Real estate as a cash substitute?

[chang]

Sorry for the click-bait subject line, but I have a serious question.

I have started a job in London. They gave me an apartment for 6 months, but I am thinking that I should consider buying a studio or 1BR in greater London to live it, rather than rent. In a good area (as central as I can afford), I believe it will be a good investment. I will start looking at places in the areas I like the most - Mayfair, Belgravia, Kensington/Chelsea, etc. A nice apartment in one of these neighborhoods cannot not be a good investment.

Here's the question. London is very expensive. Even a small 400-500 sq. ft. apartment is going to cost a lot. (Mayfair is like NYC's Upper East Side, overlooking Central Park.) To buy what I have in mind, I will basically have to sell 100% of my bonds, and even then maybe I will have to sell a little equity. This will leave me 100% equity.

That sounds risky, but is it really? I will have bought a piece of real estate that -- humor me here -- cannot lose value. Apart from liquidity, isn't that the same as cash? To put that better, doesn't that serve the same purpose in my overall asset portfolio as cash?

Of course, if I have an emergency, I will need to sell something (stock) to pay for it. C'est la vie.

I could sell equity in my IRAs and keep FI there, but I hate that idea. My IRAs are for the long term, and I've always made a point of keeping them invested in 100% equity. I keep bonds/FI only in taxable.

Much appreciate your input. I don't want to make a big mistake here.

[anitya]

Congratulations!

This is such a huge, illiquid personal decision, I am foolish to respond.

I would ask myself, would I keep the apartment if I were to decide to leave the job or the company decides to move the location to a different city shortly after you join?

I was in London for 2 years about 25 years ago. I did not own real estate anywhere at that time. I knew I will always come back to the US (i.e., not extend my secondment) but even then I looked into buying real estate in London and it turned out it was not my cup of tea (do not remember all the reasons why).

If you buy, I would finance it with some loan and not pay 100% cash.

[mnfish]

Maybe a better question would be real estate as a long-term bond fund substitute? But definitely not cash.

[Chahta]

Can you buy the apartment in your IRA? I would not consider it cash. Liquidity is the major part of cash.  Talk to an accountant about owning in London. On second thought owning inside an IRA could be horrible for RMDs. A $1m RMD?

[Capital]

Jul 31, 2023 10:32:55 GMT Chahta said:

Can you buy the apartment in your IRA? I would not consider it cash. Liquidity is the major part of cash.  Talk to an accountant about owning in London. On second thought owning inside an IRA could be horrible for RMDs. A $1m RMD?

The IRA rules do not allow the beneficiary of the IRA to use or rent the property. LINK

[howaya]

Just like mnfish , I tend to think of RE more equivalent to an intermediate or long term bond when the curve isn't inverted.

But that doesn't mean you shouldn't buy real estate. How long will you be in London? Over time real estate appreciates at least around the rate of inflation; and just yesterday I read an article claiming premium properties in London are now among the best RE investments. That said, your window of utility may be too short to reap any advantage, given one ought to amortize agency costs on the front and back ends.

Also, some cities are inherently better to owners than renters. Articles citing examples like Boston vs San Francisco are readily available. Which side of that potential equation London lies I cannot say, but if the article I read yesterday is correct the answer becomes more clear.

Aren't you contemplating taking out a loan for the bulk of the purchase anyway, leaving much of your liquid assets intact? Or, do you foresee that the cost of a loan is equal to or greater than the return you can get in the market?

[chang]

Mortgage rates have risen a lot ... a loan would have been a lot more interesting a year or two ago.

[archer]

How long do you foresee owning it? How are the property taxes (if any)? I know you did qualify with "humor me here" but real estate going down or flat for periods is certainly not unheard of.

I like your idea of looking at it as a bond replacement more so than stocks. On the other hand, your PF is your PF, and your real estate is your home. Perhaps the key question is again how long you would own? If it just for a few years of work then it could be looked at as sort of a bond replacement. If you think it might be more like 10 years, that could be a long time for a 100% stock PF and less of a way to control PF balance. Not the easiest of question :-) There is also for many of us who might offer our $.02, the issue of taxes. I have no idea how the gains on the property would be taxed overseas, or if your overall tax situation is much different than the US.

[catdog]

Besides the cost of the unit and how to finance, I would pay close attention to maintenance costs.  Will you be using a management company (you are a long distance landlord after all).  Management companies can nickel and dime you to death.  As we all know homeowners insurance has taken a big jump lately.  In the long run probably a good idea, just do your homework.

Catdog

[chang]

catdog - I will be living in the apartment while I'm working here.

[chang]

Jul 31, 2023 22:43:27 GMT archer said:

How long do you foresee owning it? How are the property taxes (if any)? I know you did qualify with "humor me here" but real estate going down or flat for periods is certainly not unheard of.

