Each year sees billions of dollars pore into residential real estate in New York City. Not all of them come from New Yorkers purchasing their primary residence. A significant portion of it comes from investors purchasing investment units and plan to rent out. In a city where the vast majority of people are renters, this is 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.
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Decide on where to buy
Real estate is all about the 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 a 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.
- Significant investment; infrastructures, such as transit options, schools, and public spaces.
- Lots of new construction; be careful that it is not rental buildings that could pressure your rental yield.
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Decide on what to buy
The type of property you invest in will decide whether you’ve purchased a golden goose or a lemon. For a start, avoid co-ops because they 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 let it right off the bat, they can always change the rules at any point.
What is the best property type?
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 for more money down when you buy them. 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.
Estimating the competition
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 additional free month or two, 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, nail salon, grocery store, and other services close by, that can be a big draw for potential tenants.
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. 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; it remains private.
What is the cap rate?
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 the common charges, maintenance, and property taxes. It is known as the cap rate (capitalization rate).
To calculate the cap rate start by calculating your Net Operating Income (NOI) and then subtracting your Operating Expenses.
It includes everything you spend to run the building but excludes significant capital expenditures or assessments to increase either the value or lifespan of the property.
Once you have your NOI, you divide the price of the property onto it.
What is the yield?
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 a yield game. It is a global market that 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 2-4% after common charges and taxes 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.
Find tenants and play landlord
Now that you have the property, it’s time to play the 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 necessary 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 wise to purchase umbrella insurance to cover all of them. If management is too much for you, consider hiring a property manager.
