The Market

Investment Bootcamp, Part 1: Are you the investing type?

By Lucy Cohen Blatter  | September 17, 2012 - 11:03AM

The NYC rental market is undeniably strong right now, and mortgage rates are low. With this in mind, we suspected more New Yorkers might be considering putting their money into investment properties.

And it turns out we were right: People were waiting for the prices to go down. They didn’t -- but the mortgage rates did," says Irene Nickolai a real estate broker with Prudential Douglas Elliman. This year, she says, buyers started to re-turned to their boomtime practice of flipping apartments for fun and profit. 

Sound tempting? Then pay attention to our new Investment Bootcamp series, kicking off today.

We'll cover several types of investments including:

  • Pied à terres, which are second homes which frequently bought with hopes to sell (for a profit) in the near future; 
  • Pure rental properties bought to rent out right away (they are almost always condos), and
  • Rental-residential hybrids, such as  townhouses, in which a buyer can live in part of the property and rent out another part. 

For the first installment of our new series, we wanted to know who should (and should not!) even consider buying an investment property, and what they should think about before they do. So we turned to the experts for some advice.

1. David Monberg, wealth manager and financial advisor, Stephen A. Kohn & Associates:

Who’s well qualified to invest? It has to be someone who’s more than financially qualified, not just someone who wants to take advantage of low rates. By buying an investment property, you’re still setting yourself up with a substantial amount of debt, plus these days it can be difficult to qualify for mortgages.

If buying the property is going to mean you won’t have 6-9 months worth of emergency expenses left over (essentially anything that’s a commited expense -- like mortgages, bills, etc.), then it’s not right for you. (Emergency expenses could be required if you lost your job or couldn’t find a renter for your investment property.)

If you know you can pay the mortgage no matter what, you can also afford to wait out a bad market and sell when it’s hot again.

Is real estate a smart investment? An investment property is a cumbersome investment, especially as opposed to say, a stock or bond. There’s the upkeep that’s required, the challenges of having a tenant. It can be an excellent vehicle for sure, but the investor has to be well qualified.

What if I just got an inheritance/I am sitting on a chunk of money? New York City is a different game than the rest of the world. What you can buy in NYC with say, $150K, is so much less than in markets where you could buy an entire home in cash for that. 

On the other hand, it’s easier to rent things out in NYC -- we have a strong rental market, and there’s a strong demand for them -- which means that if something’s priced right it should rent. But you need to keep in mind that the era of getting way above market isn’t here anymore.

So, assuming you have more than enough money coming in regularly to make the monthly payments, then that big chunk could be great for a downpayment. But remember that mortgages should and usually are granted based on income, not simple assets. 

Why are investment properties popular now?  Some clients are sitting on large amounts of cash and have lost faith in the market. They’re finding that with their money sitting in the bank, they’re getting practically no rate of return. Combine that with the fact that lending rates are low, and people are definitely looking into it

Any other advice? It’s also worth looking at investing in markets outside of NYC, places like Florida, where you’ll see property prices cut in half. These places can serve as second homes plus something you can rent out when you’re not using. People often buy those apartments in cash. 

2. Victoria Vinokur, broker, Halstead

How do you know someone’s qualified to buy an investment property? If someone’s got just the amount of liquidity needed to purchase the property, it’s probably too risky for them. And generally speaking, the person shouldn’t be too risk-averse; NYC real estate represents a stable long-term investment, but you can’t bank on a quick return.  

Remember that if you can’t afford to invest in a super desirable area, you must be willing to wait longer for a return on your investment.

Which is the most stable type of investment? If you buy a property just to rent it out, it’s much more secure than trying to flip something. I have never been involved in a case where the tenant wasn’t paying rent.

Is someone sitting on a chunk of money a good candidate? If someone tells me they have $100,000 and want to buy an investment property, I’d say no, there’s no cushion there. You need to have at least the full purchase price, and that’s conservatively speaking. 

You also need to take into account the costs of upkeep, especially if you don’t live in New York City. 

Should you buy a property in your own name? From a liability perspective, it’s better to own it as an LLC. It’s not wise to have an investment property in your own name if you're buying it as a pure investment property.

Is there a method to figuring out whether a rental will pay off?  You have to look at the monthly charges. Does the overall outlay per month make sense in terms of getting money back in a rental? Remember that the monthly common charges in a condo can be high.

Anything else I should check off on my checklist before buying?  You should be prepared to live there. Unless someone has a large portfolio, it’s important for an investor to like the space and feel comfortable there. Unless you’re a seasoned investor, you should know you could be able to use it. That eliminates a certain amount of risk. 

3. Sunny Hong, mortgage banker

What makes an investor attractive to a bank? Banks may not count the investment property income to be used to qualify the buyer.  So it is important to know whether a potential investor’s income can carry that liability including the liabilities they carry now.

Are mortgage rates the same for investment properties? Rates are higher on investment properties.  Sure, we’re hearing about all-time low rates but be prepared to get a rate anywhere from .25%-.5% higher on investment properties.

Most banks will require a larger down payment (anywhere from 5-15% more) for investment properties and have certain reserve requirements which are post closing funds (6-12 months).  So be prepared to put more down and have more in savings. This will vary from lender to lender.

Any other advice? Regardless of what the bank guidelines are, you need to set proper expectations as to what kind of rent you can receive and not just what the broker is telling you. Try to get the broker to give you a comparable rent analysis in the nearby area. 

4. Irene Nickolai, broker, Elliman

Who do you find is investing these days? A lot of first-time buyers are looking (thanks in part to FHA loans available to first-timers) are looking to buy a property and rent some of it out, a lot of clients are buying for kids, and there are a lot of foreigners looking to invest in NYC real estate.

What can someone buy if they’re not flush with cash? There are some foreclosure properties for sale for $450k-$500k in places like Bushwick and Bed-Stuy, and you can revamp them for probably another $100k and sell for $700k-$800k. That’s a traditional flip. If you’re buying a townhouse to live in and rent, it’s great to buy something that already has tenants in place. Otherwise you need to know that you have some leeway to pay for all the monthly expenses for a few months (during renovation and in case you can’t get a renter right away).

Is it better than renting? You have to do your homework, crunch the numbers and get an analysis of what you can make in terms of resale as well as rental. Use a mortgage calculator and compare that to your rent. If you’re paying $2,000-$3,000 a month in rent, it may make more sense to buy something that you can rent out a piece of. Search on StreetEasy to see what rents go for in the neighborhood. Trulia and StreetEasy are great tools. 

Next up in Investment Bootcamp: How to spot a good investment property

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