We don’t mean to dismiss rent collection. Hopefully, it will provide you with a steady annual cash flow and income. However, for those who are patient and astute, capital appreciation can be the real wealth generator when buying an investment property in New York City. To get started, here is our comprehensive guide to help you begin planning your real estate investment.
Hire an AttorneyHire an Attorney
You will need to protect your assets in the event of bankruptcy or litigation—many from a limited liability company (LLC) or limited partnership. There are ways to do it online, or you can consult a real estate attorney. One area where it may pay to ask an expert since the cost of not doing it right could be catastrophic to your finances.
Choosing a LocationChoosing a Location
As a cultural and commerce powerhouse, investment properties in New York have desirable characteristics. Unlike the 1970s, the city now has a reputation as a safe city. But your first decision should be on what neighborhood to choose. Check out other posts on this blog to better explain the attractive characteristics of New York’s real estate climate.
We won’t repeat the maxim about the three most important rules for real estate, but location matters for your Investment. Your primary considerations should be economic factors such as income growth, proximity to transportation, and neighborhood characteristics such as the types of shops and restaurants. A well-informed agent can assist with this task. We recommend thinking about micro-markets within New York City for a risk-averse real estate asset.
Neighborhood ConsiderationsNeighborhood Considerations
Like any investment, your decision on which neighborhood to invest in comes down to the risk/reward. If you have a high tolerance for risk, an up-and-coming area should provide you with a higher price appreciation potential and a higher capitalization (cap) rate. Or, you may feel more comfortable purchasing an investment property to rent in an established neighborhood. In our experience, below 23rd street offers the best rental demand. There you’ll find a lot of amenities that draw people, such as excellent restaurants and cafes. You can also take comfort in knowing that it’s been this way for decades. The more established an area is, the safer the choice, particularly in today’s market.
Choosing a neighborhood a New Yorker would live in.Choosing a neighborhood a New Yorker would live in.
While more speculative properties should have a more capital appreciation upside, you’re in for a wild ride when the housing market is correct. The rental yields aren’t necessarily higher than you could expect to receive in a more secure area. Our simple rule is to invest in areas where New Yorkers want to live, and there is a lack of competition from rental buildings.
Know the market trends for the neighborhoods you’re looking in and research other rental buildings and inventory nearby. Find out if anything new is coming to the area to make it more desirable, such as a new subway station or grocery store. Research the property tax rates and school zones, especially if you’re purchasing a two-bedroom apartment; ask a buyer’s agent about which neighborhoods in NYC are anticipated to grow and why.
What type of real estate investment property?What type of real estate investment property?
Factors that help a residential property outperform a rental include neighborhood and building. But there are also other considerations since this is an investment property. For a start, will your purchase be a residential property? If so, will it be a single condo or co-op unit or the entire building? If it’s a co-op, the board may have restrictions on subletting. Multi-units or multi-family townhouses may have more upkeep, but you’ll still have good cash flow even if some units remain empty. In general, condo units are more accessible to rent than co-op units.
The former typically has less restrictive rules regarding renting, with some placing a complete ban while others limit the amount of time. It’s also likely to take longer to purchase a co-op since you’ll have to receive the board’s approval. Even if you’re willing to bear this hindrance, the extra time means a more extended closing date and a delay in rental payments.
Knowing the differenceKnowing the difference
Delving deeper, you’ll find one, and two-bedroom units are more accessible to rent than three-bedroom condos. Three-bedroom units tend to be in the same competitive league as single-family homes. If you choose a studio, your unit may be vacant for an extended time since the tenant may leave for a bigger apartment.
The BuildingThe Building
Always see the property for yourself, even virtually, before you buy. If you’re purchasing a condo, get in touch with the building’s management to learn about what changes are coming up in the future. If you can, get a copy of the building subletting policy and leasing application. Check it to see what fees you might be responsible for paying. Some buildings even offer tax abatements or temporary tax reductions.
Sales Versus Rental RatesSales Versus Rental Rates
You don’t want to pay more for an investment property than what you’ll be receiving in rent from tenants each month. Compare sale prices for properties in similar neighborhoods against typical rental rates to gauge the property’s potential rental yield. Currently, rental return in NYC is between three and five percent. Be sure you know the rental rates and stay competitive so that your units will always have tenants. If you’re flipping the property, you’ll still need to see this information for potential buyers.
Hold Time FrameHold Time Frame
As with most investments, your time horizon is an important consideration. You can buy a fixer-upper in the hopes of making a reasonably quick profit. However, this can be high risk as hidden problems could arise, or the real estate market may change direction. That said, the potential rewards could also be high. Conversely, your time horizon is measured in decades. Leave you free to collect stable rents while potential appreciation could be substantial, given the longer time frame.
Decide how long you want to hold your real estate investments and study market trends. Are you going to hold onto the property for a decade and always keep it occupied, or will you renovate and flip it? Whether it’s long-term maintenance or renovation costs, the length of time you intend to own the property should factor into your budget.
A broad category to consider but essential. Suppose existing tenants provide immediate income but contemplate whether the rent is market-rate. Troublesome tenants can sometimes lead to more significant losses than no tenants. It’s important to remember that you haven’t personally done a background check and vetted the tenant.
Legal IssuesLegal Issues
If you choose to become a landlord, you will be working with rental agreements, liability concerns for tenants, possible evictions, and more. Be sure to have an attorney on your side who can help you navigate these scenarios as they arise. Be aware of your rights as a buyer and seek advice when encountering contracts, titles, and other legally binding documents.
Identify what costs are involved in acquiring and managing an investment property. If you’re purchasing a condo with the hope of renting it out, review the rental applications at your desired building. That way, They’ll inform you about any fees for owners and tenants.
You may consider paying a company to maintain residents’ property if you rent it out. Cover you in case something breaks or needs to replace. 5% of the gross monthly rent is the average rate for individual condo management. Most condominiums collect standard common charges for operational and maintenance expenses.
Outside Management or Go Alone?Outside Management or Go Alone?
You can hire a management company to lessen your burden to make things easier. Typical tasks include collecting rent and dealing with troublesome tenants. However, this comes at a price. Most charge a fee that is a percentage equal to 4-5% of the monthly rent.
Taxes MatterTaxes Matter
Investors should also be mindful of tax reductions. When it comes to taxes on real estate investment properties, this can be a complex area with many rules. For instance, you’ll need to think about deducting non-cash items like depreciation. These buildings have had property taxes lowered for a specified period to help revitalize an area through development. The cash savings will increase your take-home income, and your property could experience price appreciation. Of course, that’s providing things go according to the city’s plan.
Financial stability will be crucial if you invest in a condo or co-op unit. There should be sufficient funds for wear and tear items, such as a new roof. Otherwise, maintenance fees could increase, which you might have to bear until you sufficiently raise the rent. In a multi-unit building, examining the financials is also essential to see how the returns are derived.
For instance, if a large unit generates a disproportionate share of the rent, this is essential. It goes beyond examining structural issues like the condition of the roof. Since it will be a rental, the apartment must be clean. Beyond that, it might need sprucing up, so it includes items such as modern appliances. It could require additional cash outlays and may cause a loss of rental income until the unit is ready.
Real Estate Investing can be profitable through rental income and price appreciation. Our guide gives an outline for investors to consider. It would be wise to investigate and consult a buyer’s agent before investing. It’s essential to budget your cash inflows and outflow and calculate how a potential vacancy affects your finances. While not a get-rich scheme, rental properties can provide a steady source of extra income. If you choose, you can use your income stream to buy additional real estate investment properties as time goes on.