What's the expected return on investment (ROI) on an investment apartment in Manhattan?

Well, it's a forecast, and as a real estate broker, I never promise investor clients prices will appreciate by X percent within Y years. But what I can share is the historical trend of price appreciation on a Manhattan apartment, as this chart shows.

Based on data from Miller Samuel on condos and co-ops, prices were $328 per square foot in 1997 and increased to $1,183 in 2008. From there, they declined to $1,051 in 2009. From 1997 through 2009, the average appreciation was 10.2% per year. Alternatively, prices went up 3.2 times during that period.

If we remove the bubble period and include only 1997 through 2002, the average appreciation is 13%. These are unlevered returns on investment or ROI.

With leverage, returns are magnified. For example, with 40% equity down payment and a 10.2% unlevered return, the return on equity (ROE) magnifies to about 20%. I use 40% equity because that's typically what it takes for an investor's rental income to cover all expenses, including debt, common charges, taxes and insurance on a condominium apartment.

Hence, Manhattan apartment prices went up 3.2 times from 1997 to 2009, or a return of 10.2% per year. By comparison, the Dow Jones Industrial Average rose 2.3% per year during the same period, while the S&P 500 rose 1.2% per year.

The returns on the S&P and Dow do not include dividend reinvestment because the Manhattan return does not include reinvestment of rental cash flow. Of course, owning property ties up illiquid capital, and the entry level is a lot higher. That aside, the return of owning a Manhattan property is much better than the return from the stock market from 1997 through 2009.

Wei Min, CEO of Castle Avenue Partners, is a real estate entrepreneur focused on brokerage, investments and management. Previously, Wei Min was VP at Citigroup responsible for a $500 million portfolio. He received Citigroup's prestigious Chairman's Award, a recognition awarded to the top 2% of managers. He was also Director of Travel Insurance at American Express where he managed a $180 million portfolio. Wei Min's first exposure to real estate was in 1998, when he helped develop mortgage strategies at Citimortgage. He has traveled to many cities to view thousands of properties. In addition to English, he speaks Cantonese, Malay and is conversant in Mandarin. He is a runner who frequently races at 10K and half marathon distance events. Wei Min holds a black belt in tae kwon do and works out at the gym almost everyday. He graduated with an MBA from the University of Illinois at Urbana-Champaign and a BBA from Marshall University. He can be reached at tan@castle-avenue.com www.castle-avenue.com.

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