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If you want to earn some serious cash, New York City offers a unique opportunity for property investors. There are a lot of renters to go along with the plethora of condos. If you are interested in going down this path, we offer some tips on how to make this a profitable venture.
The market dynamics
Approximately 45% of New York City Housing consists of rental units, according to the U.S. Census Bureau’s American Community Survey, presented by the National Multifamily Housing Council. This is the highest among cities in the United States. For instance. Los Angeles had 39% or its housing devoted to rental, while San Francisco’s was 37%.
Other sources estimate about 67% of Manhattan’s housing stock are rentals.
While there is a ready source of demand, the economy is performing well. In August, the city’s unemployment rate fell to a low 4.9% from 5.4% last year.
These stats point to strong rental market.
Image by Mario Cuitiño /Flickr
Picking an area
Your decision on which neighborhood to invest in comes down to the risk/reward, similar to any investment. If you have a high tolerance for risk, an up-and-coming area should provide you have higher price appreciation potential and a higher capitalization (cap) rate.
You may feel comfortable purchasing an apartment to rent in an established neighborhood. In our experience, below 23rd street offers the best rental potential. There are a lot of amenities that draw people, such as the nice restaurants and cafes. You can draw comfort that it has been this way for decades.
The more established areas are, the safer choice, particularly in today’s market. While more speculative properties should have more capital appreciation upside, you are in for a wilder ride when the housing market corrects. The rental yields are not necessarily higher than you could expect to receive in a more established 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.
“It is best to buy an apartment that a New Yorker would appreciate and want to live in,” Gea Elika, principal broker at Elika Real Estate and Director of The National Association of Exclusive Buyers Agents (NAEBA) said.
Choosing a rental unit
The same factors that go into choosing the right residential property to invest are useful in finding a property that the will outperform as a rental (e.g., neighborhood, building). There are other things to consider since this is an investment property, however.
Condo units are easier 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 is also likely to take longer to purchase a co-op since you have to pass muster with the board. While you may be willing to bear this hindrance if you plan to live there, the extra time means a longer closing and a delay in rental payments.
Delving deeper, you will find one, and two bedroom units are easier to rent than three bedroom condos. Three bedroom units compete with single-family homes. If you choose a studio, your unit may be vacant a greater amount of time since the tenant may leave for a bigger apartment.
There is further work to do, such as the rent a similar unit fetches. A buyer’s agent can help you with this information.
It is important to budget your cash inflows and outflows, and calculate how a potential vacancy affects your finances.
While not a get rich scheme, rental units can provide a steady source of extra income. If you choose, you can use your income stream to buy additional properties as time goes on.