April 5, 2018

JF1311: Being Able To Overcome 2008 & Thrive In A Market Reset with Robert Dankner

In 2008, Robert had the unwavering belief that the market crash was temporary and that money could still be made. Had he been wrong, he would have been up the creek without a paddle. Luckily he was correct and the market was merely going through a reset. Robert and his partner were able to succeed in real estate at a time most people were losing all their real estate assets. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Robert Dankner Real Estate Background:

  • President of Prime Manhattan Residential, a real estate brokerage firm focusing on Manhattan’s luxury residential market.
  • More than 25 years of experience as a real estate investor in New York City
  • His team executed nearly $200 million in transactions on both the buy and sell side in 2017
  • Prime offers inventory of off-market opportunities, accounting for over $100 million in 2018 closings already
  • Based in New York City, New York
  • Say hi to him at https://manhattanresidentialnyc.com/
  • Best Ever Book: The Art of War

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Joe Fairless:  Best Ever listeners, how are you doing?  Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Robert Dankner. How are you doing, Robert?

Robert Dankner: I’m well, thank you.

Joe Fairless:  Well, nice to have you on the show, and I’m glad you’re well. A little bit about Robert – he’s the president of Prime Manhattan Residential, which is a real estate brokerage firm focusing on Manhattan’s luxury residential market. He’s got more than 25 years of experience as a real estate investor in New York City, and his team has executed nearly $200 million worth of transactions on both the buy and sell side in 2017. Based in New York City, New York.  With that being said, Robert, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Robert Dankner: Sure. Just very quickly, I’m an ex-Wall Street trader. I spent many years trading interest rates, currencies and metals, about 10 years in Wall Street, and when I started making some money, I started investing in real estate. So fast-forward a bit, my business partner who’s currently one of my oldest friends, we were investing together for many years, and he decided to start a brokerage firm when I wasn’t active in the brokerage business, but I financed it. We continued to invest together, and I have sort of leveraged my Wall Street experience being a student of the markets and a trend follower, into understanding how to unlock value, create value, and buy and sell better than most.  And a result of that, we’ve built arguably one of the most powerful boutique brokerages in Manhattan in terms of what we do here. My small group is probably in the top 5 or 7 largest producing brokerage groups in Manhattan luxury market and residential, and we also have a concentration in the commercial market as well.

Joe Fairless:  Great stuff, lots of follow-up questions. Let’s start with being “a student of the market and a trend follower”, you’re able to unlock and create value.  Can you tell us how you do that?

Robert Dankner: Well, as an example, the trend is your friend.  A good example of this is we actually started Prime Manhattan Residential in 2007.  Obviously, in 2008 is when the markets collapsed – the real estate market, the equity market, etc. As a rule — you know, I grew up on Long Island, I was surrounded by a lot of very wealthy people, most of whom were in real estate, and frankly most of them not very smart, but they were all very, very patient. And one of the things that I understood in 2008, for example, was that what was happening was a once-a-generational event; it happens once every 15 or 20 years.  And if [inaudible [00:04:57] prevailed, there would be an opportunity for — I guess the best way to say it is a massive reset.  And if I was wrong, then I would have been on [inaudible [00:05:08] with everybody else.

But overtime, Manhattan real estate in particular, has been tried and tested and is true, and the trend is your friend, and this was a reset.  So as a way to compel both the users and investors to not disregard what was happening in the environment, but not to be afraid of it, it was an opportunity to grab and create more value than you’ll have an opportunity to do in most 10-15 year periods because of this massive reset. So that’s a good example of understanding the trend is more powerful than momentary events, and if you can recognize trends and understand that they’re sustained and sustainable, then you can operate and think carefully around short-term events that may cloud one’s thinking.

Joe Fairless:  Do you see any short-term events coming up in the near future based on your analysis?

