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“IS THAT INDIA or something? Where was that picture taken, Richie?”
“You’ll never guess, Stevie. Remember 266 Washington Avenue?”
“That brown brick, 114-unit apartment building in Brooklyn that Grandpa bought 75 years ago? Mommy said he saved for the down payment with money from the kosher butcher shop he opened after he got here from Poland. But didn’t we sell it in the 1970s? It looks like the Taj Mahal now.”
“Yeah, it’s obviously been spectacularly upgraded over the years.”
“How did you get the picture?”
“Robin and I were in New York last month and went to see it. I’ve never forgotten those days.”
“You were so close to Daddy and so involved with the family real estate business.”
“No kidding. I went to law school near home, while you drove your Corvette out to Colorado to study Freud and the Rorschach inkblots.”
“Ha, ha. But you’re right, Richie, I didn’t have a clue about the business. Let’s face it, you were the good son and I was the renegade.”
“That was a crazy time for all of us. Daddy was wheeling and dealing.”
“Richie, you know I’ve been writing about the virtues and pitfalls of investing in real estate for HumbleDollar. I’d like to be clearer about what’s made me so conflicted about it. I’m hooked by the potential for large profits, but turned off by how it can stress you out, gobble up your time and pose moral dilemmas. Not a lawyer and given to anxiety, I’ve scrupulously avoided encounters with big-money predators. I’ll bet you’ve seen a lot of confrontations from your time in the trenches. Anything that would give readers a taste of what it was like?”
“Sure, let’s start with Washington Avenue because it was a real humdinger.”
“Great, but what happened?”
Big bungle in Brooklyn. “This story has been retold in my brain since the year after I got out of law school. Stevie, we just missed becoming a big player. Brooklyn has been completely gentrified since those days. When we sold the Washington Avenue building, we agreed to carry the mortgage ourselves but the buyer defaulted. Instead of allowing him to catch up, I orchestrated a foreclosure proceeding because I knew the building had appreciated beyond the balance of the loan. The people who owed us the money then made an inadequate back payment and I refused their request to terminate the foreclosure auction.”
Richie continued: “We made a competitive offer for the building but were surprised to find out that a hastily formed group of investors bid more aggressively and got the apartment building. We offered an amount equivalent to $10,000 for each of the 114 units but they bid $12,000. Even so, we walked away with something substantial. Stevie, since then, the value of the building has benefited mightily from improvements, inflation, compounding and Brooklyn’s pervasive gentrification. According to Realtor.com, the recent median selling price of an apartment unit in the area is over $600,000. Incredibly, the valuation of that austere 114-unit apartment building, bought with savings from a kosher butcher shop by our immigrant grandfather 75 years ago, can be conservatively estimated at $30 million.”
Mayhem in Manhattan. “When Daddy had his stroke and lost some of his critical thinking ability, we still owed $250,000 on the mortgage held by the seller’s firm on our 37th Street property,” recalls Richie. “After the seller started foreclosure proceedings against us, I advised Daddy to stop making payments, and delay all expenditures and improvements. I then informed the company’s attorney that the seller would be accountable for all expenses and be left with an empty building after we vacated. The seller didn’t want to pour more money into the building and sold the mortgage back to us for under $40,000. But Daddy’s judgment was impaired by his stroke. Over my objections, he soon let the building go for a modest profit.”
Zero percent. “Stevie, remember when interest rates went nuts in 1981? Mortgages were over 16%, the highest in our lifetime. Would-be buyers couldn’t qualify and developers desperately needed cash to pay down bridge loans near 20%. They had to unload fast and a few actually offered to dump inventory by carrying the mortgage themselves at 0%. We got some condos in Florida that way. I had to get a seat on the governing board of the homeowners’ association to make sure our ability to rent the condos wouldn’t be restricted. We made a nice profit when we sold several years later, plus we built up a ton of equity because there was no interest owed and so 100% of our loan payments went to principal.”
Betrayed or beloved? “Richie, I’ve got to ask you something. Didn’t you feel betrayed when Daddy sold all the properties after his stroke? You were groomed to take over and your specialty was real estate law. I was appalled he didn’t give you anything extra in the will for all you did. That’s why I gave you my half of the house.”
“I’m not bitter at all. I never took a penny for what I did and, you know what, I have no regrets. Remember Rich-Steve Realty? How many fathers put their kids’ names on their business when the kids are still in elementary school?”
“I know, Richie. He paid for my education, he paid for my sports cars and he paid for my therapy when I was deep in depression. I get it now, but it’s taken a lifetime. He never rejected me. I rejected him.”
