When you work in finance for a while, you run into problems that “Rich People” tend to have. One of the biggest questions I am asked by my friends in the industry is what the hell do I do with all the money that I am making.
If you are fortunate and landed a job in finance or another high paying career straight out of undergrad, then you will likely have paid off all your debts and started saving just a few years out of college. When you are young, you have very low amount of fixed expenses and can save a ton of money making six figures a year living in a high cost city.
After a few years, you will ask yourself, “What the hell do I do with all this money?”
In investment banking, private equity and hedge fund career paths, your compensation tends to rise significantly over time. Each year you start saving more and more and more and you wonder what to do with all the money.
This is obviously an amazing problem to have! Be glad you are in this position to begin with. Before we get into it, understand that if your net worth is less than $500K, then you shouldn’t spend a lot of time worrying about what to invest in. Focus more on how to grow your income first.
There are four standard investment choices you can make:
- Stay in cash
- Invest in the Stock Market
- Invest in Bonds / Treasuries
- Invest in Real Estate
Cash
As Ray Dalio puts it, “Cash is Trash.” Given how much the government prints money each year, the value of that Dollar slowly goes down over time. Even though inflation has been muted in recent years, there have been times in the past where inflation has run over 10% each year (just look at the 1970s).
Having a certain amount of cash on hand isn’t a bad thing, but ideally you shouldn’t have >25% of your net worth in cash. The inflation seen in the 1970s could come back given what is going on in the world and you don’t want all that hard work working in finance to go to waste.
Just look at how the value of the Dollar has changed since 1950. $1 is worth so much less today and it will continue to depreciate in value longer-term due to inflation.
Stocks
Most people seem to rule out putting all their savings into the stock market. The market has had an amazing bull market run since 2009 and most don’t believe now is the right time to invest in stocks.
I mean why would you invest your money in stocks when this has happened over the past few decades?
Bonds
Longer duration treasury bonds have done amazing well and are usually a safe bet against a downturn. But yields have fallen so much that you won’t make that much in coupons and risk losing a lot if the economy accelerates or if inflation returns, which will cause yields to rise and bond prices to fall.
You can buy into investment grade corporate bonds as well, which are probably a safe bet longer term, but won’t protect you as much from high inflation.
Real Estate
So, the last option is real estate. People will always need a place to live and the population in the United States continues to grow each and every year. Prices should naturally rise over time, right?
I spent the past six months thinking of whether I want to buy an apartment in NYC. Since I moved to the city years ago, I have been paying rent each and every year waiting for the New York market to cool down to the point where I could hopefully find a good bargain.
New York City real estate has risen substantially over the past decade, all the way from the end of the last financial crisis to 2018. Prices have since come down so now could be the time to rethink purchasing an apartment.
Here are the top 10 reasons to buy an apartment in New York City:
- Natural safe haven for assets around the world
- Real estate has historical maintained its value
- Cash is trash
- Build equity in your own property instead of someone else’s
- Mortgage rates are at all-time lows
- Real estate taxes and certain maintenance fees are tax deductible
- Real estate values across NYC have declined substantially since 2017
- High level of uncertainty in outlook for NYC
- Vacancy rates have been trending higher
- NYC always bounces back
1. Natural safe haven for assets around the world
For the past couple of decades, NYC has shown to be a good place for anybody in the world to park their money. People in other countries want to exchange their currency into the US dollar because of its reserve status.
Time and time again, NYC has shown to be resilient when faced with the worst possible scenarios. Everybody thought NYC was done after 9/11 and people quickly forget about it after a few years. Even during the financial crises of 2008, NYC was one of the least impacted markets.
Why is this the case? Well NYC has:
- Highly educated talent and jobs
- High concentration of employers
- Vibrant social culture
- Amazing variety of food
- Iconic tourism location
Practically everybody around the world knows what New York City is and would love to come visit. If you work in the city, you can easily meet clients face-to-face and can have a good time going out meeting people. Who knows if this these dynamics hold true going forward, but there is not another city in the US that has all of these dynamics.
2. Real estate has historical maintained its value
People will ALWAYS need a place to live. With the population in the US slowly increasing over time, more and more homes will need to be built to support all the new families.
As you can see below, real estate values tend to always go up over long periods of time.
3. Cash is Trash
As we described above, the US is printing money at very high rates day in day out. You don’t want all your hard work to go to waste holding large sums of money in cash over extended periods of time. Real estate provides one of the best ways to protect against inflation.
4. Build equity in your own property instead of someone else’s
Every mortgage payment consists of an amount paid for principal and an amount for interest. For a $500K apartment assuming a 3% mortgage rate, your monthly payment comes out to ~$1,700 per month. About $700 of that monthly payment goes down to pay the principal balance of the mortgage, and over time you pay less and less interest and more and more principal.
You are essentially paying yourself back each and every month and overtime that mortgage balance will go to zero. As long as you don’t buy at the top of the housing market, it is one of the easiest ways for anyone to build wealth over time.
5. Mortgage rates are at all-time lows
These days it is practically free to borrower money to buy a house. At ~3%, mortgage rates are the lowest they have ever been. Given mortgages are tax deductible, you are basically borrowing money from the bank at a ~2% rate post-tax, which is lower than what some of the largest companies in the world can borrow at.
