Why Pay Rent if You Can Buy?

ROBERT KNAKAL knows the New York real estate market is good.

His Manhattan-based company, Massey Knakal Realty Services, sells more buildings annually in the five boroughs than any other real estate agency, and Knakal's confident he and his firm's 50 brokers will meet their current goal of selling one building per day in 2004.

That's largely because they represent a vast array of properties suitable for a wide variety of buyers-even little guys who are entering the real estate market for the first time with relatively restricted budgets. Even you.

"We've carved our niche in the New York real estate market by representing a multitude of smaller buildings, such as multi-unit residential properties with two to five apartments and mixed-use buildings with one or two commercial units and several apartments, as well as the $100-million portfolios. We represent sellers throughout the five boroughs, and list many properties ranging in price from about $375,000 to $700,000, depending on the building's size, physical condition, current rent roll and location. That price range should be doable for first-time investors with limited budgets," he says.

Knakal firmly believes that it makes good economic sense for most people to buy real estate-especially in order to own their own residences.

"First of all, real estate is the outstanding investment opportunity at present, offering biggest returns and most security," he says. "Banks are paying low interest rates of one to two percent, which is secure but not rewarding. The stock market is volatile and insecure, and many investors are experiencing negative returns.

"On the other hand, real estate brings rates of return from five to nine percent, depending on the particular property's characteristics. That's fairly consistent, if not entirely predictable, and much better than most other types of investments."

Additionally, according to Knakal's investment strategy, real estate buyers' benefits can double if they intend to move from their high-market-price rental apartment into one of the units in the building they've purchased.

"Pay rent and that's it-the money's gone. There're no returns. But, if you buy a building and live in it, you're essentially paying rent to yourself. In other words, the rent goes toward paying your building's mortgage and other expenses. Initially it may cost you the same amount as your rent did, but in the end, you own the building, and its value will increase," he says.

"When you're in a multi-unit or a mixed-use property, you're also collecting rents, which help cover mortgage payments, taxes and other expenses. The advantage of a mixed-use building is that commercial units tend to produce a higher income per square foot than residential units. In some circumstances, collected rents from commercial and residential units can even allow you to occupy your apartment in the building you own for less than what you were paying in rent. Why wouldn't you opt for that, if you could?"

For most prospective investors, the biggest hurdle to actually buying is accumulating enough cash for the down payment-a one-time outlay of 20 to 30 percent of the building's price. That means if you're buying a $500,000 building, you need $100,000 to $150,000 up front. Knakal says it's possible to negotiate around that, too.

"Sometimes sellers are willing to give buyers a secondary mortgage on the property, which would lower the amount the buyer must pay up front.

"For example, if you're buying a $500,000 building, under most circumstances you'd have to come up with $125,000 in cash for the down payment, but if the seller will give you a second mortgage of $75,000, you'd only have to come up with $75,000. This arrangement can be attractive and beneficial to both parties. The seller benefits by being able to ask a higher price for the building, and by postponing or stretching out capital-gains tax liabilities to his advantage. Additionally, if the seller received that $150,000 up front, he'd probably put it in the bank for one percent, but the mortgage will earn him around 7.5 percent instead. Those can be convincing arguments to present to a seller," Knakal says.

"Obviously the buyer benefits by being able to acquire the property with less cash up front. But these deals are often quite complicated and difficult to negotiate, so it's advisable that both parties have well-informed financial advisors and experienced legal representation."

Knakal points out that investors willing to move from rentals in well-established neighborhoods to apartments in buildings they buy in emerging neighborhoods often get more living space for their money.

"Dollar for dollar, you can get more personal living space-rented or owned-in emerging neighborhoods. Using our $500,000 building purchase in an emerging neighborhood as an example, what would be the monthly cost for you to live there? And what would you get in terms of space?" he posits.

"If you've got a bank mortgage of $375,000 at six percent, say, you're paying back $2270 monthly. And you've got a secondary mortgage from the seller for $75,000 at 7.5 percent, say, that you're paying at $530 per month. That's a total of $2800 per month. What kind of space does that amount of money rent for you in a well-established neighborhood? Depending on location, of course, it could get you anything from a studio to a small one bedroom. But it will probably get you a very nice two bedroom in a building you own in an emerging neighborhood."

What are the emerging neighborhoods where you can get good deals? Massey Knakal brokers specializing in the five boroughs give us the latest leads to the best neighborhoods for deals and steals in an upcoming "Property Tales" series, beginning next week. o