Each year sees billions of dollars pore into residential NYC real estate, not all of which comes from New Yorkers purchasing their primary residence. A significant portion of it comes from investors who plan to rent out the unit right after closing day. In a city where the vast majority of people are renters, this is just good business sense. For instance, in Manhattan, two-thirds of the housing stock is rental while the remaining 60% are co-ops. Becoming an NYC real estate investor will call for a hefty investment to get started. But if you do it right you can secure a very nice income and save a bundle in tax benefits. Here’s how you can do it.
1. Decide on where to buy
Real estate is all about location so choose yours carefully. If you want the least risk possible it’s better to stick with tried-and-true neighborhoods such as Tribeca, East/West Village, Midtown East and the Upper East Side. There’s always demand for these neighborhoods, so you will have to worry less about finding tenants, of course, depending on the property itself. But that high demand also translates into limited and more expensive inventory, so you’ll need to be ready to wait and pay up once you do find the right property.
If Manhattan real estate is out of your price range, then look for properties in emerging neighborhoods in Brooklyn, Queens and the Bronx. You may face less competition from other investors and property taxes that may potentially return higher yields. Wondering how to identify emerging neighborhoods? Look for the following:
- A decline in the DOM (days on the market) of properties in the area.
- Large investment in infrastructures such as transit option, schools, and public spaces.
- A lot of new constructions and conversions, but be careful that it is not rental buildings that could pressure your rental yield.
2. Decide on what to buy
The type of property you invest in will decide whether you’ve bought a golden goose or a lemon. For a start, avoid co-ops because they just aren’t appropriate for this scenario. They may be on average 30% less expensive than condos, but most co-ops have strict house rules that don’t allow subletting until you’ve lived in the unit for at least two years. And even if you do find one that does allow it right off the bat, they can always change the rules at any point.
Condos present the best choice due to their liberal policies, and you can begin renting them out from day one. Still, though, they are more expensive, so you must be ready to more money down when you buy. If you’re thinking you’d rather spread your investment around rather than putting all your eggs in one basket, buying multiple studio apartments can also potentially be a smart investment. They’re cheaper to pick up and tend to generate higher yields than larger apartments however the flip side is that they have short life cycles than larger units and less emotional value so despite the potential for short-term gains a 2 Bedroom apartment over the longer term will likely outperform in capital appreciation.
Also, when looking at properties, pay attention to the competition. Avoid areas with a high rental inventory and have buildings that come with a lot of extra amenities or concessions such as an extra free month or two being included with the lease. Most of these buildings offering concessions tend to be in new constructions that are focused offer more bells and whistles and have deeper pockets to offer incentives, which highlights the reason to find unique properties with desirable characteristics so that your property stands out such as a townhouse apartment on a lower floor. Lastly, don’t overlook auxiliary services around the property. If there’s a subway station, a nail salon, grocery store and other services close by that can be a big draw for potential tenants.
3. Calculate your returns
Like any investment, you don’t want to buy without first calculating what kind of returns you can expect. Getting a rough estimate on your returns is relatively simple. First, figure out how much you can rent out the property for. You can do this by looking at the past and currently available comparable rental properties in the neighborhood. Just keep in mind that the last list price for a rental online may not reflect the actual signed lease which remains private.
Next, determine your cost basis. Make sure to include not just your initial investment of sales price and closing costs but also upkeep such as common charges, maintenance, and property taxes. This is known as the cap rate (capitalization rate). It starts by calculating your Net Operating Income (NOI) and then subtracting your operating expenses. This includes everything you spend to run the building but excludes major capital expenditures or assessments to increase either the value or lifespan of the property. Once you have your NOI, you divide the price or value of the property onto it.
Average yields are difficult to estimate as there are so many variables in play such as the neighborhood and whether you’re financing. In New York, it’s more of an appreciation game rather than yield game. This is a global market which can remain competitive even in a down economy so look at long-term benefits like appreciation. But, in general, a Manhattan condo has a rental yield of 3-4% after common charges and taxes are deducted.
As you move through negotiations and towards a binding contract of sale you’ll have a better handle on these estimates so keep a close eye on them.
4. Find tenants and play landlord
Now that you have the property it’s time to play landlord. You have to be sure you can handle the responsibilities of this as you’ll need a solution for almost every problem that may arise. Potential tenants will need to be vetted, maintenance and repairs may be needed from time to time, and you might have to deal with the cost of a bad tenant.
If you’ve bought multiple properties it would be a wise to purchase umbrella insurance to cover all of them. If management is too much for you, consider hiring a property manager.