Keeping it real. Truth be told, I’ve never been able to shake the family obsession with real estate ownership, and my wife Alberta and I have had to contend with our share of deadbeat renters and leaky roofs. But we never sought the limelight or had to dodge the sticky moral questions raised when skirmishing with the big boys. My brother has successfully renovated numerous commercial properties. Meanwhile, Alberta and I are a mom-and-pop team with no employees and a smattering of small residential income properties around the city.
Will our children become the family’s fourth generation of private real estate investors? Richie’s three kids have moved elsewhere and are busy building their own careers, and my son Ryan’s strengths and interests are better-suited to hassle-free real estate investment trusts and the mathematical challenges of the stock market. Ultimately, our family’s history of real estate investing will likely end up when my death and that of Richie allows the family to step up the cost basis on our various properties, thus eliminating the embedded capital gains and allowing the properties to be sold tax-free.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Steve, thanks for this!
My kids seem stuck living at home since I can’t bear the thought of them spending tens of thousands a year on rent when they have perfectly good bedrooms in this old house.
It seems so easy fifty years ago for youngsters to get apartments. What the heck happened?
Catherine, several things have happened I think. Although housing prices and mortgages are high, so are rents. Also, recent generations of kids do not necessarily follow the old Protestant ethic prescription that life must proceed in a straight line, from home, to school, to work, to family and only then to retirement. You just want to take care that the real issue is the money and not one of your child’s development.
I can relate to Catherine’s sentiment. One of my kids has a professional but lower paying job and lives at home. They pay rent, do their own laundry, and share utilities. They could probably get an apartment on their own (and plan to at some point) but their budget would then have little to no margin. Meanwhile, we’re not going anywhere and have 3 bedrooms available. It does not cost us anything to have them live here, and we all get along very well. Multigenerational living is back for a bit and is not necessarily a bad thing.
Boy, are you right! I guess I’m a little too far removed from the practical benefits of home-based living for younger families. And you have found a way to teach him the sense of responsibility formerly reserved for kids venturing out on their own. Really very creative on your part.
We are in the same place, with my two oldest still at home. My oldest (as an electrician’s apprentice and employer paying for his schooling) is able to save up a lot of money, much more than any of his peers and is firmly onboard with saving for retirement, though he wonders if maxing out his 401k is a good idea when faced with potentially buying a house in X number of years.
My second will likely move out before him though with less savings due to having to pay for his pilot’s license (we currently pay 1/2).
It is hard to look at property prices these days and think it is a good deal.
Steve, it appears your relationship with your brother has survived some challenges that would have sunk many. I happy for you on that account. Thanks for the article..
Edmund, my brother is an all-around good guy. We have always been cordial but never really close until recently. I guess we both realize our time is short and we seem to have resolved the under- the-table sibling money competitiveness that was inevitable in my family. My biggest problem with him is simply that he had a better relationship with my father.
I’m glad you and your brother have worked on your relationship. My brother was also a good guy, but died before we could discuss the different choices we made during out lives. One of his financial goals was to start drawing Social Security as soon as he turned 62. Sadly, he didn’t make it that far.
Seems like you have been in a good deal of grief. Very sad you didn’t have time to resolve old issues. But do take some solace that you had grown to where you were ready to connect.
Owning rentals is not for sissies. I dabbled in my 20s with a 4 family and a house. I had no experience with rentals and made dumb mistakes. I sold them after just a few years. Had I been patient they would have provided some decent income today. I found it difficult to work full time at one occupation while being a part time landlord.
Dan, mistakes are inevitable when you own real estate. You have to juggle so many balls all at once. Yes, if you want to ba a fair owner, for yourself and your renters, it is very difficult to manage things alongside a full-time job. Holding an academic job, fumbling around in the market and trying to manage multiple properties simultaneously proved a disaster for my mental health.
Steve, I’m beginning to think you have carried a voice recorder your entire life and have saved every conversation you have had since age five.
Better hope that step-up remains in the current federal fiscal environment.
Biden has tried unsuccessfully in all of his budget proposals to go after 1031 exchanges and also end the step up in basis. His proposals would only affect the very wealthy as he would allow a $10 million exemption of unrealized gains per couple and cap gains from 1031 exchanges at $1 million annually per couple. Thus, I think it is safe to say that any future restrictions won’t affect those of us who don’t have large real estate investments.
Dick, yeah too much business emphasis all around. My parents were very loving, but as you’ve hinted at several times in your comments to my articles, their own life was hard and they didn’t teach me how to really enjoy life. BTW, I apparently forgot to press the post button when intending to compliment you on yesterday’s article. So well-written and I think one of the best of your many.
Thank you