Robert Dankner: Well, in any market, any asset class, whether it’s real estate or equity markets, things just can’t go straight up or straight down forever. I wouldn’t profess to be able to time markets – nobody can – but the equity markets are at a point where I’m sort of hoping that they’ll correct soon, because they’ve been moving in a parabolic state. But I think what’s going to happen is real estate, particularly Manhattan real estate, is going to be the beneficiary of what I think would be ultimately a slight reset of the markets. The reason for that is — again, it’s a different asset class, but it’s in the ground, you can touch it, you can feel it, you can use it, you can rent it. And again, with patience, a combination of whether you’re a user or you’re an investor, patience should pay, and I think values will continue to build on themselves and create more long-term value, and I think we’re at a particularly interesting point in time.

Joe Fairless:  So the thought process of “things can’t continue to go up and things can’t continue to go down, there’s ultimately going to be correction, and during that correction, just keep a long-term view” – anything specific within that that you look for…? I know you said you don’t time markets, but any fundamentals that when you start seeing some of those fundamentals change, it starts raising red flags in your mind?

Robert Dankner: Well, when the fundamentals change, you have to think a little bit more carefully. What I mean specifically is when things are going well, it’s very easy to make money, and when things are going as well as they are now, even in the real estate market, although prices have stabilized a little bit in the luxury market, north of 6-8 million dollars plus… But an area or category that has been moving well but is sort of not paid as much attention to because they buyer base is smaller is, for example, the Greenwich Village townhouse market.

The Greenwich Village townhouse market has been moving at a pace that’s probably 50% faster than the condo or co-op markets, specifically because there are less of them, you can’t make more of them, unlike a high-rise, and although it’s a different type of living, meaning it’s not living in a condo or co-op with a doorman, so a different type of vertical living, the money goes further, buys more in terms of square footage, and there’s a natural – for lack of a better term – arbitrage that will bring markets close to one another.

For example, if one wanted to buy a 5,000-square foot condominium in Greenwich Village today, if you can find one, you’re going to pay in the neighborhood of $4,000 or $4,500/square foot. In the townhouse market in Greenwich Village, you can buy the same amount of space for only $3,200/square foot, for example. It doesn’t have a doorman, it doesn’t have the services, but when you start to understand the huge disparities in terms of price per square foot in environments like we’re in now if you’re an investor, or even if you’re a user looking to build long-term value, you might want to pay more attention to sort of anomalies, things like these that will cushion you and create the opportunity for things to fall slower and rise faster when markets recover or start to move parabolically again.

Joe Fairless:  Interesting. Yeah, so taking a look at the rent per square foot on different asset types and seeing where the value could be, and then capitalizing on that value.

Robert Dankner: Yeah, it’s really not rent per square foot, but really selling price per square foot.

Joe Fairless:  Selling price — yeah, sorry.  My investment lingo isn’t there — selling price per square foot, okay.  Cool, good stuff. You mentioned that your business partner is one of your oldest friends, and you initially financed the real estate brokerage. Why did you do that, and how does that work? What type of structure did you set up?

Robert Dankner: Well, we’ve been friends. We always invested together, and he was actually in the apparel business, and he wanted to — again, we were real estate investors, and he wanted to get into the brokerage world, so we both put money together to help create a company that I didn’t really have particular designs on becoming active in it or not… But he’s a smart guy, smart as I am or smarter than I am, so I was sort of investing in him as much as I was in just creating an enterprise. And 10 years later, I started working everyday with him, but it was nothing more than we just got together at the right time and the right place, and both put in money to start an enterprise that he ran and I was going to be silent, but I’m no longer silent.

Joe Fairless:  When you left Wall Street as a trader, you said you initially started investing in real estate. What did you buy?

Robert Dankner: I’m not a developer, I’m not a builder, although I purchased single-family homes and apartments and fixed them up and sold them, that’s not what I do. I just started buying good quality cap rate place, meaning great locations or emerging locations, and a key rule for me is I don’t need to be first; I need to be right. So I’m looking at emerging neighborhoods where I saw smart money, developer money going in and building condominiums and hospitality etc., that was early stages, whether it was at Lower East Side or the East Village, for example, before it was cheap.