I like your idea of looking at it as a bond replacement more so than stocks. On the other hand, your PF is your PF, and your real estate is your home. Perhaps the key question is again how long you would own? If it just for a few years of work then it could be looked at as sort of a bond replacement. If you think it might be more like 10 years, that could be a long time for a 100% stock PF and less of a way to control PF balance. Not the easiest of question :-) There is also for many of us who might offer our $.02, the issue of taxes. I have no idea how the gains on the property would be taxed overseas, or if your overall tax situation is much different than the US.

Excellent questions. I will live in it as long as I'm working here, saving probably 50 grand a year in rent. That's the whole idea, really: buy an apartment instead of renting, and one day sell it for more money, rather than watch my rent going down the gurgler. 

If I leave the job (and London), I can sell or rent the place. Rent should generate an annual return of around 5-10%, minus the costs of management, maintenance, and taxes. Ultimately, I would rather own liquid FI than be a landlord, but I can make that decision when the time comes. For now, they've given me six months free in a serviced apartment, so I want to use this time looking for a place to buy.

Taxes will be a drain, of course. I think tax will run under $10k a year, so perhaps 5-10% of what I could expect to spend in rent.

[mnfish]

This popped up this morning -

An outdoor balcony "with its own private entrance" in a wealthy London neighborhood is on the market for £50,000, or around $63,700. But an apartment isn't included in that price, the property's listing agent told Insider.
The unique listing is a 'reflection' of London's property market, Jacobs says.
Housing prices in the capital and the rest of the UK have soared in recent months, people are "looking for more creative ways to utilize space," Jacobs said

chang, good luck with your decision.

[archer]

Aug 2, 2023 9:55:43 GMT mnfish said:

This popped up this morning -

An outdoor balcony "with its own private entrance" in a wealthy London neighborhood is on the market for £50,000, or around $63,700. But an apartment isn't included in that price, the property's listing agent told Insider.
The unique listing is a 'reflection' of London's property market, Jacobs says.
Housing prices in the capital and the rest of the UK have soared in recent months, people are "looking for more creative ways to utilize space," Jacobs said

chang , good luck with your decision.

Sounds like a deal if you live nearby LOL! Come home from work, then drive over your balcony for a drink, then drive home again. 

[sam]

It seems like, you like the idea of owning " real estate " in some prime area of LONDON. Sort of Bragging rights.

It is well known in NYC renting is cheaper than owning. I assume same is true in LONDON.

You are only looking at rent cost. In general transaction cost and time to sell (empty apartment) eats way several years of property appreciation. You still have to pay tax and Condo fee (whatever they are called in LONDON) or other ownership costs.

There was article in WSJ

www.wsj.com/articles/london-rental-apartment-landlord-personal-statement-2a4f1a0a?mod=Searchresults_pos7&page=1

Are you one of those renters?

[chang]

I've been apartment hunting every weekend ... going out (in the rain) today to see a few more.

Unfortunately I have fallen in love with a top floor, 1BR apartment in Mayfair that is well above my budget. About double what I was hoping to spend. That's the asking price, anyway: I need to find out how long it's been on the market, and make a guess how much I could knock off and still submit a viable offer. The problem is, people who own apartments like this probably don't need the money, and they might be happy to let it sit on the market forever.

What I'm wondering is, should I consider taking out a mortgage for 1/3 of the price, in order to buy and live in the place I really want?

Needless to say, this place would almost certainly be a good investment. Think New York City, Upper East Side, 59th-65th Streets, facing Central Park. 

[Norbert]

I spotted this at Rightmove (UK real estate listings):

"Properties in Mayfair had an overall average price of £5,046,397 over the last year.

"The majority of sales in Mayfair during the last year were flats, selling for an average price of £4,899,877. Terraced properties sold for an average of £7,000,000.

"Overall, sold prices in Mayfair over the last year were 15% down on the previous year and 33% down on the 2019 peak of £7,580,217."

So, there's presently some price weakness. Hopefully you'll be able to take advantage.

As for whether prices might be even cheaper by Christmas, I'll get back to you next January.

It doesn't seem that prices will run away from you at present. There's a degree of pessimism in the UK and there's a likelihood Labour will take over in the UK next year.

It does strike me that a London apartment would be a terrific complement to your Pyrenees house. Do you really like London? Can you see spending time here long term? If yes, that makes buying a flat you love at a higher price more attractive.

Personally, I'm more partial to Hampstead than Mayfair, Belgravia, or Kensington; I love the Heath more than Hyde Park. But, that's just me. Anyway, I wouldn't rush this. I rented for a year in Paris before buying, which led to a big change of preference as I got to know different neighborhoods. Don't rush this?

If you want to talk, could meet you this weekend. Happen to be in London for another week.🇬🇧

N.

[chang]

You're here?! Will send you a PM and e-mail. Let's meet up!

