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Buying an investment property is out of reach for many New Yorkers, but for those who can swing it—and can handle the responsibilities of being a property owner, such as vetting potential tenants and dealing with midnight plumbing emergencies—it’s a great way to make some extra cash each month.
Of course, recent reforms in New York’s rent laws—which impact rent-stabilized as well as market-rate apartments—have changed the game for renters and landlords alike in NYC, and mean that you’ll need to weigh the cost of property ownership with more caution.
Another consideration is the mansion tax—which kicks in when you purchase a unit for $1 million or more in NYC. It’s no longer a flat fee, now it increases incrementally depending on the value of your property.
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In this week’s Buy Curious, Adina Azarian of Adina Equities at KWNYC Tribeca and Julia Hoagland of Compass explain how to buy an apartment to rent out, including where you should look, what size unit to purchase, and how much you can expect to take in each month.
I want to buy a single apartment as an investment property. Where should I look? What type of unit is best?
In a city in which the vast majority of people rent rather than own, buying an investment property makes good sense, Hoagland says. Thanks to a robust local job market, you’ll find renters who can afford to pay NYC high rents. Also in your favor: very low vacancy rates.
What else should you know before embarking on a search for an investment property?
Where should you look?
“I personally recommend the tried-and-true neighborhoods,” Azarian says, listing Midtown East, Tribeca, Soho, the West Village, and the Upper East Side as some of her favorites. “You know what you’re getting into and there is less risk involved since there will always be people looking in these prime Manhattan neighborhoods.”
Hoagland agrees that areas seeing growth (like North Harlem and Inwood) tend to provide higher cap rates and appreciation potential, whereas coveted prime downtown Manhattan areas (like the West Village and Tribeca) will provide downside/volatility protection. In other words, if you’re looking for a sure thing, go with a known entity. That means paying higher prices.
If you’re willing to explore beyond these luxe locales, look into a less established area. You’ll probably collect lower rent at first, but you may be pleasantly surprised by how much you’ll earn when the neighborhood takes off.
How do you identify such emerging areas? Here's what to look for:
Is there increased investment in infrastructure, such as expanded transit options, a new school, or renovated parks?
Is there lots of construction or are lots of conversions happening? Developers spend tons of money getting intel on where to invest, and you can capitalize on their findings.
Is the average DOM (days on market) declining? In other words, are most homes being scooped up after just a few days on the market?
If all or most of these are true, chances are that a neighborhood is poised to break out.
Condos or co-ops? Which work best?
Although co-ops (which make up about 60% of available apartments for sale) are typically more affordable than condos, they’re not ideal in this situation.
“Co-ops are not options for pure investors as they generally don’t allow subletting from day one and generally have limits on the maximum amount of time that the unit can be rented out when they do allow it,” Hoagland says. Usually, that maximum time is two years.
Most co-ops “are not generally amenable to investors,” she says. “And even if you were to find one that was, they can always change the rules, so I don’t recommend them for investors.”
In addition, there’s usually a lengthy approval process that calls for financial disclosures, character references, and a personal interview with the co-op’s board. So even if they did allow you to rent the place out immediately after purchase, you might not want to suffer the indignity of it all—especially when you don’t even plan on living there.
While some condo boards are making buyers jump through more hoops these days, a board can't reject you unless they buy the apartment themselves (which pretty much never happens). Importantly for investor-buyers, you can generally rent it out without asking permission or having to live in it for a period of time first.
Usually a listing will say whether an apartment is "investor-friendly." If not, ask the agent.
What size unit works best for an investment apartment?
“Apartments with one- or two-bedrooms are typically the easiest to rent,” says Hoagland, noting that “prospective tenants looking for smaller units make up a larger sector of the tenant population.”
Bigger apartments “will of course command a higher price,” Hoagland says, “but their vacancy periods can be longer as there are fewer tenants shopping for larger units.”
That said, in her experience, “this tenant mix tends to be less transient” because they have families and are more likely to want to settle somewhere for a while, “so once a tenant is secured they are more likely to stay for multiple years.”
If you're not seeing enough apartments for sale in your price range or target neighborhood, consider expanding your search to include "off-market" listings. NYC real estate brokerage Triplemint uses technology to mine public records and identify owners who may be ready to sell. They can arrange for you to meet and deal with owners before their apartments hit the market.
Azarian is also a fan of studios as investment units.
“Studios are in very high demand and are easy to rent to professional tenants,” she says. (However, the studio market can be very competitive since it’s on the low end of the market where starter buyers begin, so you need to be prepared to deal with that.)
Additionally, she loves “the idea of buying a few studios, rather than [a single] one-, two-, or three-bedroom apartment as an investment. It spreads your risk around and generally you can count on a nice rental income.”
Should you steer clear of properties that’ll be subject to the mansion tax?
Not necessarily, Hoagland says.
“While the mansion tax on $1 million is $10,000, which is a lot of money on an absolute basis, it is only one percent of the overall purchase,” she says. “So it should be considered in the overall calculus, but not necessarily be given more weight than other financial considerations.”
If, however, the yield on an apartment with a mansion tax will be significantly better due to lower monthlies, then it may be a smarter investment, she says. “I always recommend spending more money on a unit with low monthlies than the opposite, all else equal. One can pay off a mortgage, but monthlies tend to only go up.”
Will you be able to live off the rental income?
Probably not if you’re buying just a single apartment, say our experts. “Most investors are picking up one to two apartments,” Azarian says, “so it is more of a second income opportunity. You have to go big with quantity in a rental portfolio or get more into buying and flipping to think of it as a quit-your-day-job thing.
"If you collect a portfolio of say 15 apartments and rent them out—studios, one bedrooms and two bedrooms—you can make a six-figure income from your investments. You need a fairly large portfolio to get to the six figures, however.”
Hoagland adds, “If one is able to purchase an entire apartment building… the income may be more conducive to that of a career.”
That said, she notes that “with the recent changes in the rent laws, the value of apartment buildings that have rent-stabilized units has changed dramatically given that landlords are not able to benefit as much from the improvements they make, from vacancy of units, or high-income deregulation. So approaching multi-family purchases should be done with care.”
As to how much you’ll make each month, Hoagland says that “rental income less expenses—including mortgage, common charges and taxes—equals net income.” So make sure you charge enough rent to cover those and still make a bit of money on top of that.
Finally, only you can be sure that you’ll be able to handle the headaches of being somebody else’s landlord. Because you need to have a solution for pretty much every problem that might arise—and not everybody can cope with the responsibility.
“You need to find and vet tenants, collect the rent, and deal with any issues your tenant has with the unit,” says Hoagland. So try and identify what you’d do—and who you would turn to—in a slew of possible situations—What if the building’s boiler breaks and there’s no heat? What if the tenant discovers black mold? You'll need to take quick action to rectify anything and everything that might come up.
[Editor's Note: An earlier version of this article was published in August 2019. We are presenting it again here as part of our summer 2019 Best of Brick week.]
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