6. Real estate taxes and certain maintenance fees are tax deductible
In addition to mortgage rates, your real estate taxes and a portion of your monthly maintenance fees are tax deductible. There is now a limit on how much of your taxes are deductible, but this primarily applies to those who buy seven-figure plus homes.
7. Real estate values across NYC have declined substantially since 2017
You never want to buy at the peak when making a large investment. Most people who bought homes across the country in 2005/2006/2007 ended up losing money. New Yorkers fared better than everyone else since real estate prices held up better, but you could have ended up with a better deal if you bought during the Great Recession.
Always avoid buying at the peak of the market. For NYC, the peak of the market was in 2017 and home prices have been declining since then. Who knows how long they continue declining from here, but at least you know that you are getting a better deal than if you bought a few years ago.
8. High level of uncertainty in outlook for NYC
Now is the time when there are very few buyers out there for New York City real estate. Just a few years ago there were bidding wars going on and apartments were being sold above the listing price.
This dynamic has changed dramatically due to changes to the tax laws in 2018 causing real estate taxes to be substantially higher (due to limitations on the deductibility of state and local taxes) and also demographic population trends shifting to lower cost states.
More importantly, we are in the middle of a crisis where unemployment is >10% and coronavirus is making people rethink the point of living in big cities.
All this uncertainty may initially make you think this is the worst time to buy real estate in NYC, but it is quite the opposite. You want to buy in uncertain times when there is less demand and more supply. Everything goes through cycles and you make the most money when you buy when prices are low and sell when others start jumping back on the bandwagon. Learn more about investing across cycles here.
9. Vacancy rates have been trending higher
The best way to value any investment is to model out the cash flows into the future and determining what the implied return in. You look at the rental rates for a similar home in the area you wish to purchase, deduct out all the monthly expenses, and have an exit assumption.
Since the beginning of 2020, vacancy rates across NYC have trended up significantly. Landlords are having a harder time finding tenants to fill their apartments and rental rates are coming down substantially.
Given the value of what an apartment brings in today is substantially lower than it was in prior years, the purchase price of the real estate should go down as well. Higher vacancy rates across NYC should be a cyclical phenomenon and prices of real estate should jump back once things return back to normal.
10. NYC always bounces back
If you look at other times in history when people thought NYC was done for, you would see that everybody was wrong. Look at the high crime of the 1970s, 9/11 or during the Great Recession. NYC has always bounced back.
Top reasons not to buy an apartment in NYC
- Maintenance fees are extremely high
- Most apartments are Co-ops and don’t allow subletting
- Big cities are dead
- Low return on investment
- Not sure if NYC is the right city for you longer-term
1. Maintenance fees are extremely high
Depending on the building, amenities and the apartment size, maintenance fees can vary from ~$750 to over $3K per month (substantially higher if you are looking at a $5MM+ apartment). These fees typically include real estate taxes as well.
These monthly expenses are substantially higher than typical HOA fees in other parts of the country and are a big negative to investment returns. The best choice is to find an apartment with the lowest maintenance fees so that your fixed costs are lower over the long run.
2. Most apartments are Co-ops and don’t allow subletting
If you ever decide to move to a different apartment or city, you will likely have to sell your apartment unless the co-op has a lenient subletting policy. With all the fees associated with selling an apartment (primarily transfer taxes and broker fees), the longer you own the property the better your returns will be.
Make sure you pay close attention to the subletting policy. Some buildings that are self-managed will allow subletting after a few years of ownership. You never want to have to sell a place after just a few years of owning it.
3. Big cities are dead
It is a fact that population trends are shifting away from big cities to suburban areas. Over the past 10 years, the cost of living has grown dramatically in big cities to the point where you can no longer afford living there without making a six-figure paycheck.
Some people have the view that big cities are dead longer term, but who knows if this is the case. Like I said before, NYC has always bounced back after major negative events.
4. Low return on investment
Manhattan apartment prices have risen so much in the last two decades that prices are substantially higher relative to the rent that you can charge compared to other cities. Don’t expect to make a very high return from owning an apartment, especially considering the high amount of maintenance fees.
To make a lot of money owning NYC real estate, prices need to continue going up over the longer-term. Realize that you are making a bet on the outlook of NYC when purchasing an apartment.
5. Not sure if NYC is the right city for you longer-term
If you do not plan to own that apartment for more than five years, then it does not make sense to make a purchase. Closing costs can be as high as 2% of the purchase price of the home when you buy and when you sell you have to pay ~6% in broker fees.
These fees make a massive difference in whether it makes sense to own a home. The longer you own real estate, the more time you have to cover these costs with the equity you build from your monthly payments.
Don’t put all your eggs in one basket
Whatever you decide to do, you never want to put your entire net worth into one asset class. Make sure you have a substantial amount of savings after deducting out the down payment on the apartment. You never want to be a forced seller.
Learn about investing by reading How to Invest your Money: Learn When to Take More or Less Risk.
When you say apartments , are you referring to co-ops or condos – also which would you recommend someone invest in?
Lastly, would the money be better spent acquiring rental properties outside of NYC for better returns?
Thanks!
Most apartments in NYC are co-ops. Investing in rentals in NYC is usually not a good idea given the high maintenance fees and high purchase price. If you are looking for a rental, then look for cheaper citiies such as Atlanta where you can get more rental income per month as a % of your purchase price.
Reason for this article is that it is a good time to buy in NYC if you want to live there. Prices are down despite mortgage rates falling significantly.