Buy Curious

Want to buy an investment apartment to rent out? Here's what you need to know

  • Studios and smaller one or two bedrooms are usually the easiest to rent out
  • Avoid co-op buildings if your goal is to rent the apartment out for the long term
  • If you can swing buying all cash you will maximize the return on your investment
By Jennifer White Karp  |
July 1, 2024 - 1:30PM
517 East 77th St. #5CD

A two-bedroom co-op, 517 East 77th St., #5CD, in Lenox Hill, is on the market for $1,000,000. It can be sublet without restrictions.

Keller Williams NYC/StreetEasy

Most people can’t afford to buy a New York City condo or co-op as an investment property, but for those who can swing it—and can handle the responsibilities of being a landlord, such as vetting potential tenants and dealing with midnight plumbing emergencies—it can be a good way to make some extra cash each month, hedge against inflation, and hopefully turn a profit when you sell.

The NYC rental market is typically competitive—there are always way more renters than buyers here. And many potential buyers find themselves renting now: They are holding off making a move amid still-high mortgage rates and are willing to pay more for rentals. 

That's one reason brokers say it is a great time to be a real estate investor. 

But be aware: Changes to New York State's rent laws, which impact rent-stabilized as well as market-rate apartments, have transformed renting for renters and landlords alike, and mean you'll need to weigh the cost of ownership with more caution. And recently passed Good Cause eviction legislation now protects some market-rate renters from big rent hikes.  

[Editor’s Note: A previous version of the article ran in July 2023. We are presenting it again with updated information for July 2024.]

Common FAQs about buying a rental property

In this edition of Brick Underground's Buy Curious, Julia Hoagland, a broker at Compass, and Erin Wheelock, an agent at Keller Williams NYC, explained how to buy an apartment to rent out, including where you should look, what apartment size to consider, and how much you can expect to take in each month.

The proposition:

I want to buy a single apartment as an investment property. Where should I look? What type of unit is best? And what type of return on my investment can I get?

The reality:

"It is still an amazing time for buyers, especially cash buyers who are looking to build their portfolios. We know the market is cyclical and I feel that this is a great time to take advantage. I look at my buyers who say they are kicking themselves for not buying in 2009. Well, now is their time or they will kick themselves again in the future," Wheelock said. 

Mortgage rates have dipped slightly however, the combination of high prices and the high cost of financing is keeping some buyers out of the purchase market—and driving rents up thanks to so much demand. 

"It is projected that later this year the Federal Reserve will target a lower target interest rate, which typically is followed by lower mortgage rates. This downward shift in the cost of borrowing generally drives buyers out of the rental market and back into the purchasing realm," Hoagland said. "Smart dwellers should always look to build their own equity instead of their landlord's, when they can swing the calculus."

If you don't have that kind of liquidity and need to get a mortgage, you can still get in the game. Wheelock said in a few years you should be able to refinance at a lower interest rate if you financed the purchase. 

But she said it's important to understand that cap rates (i.e., the rate of return on an investment property based on projected income) won't typically cover your mortgage in NYC. That can be a shock for people new to buying here, since capitalization rates are typically around 2 percent, and your mortgage will be (much) higher.

That's another reason to buy with all cash. Wheelock advised holding it for four, five, or six years until prices surpass what you paid for it. “I once heard someone say, 'If you can’t afford to hold, you can’t afford to invest in NYC,' and I strongly agree. If you are the person who has been waiting for interest rates to go up in order to snag some cash deals, this is your moment,” she said.

Of course, there's the risk that you will not make anything at all. Hoagland credited the tenant-friendly legal and regulatory environment with cooling interest in being a landlord.

She said several investor clients approached her team about selling as opposed to re-renting, citing the inability to collect more than one month’s security deposit (a disrespectful tenant can do a lot more than that in damage), and the hassle of being a landlord, in addition to the current legislative environment.

Pro Tip:

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. New York City real estate brokerage The Agency 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.

Which NYC neighborhoods work best for investment properties?

Where you look depends on what strategy you favor. If you want to buy where young renters want to be, head to the Lower East Side, East Village, Flatbush, Bushwick, or Bed-Stuy. If you want to buy something limited and in high demand (and are prepared to shell out more), explore Chelsea—especially near the High Line or Hudson Yards—as well as Soho, Tribeca, the Flatiron, and the West Village. 

For new developments where renters can live large with lots of amenities, consider the Financial District, Downtown Brooklyn, Fort Greene, Dumbo, Williamsburg, and Clinton Hill. For neighborhoods where you can get a discount, zero in on Washington Heights, Hamilton Heights, Central Harlem, Yorkville, and Hell’s Kitchen.