[acksurf]

Personally, I'd rent unless you want to maintain a London pad after your work gig is finished. I wouldn't "stretch" to buy something you might only live in for a few years. Your FI may be generating decent returns during this period so how much would you really be "throwing down the drain"?

[win1177]

Chang,
I would be VERY careful about real estate as a “cash substitute”! Real estate can be very illiquid, and IF you leave your job, develop health issues and are forced to retire (God forbid), or have some reason where you need to consider selling in less than 5-7 years, it may be hard to recoup your investment. My wife is a very experienced realtor, and has a lot of experience in the field. Asked here about it, her response was “not only NO, but hell no”!

London real estate may be different in that there may be a shortage, nice apartments may be “always in demand”, but in general I would be very careful with this. I’ve always looked at real estate as a more “intermediate to longer term investment”, more like a mix of equity/ stock and longer term bonds. It should probably be held for at least four PLUS years, preferably longer. We are (eventually) due for a recession, and it may pop up in 6-12-24-48 months.

In general, I would be very nervous tying up a LOT of my investment dollars in something I may be selling in less than 5-8 years! And I’m normally a “risk taker”, now about 86% in equity as a retiree.

Win

[Norbert]

One point about Kensington, Belgravia, perhaps Mayfair (not sure). Gulf money has been pouring into these neighborhoods. The Arabs have been buying multi-million £ flats like I buy croissants for breakfast. Just take a walk on the south side of Hyde Park.

So, the m2 price is sky high around there now. I went to an old café in Belgravia with my girlfriend on Friday, only to discover that 100% (!) of the customers were (very wealthy) Arabs. One can probably get better value in other parts of town, I think.

Which doesn't prove that a Mayfair property won't be an excellent investment.

[chang]

Norbert, it seems to me like there are growing Arabic populations everywhere. Mayfair and Knightsbridge / South Kensington, absolutely; those are wealthy neighborhoods. I like them because they are clean, feel very refined, and are close to restaurants, shops, and everything. 

Where I'm staying now near Whitechapel (E1) it feels like a Karachi bazaar at night. Great food (Brick Lane just opposite), but it's a very lower class area, and I'm not sure how safe it is at night.

I looked at a place off Bayswater Road near Notting Hill Gate, and I didn't like the area very much. The population was just too young for me; the streets were a bit dirty, and the people just a bit too punky for me. I'm not a snob, but I tend to like the areas around the embassies and private clubs. (Italian and Japanese embassies right near the place I saw on Grosvenor St. in Mayfair ... Thailand and Bangladesh embassies next to the place I saw off Queen's Gate in South Ken.) OK, maybe I am a snob.

[Norbert]

Aug 5, 2023 15:54:33 GMT win1177 said:

Chang,
I would be VERY careful about real estate as a “cash substitute”! Real estate can be very illiquid, and IF you leave your job, develop health issues and are forced to retire (God forbid), or have some reason where you need to consider selling in less than 5-7 years, it may be hard to recoup your investment. My wife is a very experienced realtor, and has a lot of experience in the field. Asked here about it, her response was “not only NO, but hell no”!

London real estate may be different in that there may be a shortage, nice apartments may be “always in demand”, but in general I would be very careful with this. I’ve always looked at real estate as a more “intermediate to longer term investment”, more like a mix of equity/ stock and longer term bonds. It should probably be held for at least four PLUS years, preferably longer. We are (eventually) due for a recession, and it may pop up in 6-12-24-48 months.

In general, I would be very nervous tying up a LOT of my investment dollars in something I may be selling in less than 5-8 years! And I’m normally a “risk taker”, now about 86% in equity as a retiree.

Win

I agree about being careful. London prices are coming down, but they're not cheap yet. (Don't know if they'll go lower.) Personally, I would love to own a little place in London; but my EU passport and French medical care don't work in the UK. London is more expensive than Paris.

My take is that the flat has to work on multiple dimensions: you know and love the neighborhood in Summer and in Winter; the fees and taxes are reasonable; the rental income at least covers the cost of money; the building is well managed with acceptable rules, etc.

[Norbert]

Aug 5, 2023 17:59:49 GMT chang said:

Norbert, it seems to me like there are growing Arabic populations everywhere. Mayfair and Knightsbridge / South Kensington, absolutely; those are wealthy neighborhoods. I like them because they are clean, feel very refined, and are close to restaurants, shops, and everything. 

Where I'm staying now near Whitechapel (E1) it feels like a Karachi bazaar at night. Great food (Brick Lane just opposite), but it's a very lower class area, and I'm not sure how safe it is at night.

I looked at a place off Bayswater Road near Notting Hill Gate, and I didn't like the area very much. The population was just too young for me; the streets were a bit dirty, and the people just a bit too punky for me. I'm not a snob, but I tend to like the areas around the embassies and private clubs. (Italian and Japanese embassies right near the place I saw on Grosvenor St. in Mayfair ... Thailand and Bangladesh embassies next to the place I saw off Queen's Gate in South Ken.) OK, maybe I am a snob.