I started buying individual units and condos, those that existed, very small buildings, and just grew the rent roll, which improved the cap rate, and either I’m still holding them or sold them and redeployed my money as those markets started to mature, and I could grab higher capital appreciation base by redeploying that money back into areas that I felt were still emerging, as opposed to being more mature.

Joe Fairless:  You don’t need to be first, you just need to be right.  So you mentioned you look for developers who are building other condos and hospitalities. What are some other things you look for in order to be right about the market — well, the sub-market or the neighborhood?

Robert Dankner: In New York, for example, there are some extraordinary developers, whether it’s The Related Group, or HFZ, or Property Markets Group, or people that are  just very savvy, have access to a lot of money, have strong development track records… And although it’s not telltale, if you see more than one of them starting to infiltrate an area, that would raise my eyebrows, because right or wrong or otherwise, my first inclination is that I think they are smarter than I am, and if they’re moving into these areas, even if they’re not spot on right, at least they’re going to provide support from the standpoint of new residential options in the area, new hospitality options in the area, which brings new commerce. And once there is sort of a foothold there, meaning it’s starting to be developed, I think one can mitigate the risk by following in their footsteps so to speak.

Now, their perspective, they’re developers, so they’re in, they manufacture, build, sell it, and then they move on… But because the development cycle is so long and it’s not like picking a stock – they’re developing areas – I think logic should generally prevail that if there’s smart enough money or enough smart enough money moving into a new area, let them be first, let them sort of break the ice. It doesn’t mean it’s a telltale and an absolute that the area is going to mature into what they think it’s going to be or what I think it might become, but like I said, I think it mitigates the risk a lot, and that’s also a way of following trends. Let them sort of create trends, and then you hop on to it, ride it as long as you can, and as long as the trend is working in your favor, stay with it.

Joe Fairless:  Our audience are primarily real estate investors. As real estate investors, what should we know about investing in Manhattan, because you’ve successfully done that and are doing it?

Robert Dankner: Well, Manhattan is a market unlike any others, in that over the past 10 years the average annual appreciation rate, for condominiums for example, has been 12-13%, which is very high, and that’s really not sustainable. But the thing that’s interesting about Manhattan is if you want to be successful here, you pro-form yourself at a very low level; if you cut that in half or cut that in more than half, and make the assumption that over a 10-year period the average annual appreciation rate is going to be 3-4%, not 12-13% like it’s averaged over the last 10 years… But combined with that you have a very strong rental demand, so if you’re buying a property and renting it, you’re going to get 3-4% yearly rent increases, and after over a 10-year period, when you factor in your net [unintelligible [00:14:36].13] cashflow received, including your rent escalations, combined with 3% or 4% capital appreciation if you’re lucky enough to participate in a run like we’ve had over the last ten years, that’s great.  What happens is at the end of that period, when you sell your property, the combination of capital invested, based on your NOI and your capital appreciation, you can come out with 16-18% average annualized rate of return, which by any standards is very good in a market that’s very stable, and this is not an island, so there’s built-in support.  It’s not like — not that there’s anything wrong with being in Florida or Texas or wherever, but there’s only so much you can build on this island. So as a result of that, it’s sort of a built-in price supporting, built-in rental demand, so you sacrifice near-term capital appreciation for long-term average annualized rate of return combining capital appreciation with net operating income.

Joe Fairless:  I love the way you think about that. It’s gonna be really helpful for comparison purposes. How much do we need to invest in Manhattan?

Robert Dankner: Well, it’s a good question. The barrier to entry is pretty high, because this is an expensive market, but I would say that sort of the lower tier entry-level, if you will, as an investor, and if you’re buying single units, not houses, but they have to be condominiums, not co-ops, you have to be in the $1.2-1.5 million range as sort of a starting point. That’s not cash — that’s selling price. But the number of condos that are available in that range – one-bedroom condominiums – are few and far between, frankly. But that’s sort of the barrier to entry or the starting point, and then it’s onwards and upwards from there.