(Want more detail on these areas? Check out "The best NYC neighborhoods for real estate investors.")

In general, if you’re looking for a sure thing, go with a known entity—for example, the Upper West Side and Upper East Side are perennially popular, especially with first-time NYC renters. That means you'll be paying higher prices. If you’re willing to explore beyond these or the luxe locales mentioned above, 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? The arrival of Citi Bike stations is another clue. 

  • Is there new 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 days on market declining? In other words, are most apartments scooped up after just a few days on the market?

Do condos or co-ops work best as investment properties?

Ah, the old condo vs. co-op debate—one of NYC's more nuanced real-estate ruminations. 

Co-ops make up about 60 percent of available apartments for sale in NYC and are typically more affordable than condos. Unfortunately, they’re not ideal for investors.

“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 said. Usually, that maximum time is two years. 

Most co-ops “are not generally amenable to investors,” she said. “And even if you were to find one that was, they can always change the rules, so I don’t recommend them for buyers who want to rent them out.” In addition, there’s usually a lengthy approval process requiring 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 deal with all of that—especially when you don’t even plan on living there.

Co-ops may need to change some rules to attract more buyers, but condos will always be friendlier to investors, Hoagland said.

While some condo boards also make buyers jump through some hoops, a board can't reject you unless they buy the apartment themselves (which pretty much never happens). And you might luck into a sponsor unit, where no board approval is required.

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?

According to Hoagland, apartments with one or two bedrooms are typically the easiest to rent out—prospective tenants looking for smaller units make up a larger sector of the renter population.

Bigger apartments “will of course command a higher rent,” she said, “but their vacancy periods can be longer as there are fewer tenants shopping for larger units.” That said, families 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."

Some buyers like to buy a few studios to rent out, rather than a single, large apartment, as a way of spreading their risk around.

That's Wheelock's advice. "Luxury units are less in demand, so I now highly recommend getting a few smaller units because units that rent between $3,000 and $5,000 a month are where the most activity is," she said. For example, she listed one Manhattan apartment at $12,000 and it was bid up to $13,300; the following year, that same apartment was listed at $11,500 and ended up renting for $10,500. "I have another unit in Brooklyn that's going through the same price issues."

Should you avoid properties subject to the mansion tax?

Not necessarily, Hoagland said. “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 said. “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 said. “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. And closing costs are amortized and become less annually the longer one owns the space,” she said. 

There are also ways to lower your closing costs—such as buying in a new development with a tax abatement (or convincing the seller of a $1 million property to drop it below the mansion tax threshold). 

For more information on the upfront costs of buying a home in NYC, see "Closing costs: A guide for NYC buyers and sellers."

Can you live off the rental income?

Probably not if you’re buying just a single apartment, our experts said. For most investors, it's more of a second-income opportunity. 

You would need a much larger portfolio of apartments to rent out or get into buying and flipping if you’re looking to quit your day job.

Buying a small, multi-family apartment building used to be the route to that sort of income, but, as Hoagland explained, “with the 2019 changes in the rent laws, the value of apartment buildings that have rent-stabilized units changed dramatically because landlords are not able to benefit as much from the improvements they make or high-income deregulation (or deregulation at all). So approach multi-family purchases with caution.”

What should you know about being a landlord? 

Speaking of rent laws, you will want to brush up on what you're signing up for—even market-rate tenants get lots of protections in NYC. 

With the recently passed Good Cause eviction law, an owner needs a good reason to evict a market-rate tenant, such as if they broke the law or violated terms of the lease. It also means an owner has to justify rent increases above a certain threshold pegged to inflation; for this year that amount is 8.82 percent.

Ultimately, only you can be sure you're ready, willing, and able to handle the headaches of being somebody else’s landlord. Not everybody can cope with the responsibilities. 

"You need to find and vet tenants, collect rent, deal with any issues your tenant has with the unit, and stay updated on current rules and regulations applying to the landlord-tenant relationship to ensure you're always on the white side of gray,” Hoagland said.

Before you venture into landlord territory, take time to 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 swift action to rectify anything and everything that might (make that does) come up.

"Or follow Hoagland's advice and spend money on a manager, "which, while providing significant value from a qualitative standpoint, eats into your quantitative return."

—Earlier versions of this article contained reporting and writing by Leah Hochbaum Rosner.



Jennifer White Karp

Managing Editor

Jennifer steers Brick Underground’s editorial coverage of New York City residential real estate and writes articles on market trends and strategies for buyers, sellers, and renters. Jennifer’s 15-year career in New York City real estate journalism includes stints as a writer and editor at The Real Deal and its spinoff publication, Luxury Listings NYC.

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