Will show you Hampstead tomorrow. The snob factor works there too; plus you get to swim in the Hampstead Heath ponds on the (not this week) warm days.

[chang]

Norbert: “My take is that the flat has to work on multiple dimensions: you know and love the neighborhood in Summer and in Winter; the fees and taxes are reasonable; the rental income at least covers the cost of money; the building is well managed with acceptable rules, etc.”

London neighborhoods all have a clear “personality”. Spend an hour walking the streets, and you feel it. Either you love it, or you don’t. Me, walking through Kensington Gardens and into South Ken — down Queen’s Gate Rd, into Cranley Gardens, Onslow Gardens, by Gloucester Rd., and along Old Brompton Rd. — that’s the life.

Mayfair — well, you feel like you’re in a P. G. Wodehouse novel. It’s ritzy. And you’ve got Hyde Park to the west and Green Park to the south. Just a little further, St. James’s Park, Buckingham Palace, Whitehall, 10 Downing Street … I wouldn’t be surprised if I bumped into King Charles in the pub.

More seriously — you left out transport links. I want an easy commute to the city. There, South Ken is better - right on the District and Circle lines. Mayfair, not so good. From Green Park, you need to change. Probably most Mayfair residents have Bentleys and chauffeurs; I doubt they take the subway.

[Norbert]

Unfortunately, we have to depart London on Saturday. I must say that I'd love to own a little place here. The city is dynamic and exciting, but also full of beautiful parks and gardens. I love the place, warts and all. This morning am off to swim in a freshwater pond on Hampstead Heath. Friday night have tickets at the Noel Coward Theater. We attended the BBC PROMS at Royal Albert Hall twice; caught "Dear England" at the NT.

A city place here would be the perfect complement to a country house. It wouldn't have to be very large.

The only issue is price. Price-to-rent ratios are near their all-time highs. Gross rental yields in the best districts are under 4% and sometimes 3%. Given the capital tied up in a purchase, it seems that buying to save on rent for 2-3 years in an ũber-pricey area like South Kensington or Mayfair might not be a smart move.

In the other hand, buying for the long term in a neighborhood one truly loves (not just after a few weeks), why not? It'll be more an investment in lifestyle, but there's nothing wrong with that. I'd visit at least 50 flats and look for the odd bargain that fits your taste and practical requirements.

That's my 2.

N.

[retiredat48]

Norbert, chang,..NO golf courses handy? Shucks! Or inland waterways to sail/kayak; or beaches in which to get sunburned while watching eye-candy.

R48

[Norbert]

Aug 11, 2023 3:15:14 GMT retiredat48 said:

Norbert, chang,..NO golf courses handy? Shucks! Or inland waterways to sail/kayak; or beaches in which to get sunburned while watching eye-candy.

R48

Golf right in North London, a few steps from Hampstead Heath:

Highgate Golf Club
020 8340 1906

www.highgategc.co.uk/

-----

Excellent sailing on The Solent, just south of London.

www.universalyachting.com/solent-cruising-area/

Or, small boat racing on the Thames.

[retiredat48]

Norbert ,...  thanks.  The highgate golf club under "membership" would not give out the annual dues or fees.  Suspect quite costly.

But you must transport to the above.  At my Florida third home, my home abuts a par 3 of our Nicklaus -designed golf course; to the left the backyard touches a "lake".  Across the street is the Saint Lucie River, 0.9 miles wide at this spot,  for boating of all kinds.  Nothing beats having a bottle of wine, with smoked salmon on crackers, sitting along the river watching the pelicans flying by, evening feeding with deep dives.

Not bad, for a Penna. farm-boy who retired early.  In my front yard I do have a sign that says: To robbers/thieves; the rich people live across the street!

Best regards, city folks.


R48

[chang]

Norbert You were more correct than you know about the (rich) Arab influence. We went to see two flats in Knightsbridge and Belgravia. Knightsbridge around Harrod’s is like a rich neighborhood of Abu Dhabi. Sheikhs in white robes and their wives in gold jewelry and sunglasses. Shop windows have signs in Arabic.

I have nothing against this, but are these neighbors who will invite me to a barbecue, or whom I can go to for a cup of sugar?

Mayfair is really the only neighborhood I can say I truly like.

[Norbert]

chang ,

We happened to visit RIBA (Royal Institute of British Architects) at 66 Portland Place the other day. It's just south of Regent's Park, in Marylebone. Maybe check out the neighborhood? We liked it. Upscale, fairly quiet and close in. It's nothing like the touristy part of Marylebone.

Mayfair is truly very expensive.

Excellent architectural bookshop at RIBA, by the way.