Joe Fairless:  So let’s see – $1.5 million… I just need 25% of that. That’s $375,000.

Robert Dankner: Correct.

Joe Fairless:  What variables or factors would you look at if you were an investor who does not live in Manhattan… Let’s say you live in California, and you’re deciding between some city in the South or the Mid-West, and you just heard this interview and now you’re considering Manhattan, and you’ve got about $500,000. How would you think about where to invest?

Robert Dankner: A very large portion of my business is dealing with investors at this level and above, and there’s no right or wrong answer. Everybody has their mission statement and what works for them. And if somebody is looking for near-term yield, meaning they’re looking to generate 7%-8% on their money, New York is not the place for that. But if one has a longer-term perspective, the capital appreciation pace from New York, in my opinion, will far outpace almost anywhere else in the country. As a matter of fact, there’s really only two or three markets in the world that work like Manhattan, which is Manhattan, London, and I guess you could say Hong Kong. But one has to be prepared to live with cap rates cash on cash that are not exciting – 3%-4% maximum – but the carrot is the hope (which is usually reality) that the capital appreciation rate, combined with your net operating income over time is going to create a rate of return that far outpaces what you can get in most other geographies.

Now, the icing on the cake is if one happens to be fortunate enough to be a participant in the market when it’s moving as briskly as it’s moved in the last 10 years, then it’s that much better. But I think as an investor, it’s prudent to take a very conservative approach.

One thing that’s going to remain constant, if in you’re in the right neighborhoods, is rental demands and rental income. A thing that’s less predictable is what the appreciation rate and the market is going to be. But unlike other areas of the country, Manhattan real estate is really looked at as an asset class that is a diversification outside of equities for example, and it’s a place where investors from all over the world park their money, whether it’s here or in London or in Hong Kong for example, for the reasons that I’m explaining to you – that there’s not wide open spaces, you can’t continually make a lot more of this stuff, for lack of a better term, because we’re on an island, and as a result of that, there’s built-in price support, which creates an appreciation rate that’s a bit different than most other geographies in the country.

Joe Fairless:  Are there opportunities for a value-add play similar to what I do in Texas, where I buy apartment buildings, renovate interiors, increase rent, and then I’ve got a higher value property?

Robert Dankner: Of course, but that’s really not for people that are passive investors. You really have to be here on the ground.  But in the investment side of our business, that’s probably the most active area in the $8-30 million market, whether they’re individual houses or small buildings that are bought, refurbished, renovated, increase the rent roll and sell them. But the nuances of renovating in Manhattan, or like in any other place in the country – it’s different everywhere you go, but rules and regulations and insurance requirements and how you work with contractors is a little bit more treacherous here.

So virtually every day we get calls from people that want to get into that type of investing, and the romance of it wears off very quickly when they realize what’s involved. But those who have the stamina to understand what’s involved in terms of being on the ground, the payoff is huge. But I think one has to have a very realistic expectation that it involves a lot of heavy-lifting, but the rewards are massive.

It’s not brain surgery. It’s just something that you really have to pay a lot of attention to, and as an investor, clearly you can pay somebody to do this for you, but that person that you’re paying to do this for you is going to be taking a large portion away from why you’re doing this. It might be defeating purpose, so… I think you understand what I’m saying. But to answer to your question, the answer is yes, you can do here what you do in Ohio, but it’s a little bit different.

Joe Fairless:  A lot different. [laughs] It’s a lot different.  The tenant-landlord laws aren’t as friendly either to investors in Manhattan.

Robert Dankner: No, New York and Manhattan particularly is very tenant-friendly, which has its positives and negatives. If you’re a landlord, obviously it’s entirely negative, and I will say that we have rent stabilization laws here that are very unique to New York, and we have tenants [inaudible [00:21:14] that are very unique to New York, and the vast majority of these protected tenants understand the laws as well as many attorneys do. So navigating around them, you have to be very savvy.

