. I'm here to learn different strategies and whether a deal in NYC is actually a good investment in the long term even if it consumes all my capital. And how I can strategize so that my first deal allows me to do the next. 

I would love to hear from anyone who started out in an expensive city or started with a deal that consumed all their capital. But really, advice from anyone is helpful at this point. 

Glad to find such a great place for people to meet!

[Chris K.]

@Brittany H.

Here's a very simplified example of how investing in NYC can be very lucrative. Let's say you invested in a 20 unit apartment back in 2010. Each unit rented for about $2,000 a month for an annual gross scheduled revenue of $480,000. Let's also assume that the NOI is about 50% of the gross revenue ($240,000) and that your all-in amount for the project was equivalent to buying it at a 5 cap ($4.8 million). My guess is that you won't find 5 cap properties in NYC now but we all thought the world was ending in 2010.

Let's look at the property in 2020. From what I understand, the average rent in the NYC market has increased around $1000 per unit since 2010. So let's say your NOI is now about $360,000 instead of $240,000 (3000 * 20 * 12 * 0.5). And because it's now 2020, the market cap rate is around 3.5% (no idea if this is true but sounds about right). So now your building is worth around $10.3 million. So just by the simple fact that you bought a building in NYC, the value of your building increased by about $5 million.

The above is a very simple analysis with perhaps unrealistic assumptions. But that's the basic idea. Essentially, investors are betting on the fact that NYC will always be a desirable place to live. 

My guess is that the above example applies to smaller investors as well. For example, I would guess that folks who bought an apartment unit in 2010 will likely find that it's worth more in 2020. Again, this is by the simple fact that NYC is a cool place to live. 

That said, it's hard to predict what will happen in the future. Maybe we will have another crisis in 2030 and real estate prices tank again. Institutional and larger investors can offset this risk by diversifying their investments. And they may have enough cash to withstand the storm for decades. But in your situation, you are going all-in on this one apartment unit.

Cost segregation just refers to something you can do to accelerate the depreciation on a building. Instead of taking the depreciation over the standard number of years, you send in an army of qualified professionals and they go and look at each part of the building and make a guess at how many years each component has. For example, they may look at a doorknob and say "it looks like this knob has 2 more years left"). In the end, they tally up all their findings and give you a new depreciation schedule. So you now could potentially depreciate the entire building in 5 to 10 years. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.