You Want To Make Money….Get On A Plane!

You Want to Make money….Get on a Plane!

{2 minutes to read} 

• Sam Liebman
• November 24, 2021

Are you aware that your return on investment for an identical property located in Texas rather than New York City “(NYC”) could be almost 50% – 70% higher?

 

The “Texas Advantage” applies to all sectors of the real estate industry whether multifamily, retail or commercial. Additionally, the Texas Advantage isn’t limited to just NYC. There are many other states such as Florida where The Texas Advantage also applies. In this article we’re going to focus on the significant difference in acquisition and selling costs for an identical retail property, except one is located in NYC and the other in Texas.

 

Illustration:

Assume a small 6,000 sq. ft. retail strip center was purchased in 2016 for $3,000,000 representing a 7% cap rate on Net Operating Income (“NOI”) of $210,000. The down payment was $750,000 and the owners obtained a mortgage of $2,250,000 with a 5 year term, interest @ 4.5% and 25 year amortization. The annual debt service is $150,000. Annual Net Cash Flow is $60,000.

 

If Property Purchased in NYC

If the property was purchased in NYC rather than Texas, the projected closing costs would be as follows:

NYC imposes a mortgage recording tax (“MRT”) simply for, \”the privilege of recording a mortgage.\” For commercial mortgages greater than $500,000 the rate is 2.80% of the mortgage. The tax is generally paid by the purchaser as a closing cost. It’s also a tax that applies to a refinance.

 

In addition to the down payment of $750,000, the purchaser would need to contribute additional capital of approximately $100,000 to cover the closing costs for a total investment of $850,000.

 

Side Note: there is a maneuver called a “mortgage assignment” that is often used to significantly reduce the tax. Obtaining an assignment is a function of how strong your relationship is with the bank and usually a fee is charged.

If Property Purchased in Texas

If the identical property was purchased in Texas rather than NYC, the projected closing costs would be as follows:

 

On the buy side the closing costs in Texas would be $69,250 lower than NYC.

 

In addition to the down payment of $750,000, the purchaser would only need to contribute additional capital of approximately $30,750 instead of $100,000 to cover the closing costs for a total investment of $780,750.

 

Due to the increased closing costs the cash investment in NYC would be $69,250 higher which will negatively impact the owner’s Average Annualized Return on Investment. 

If Property Sold in NYC

Assume the property is sold in 5 years for $3,400,000. The mortgage of $2,250,000 would be amortized down to $1,976,803. This would be true no matter where the property was purchased.

 

The owners projected net sales proceeds would be as follows:

New York State and New York City imposes a tax on the transfer of real property (“RPTT”). The tax is generally paid by the seller, Transfer taxes are one of the largest closing costs for sellers after a typical broker fee. The tax percentages range depending upon the sales price.

If Property Sold in Texas:

Assume the same factors above, except that the property is in Texas. The owners projected net sales proceeds would be as follows:

Summary

Because the property was located in Texas rather than NYC the net sales proceeds would be higher by $185,600 ($450,447 – $264,847) or by a whopping 70%.  The inherent retail risk is basically the same but the return is much higher in Texas.

A return of 19.22% in Texas versus 13.29% in NYC for the same property but located in a different state.

 

NYC gets you both coming and going. Because of the mortgage recording tax and the transfer taxes, the same property purchased in NYC would cost you additional closings costs of $174,350 (MRT $63,000 + RPTT $111,350) Can you imagine the additional closing costs on a $10 million or higher priced property?

Other Factors Favorable to Texas

• Contract Deposit (‘deposit”) – in NYC the deposit generally ranges from 5% – 10% of the purchase price. In Texas the deposits are usually 1% – 2% of the purchase price. For example, a few years back I purchased a property in Texas for $12,000,000 and the required deposit was only $100,000. In NYC the deposit could be $600,000 – $1,200,000. Generally, the higher the price the lower the deposit.
• Legal Fees – legal fees in Texas are general 25% – 50% less than there are in NYC. A few years back I did a small syndication and used a NYC law firm. The cost was $150,000. Subsequently, I used a Texas law firm for basically the same documents and the cost was approximately $65,000.
• Income Taxes – Texas has no state income tax. New York State and NYC have crippling taxes that will soon increase significantly due to large fiscal deficits.
• Friendly Business and Political Environment – Texas has no rent controls and no progressive activists that despise the real estate industry. Texas offers a business friendly regulatory environment, has been a national leader in job creation, attracting more than 140 corporate headquarters in the past decade with more relocations in the pipeline. Texas has an invisible sign that says; “Welcome All Property Owners”

NYC on the other hand offers an unfriendly business and political environment. NYC has one of the worst rent control laws in the country. Radical progressives led by the Mayor and City Council are constantly passing new laws that has devastated a properties potential for increased cash flow and appreciation. Add in that crime is running rampart and the result is a mass migration out of NYC. NYC has an invisible sign that says; “Go Away Property Owners, You’re Not Welcome Here”! 

 

We have only focused on Texas and NYC in this article. Every property owner should research the various closing costs applicable to the state where their looking to invest. As we have illustrated, a transfer tax and a mortgage recording tax will have a significant effect on a property owner’s return on investment.

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Sam Liebman is founder and CEO of WealthWay Equity Group LLC, a New  York-based private equity and real estate development company. He has owned substantial interests in over 70 properties during the past 30 years, ranging from multifamily communities, office buildings and shopping centers, to the ground up construction of a luxury 21-story condominium development in Manhattan. He is also CEO of Rolling Cash Realty, Inc., a real estate management company, as well as a partner in Tepper & Co., a certified public accounting firm. His new book is Harvard Can’t Teach What You Learn from the Streets: The Street Success Guide to Building Wealth through Multi-Family Real Estate (Made for Success Publishing, Jan. 11, 2022). Learn more at samliebman.com.