With that being said, I like things with hair on them, and the more complicated it is, that’s things that people overlook, and if you understand tenancy laws extremely well as I do, then it creates a different set of opportunities, because you can look at properties that a lot of people overlook because they see some obvious roadblocks. But if there are ways to mitigate your risk, then it creates much greater value-add opportunities.

Joe Fairless:  What is your best real estate investing advice ever?

Robert Dankner: My best real estate investing advice ever — well, there’s a lot, but I would say, don’t over-negotiate. Don’t try and buy it and get the last penny out of it, and don’t try and sell it and get the last penny out of it. Everybody has to walk away a little happy, but I see people lose things on both sides of the equation because they have to win. And you win even when you don’t win, so don’t over-negotiate.

Joe Fairless:  We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Robert Dankner: I suppose.

Joe Fairless:  Alright, then I suppose we shall do it. First though, a quick word from our Best Ever partners..

Break: [00:22:24].19] to [00:22:53].10]

Joe Fairless:  Best ever book you’ve read?

Robert Dankner: The Art of War by Sun Tzu.

Joe Fairless:  Best ever deal you’ve done?

Robert Dankner: Purchasing a townhouse in West 10th Street in Manhattan.

Joe Fairless:  Why is that the best ever?

Robert Dankner: Because it was purchased, we bought it for $9.5 million, had to spend about $2.5 million to get the tenants out, then spent another $8.5 million dollars to renovate it, and I just put it under contract for over $37.5 million, over a 4-year period.

Joe Fairless:  2.5 to get them out — is that cash in pocket to be on their way?

Robert Dankner: Yeah, cash in pocket, yes.

Joe Fairless:  Got it. You gave them a living situation too, so they can transition into, I imagine…?

Robert Dankner: Correct.

Joe Fairless:  What’s a mistake you’ve made on a transaction?

Robert Dankner: I don’t know. I’ll have to come back to that one.

Joe Fairless:  Alright.  What’s the best ever way you like to give back?

Robert Dankner: I give a lot of money away. Money is wonderful, but even when I was a kid, I wanted to grow up and have enough money so I could give it away and just support causes that are near and dear to me, near and dear to people that I like and support, and I’m very involved in philanthropy, and it’s my biggest joy.

Joe Fairless:  Maybe think about one of the last deals you’ve done and what’s something that if presented the same opportunity, you would have done it slightly different to optimize in the future.

Robert Dankner: Just going back to my advice, which is don’t over-negotiate… Again, there was a townhouse that I was representing, I represented the person that bought it, and I was representing them when they sold it… And I’m usually pretty forceful with people and the first offer that we got was an extraordinary offer, and I am a shepherd – I can’t push people to do things, but I can very persuasive when I want to be.  I wasn’t as persuasive as I should have been with my seller. I give advice like I’d want to get it, like I’d want to receive it, so I said, “I would do this. I would take this one,” but I wasn’t forceful enough, and we ended up selling it for about 6% less than our best offer, which was an extraordinary offer, like off the reservation. So my answer is not being forceful enough with my convictions, because I’m not pushy.  And you can never push, you can’t make somebody do something, but I think I could have been more persuasive with data.

Joe Fairless:  How can the Best Ever listeners get in touch with you or your company?

Robert Dankner: They can email me at rdankner@primemanhattan.com, or they can call me at 646-485-5896, or they can visit our website at primemanhattanresidential.com.

Joe Fairless:  Robert, thank you for being on the show and sharing your advice from your ex-Wall Street trader days and how you’ve applied those lessons and that thought process to real estate, both building up the brokerage, as well as investing and what you invest in…  And also the comparison for investing in Manhattan versus anywhere else in the world, besides London, Hong Kong… But really comparing the Mid-West and the South to Manhattan, and what to think about when investing, and pros and cons. So thanks for being on the show.

Robert Dankner: My pleasure.

Joe Fairless:  I hope you have a best ever day, and we’ll talk to you soon.

Robert Dankner: Thank you so much.

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