Saturday, August 27, 2011

BoogieDowner Real Estate: Are High Density Bronx Lots a Hedge against Volatile Capital Markets?

BoogieDowner Real Estate: Are High Density Bronx Lots a Hedge against Volatile Capital Markets?

Much like Hurricane Irene’s pending flogging of NYC this weekend, other “black swan” events have ravaged our economic markets recently. During the last few weeks we watched Standard and Poor’s down grade America’s sovereign debt rating, capital markets skip erratically and gold surge. As everyone rushes to gold or other safe havens we should ponder the question; Is it time to think outside the box and consider positions in real property that, much like undervalued stocks, if chosen properly will provide great returns in the future, while also providing wealth preservation today?

More specifically; Are high density R7 and R8 lots in the Bronx which are trading at one third or at least half their past values during the housing boom, good investments? In order to investigate my belief that high density lots are prudent investments for cash rich individuals or entities, here is an analysis of a lot I have listed at 1690 Nelson Ave. The givens are;

Address: 1690 Nelson Ave
Asking: $350,000
Lot Size: 50 x 130 / Total Sq. feet 6,500
Zoning: R7 (General Residential District)
Max FAR (Floor Area Ratio): 3.44
Annual Taxes: Approximately 2,000 annually
Sq. foot asking (foot print only): $53.84

The first question is; Are these lots trading for less their historical highs. As a real estate broker I subscribe to various programs that provide me with data that can easily answer these types of questions. Realistic comparables can be found within a block or two right on Nelson Avenue. Inclusive of a small flip, 1624 and 1628 Nelson Ave sold to the same buyer for $575,000 each. The combined lot size is approximately 9,016 sq. ft. The total sales price for both lots was $1,150,000. The lots were recorded in June and July of 2008. When dividing sq. footage by sales price we come to about $128 per sq. ft. I believe this comparable to be a realistic high based on past trends for future prices when land becomes a necessity for builders again, tax credits are in demand and our present “over supply” of housing stock is depleted.

I think it’s safe to assume, most people want to know the “present value” of any investment they purchase, especially when digging into their own pocket. How did we come up with the $350,000 asking price? Is it a realistic asking figure? As always the market will dictate value, however there are theoretical calculations that can assess value for any investment when certain variables are known, based on going industry trends. The primary question is; What can be built on the 6,500 sq. ft R7 lot? Zoning and Max FAR (Floor Area Ratio) help us to answer this question. R7 is a very good residential zoning. When combined with a Max FAR of 3.44, 6,500 sq. feet should provide approximately 22,000 sq. feet of housing, less the sq. footage taken up by an elevator. Please note these are very rough calculations and should be confirmed by a licensed architect, however over the years I have my own slash and burn way of making estimates on the buildable sq. footage of any lot. When determining the $350,000 asking price we used a 5,000 sq. ft. footprint to account for any possible set backs or other requirements. With the conservative 5,000 sq. ft. footprint and a 3.44 far the estimated buildable square feet for a six story building is about 17,200 sq. ft of living space. Developers in today’s market are paying a discounted $20 a buildable foot for land. Therefore the conservative value based on today’s market trends is approximately $350,000. We can go further with estimated gross potential rent and estimated building costs per sq. ft. but those calculation are more the responsibility of each specific developer. With an average apartment running between 700 and 1,000 square feet it is safe to estimate that you can build a six story elevator building with about 20 apartments.

So far we determined that lots like 1690 Nelson Ave are trading at historic lows and that the present asking prices are reasonable based on present market trends. We also know that it’s fairly reasonable to one day see a 20 unit elevator building on the site. The next questions I would expect to hear from a prospective buyer are;

1- What dividends or income should I expect right know?
2- Real Estate is all about location. Where is this lot and what does it have going for it?

Most lots in the Bronx situated in high density neighborhoods are used as parking lots for local residents providing immediate revenue. Remember many of the buildings in the South Bronx are pre-war buildings, built when cars were a luxury. Most do not have built in garages. Besides the present need for local residents to park their cars and their preference to park in a secure environment, every time downtown mentions “congestion pricing” the phone starts ringing off the hook for people looking to secure parking lots in the South Bronx. When you consider the average width of a parking space is about eight feet and the lot is approximately 130 feet deep, you could easily place 15 cars on each side with room to spare. Thirty cars at $150 per spot would net $4,500 per month or $54,000 annually. On a $350,000 investment that’s a gross potential dividend of about 15% annually. In addition, The Morris Heights location is up and coming. The proximity to Manhattan, The George Washington Bridge and major highways including R87 and R95 are definitely positive factors. Major construction projects riddle the area and a walk down University Avenue will provide a first hand glimpse of a busy commercial corridor.

I assume many of you will read this during our visit from Hurricane Irene. Besides hoping that everyone finds a safe haven during the hurricane I also want to express how much a game changer this hurricane is with real life real estate ramifications. From now on, I will have one of the many charts circulating presently showing which territories are vulnerable to flooding within NYC. Sea level issues were sometimes discussed; however with a major hurricane paying us a visit, I am sure it will weigh in more as a factor for serious investors when purchasing long term investment properties. Rest assured Morris Heights and most of the West Bronx will be safe from any flooding do to it’s topography on top of solid bedrock on high ground overlooking the Harlem River.

I believe my arguments advocates strongly that investing in Bronx high density lots makes prudent sense when hedging against volatile markets or when wealth preservation is a priority. Any one interested in the lot at 1690 Nelson Ave, or any other lots in the beautiful borough of the Bronx, is welcome to contact me. This particular lot would be a perfect location for an affordable housing development or religious organization seeking a new house of prayer, which they own, with the potential for rental income to help make ends meet. In addition, I would appreciate any responses to my argument posted here today. Once again be careful this weekend.

Gregory Tsougranis
NYS Licensed Associate Broker
Century 21 Metro-Star
2017 Williamsbridge Road
Bronx, NY 10461

Cell # (845) 304-5745

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