Most people can’t afford to buy a New York City apartment 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.
Right now, the NYC rental market is on fire, thanks to New Yorkers who left the city during the pandemic and are returning en masse because their offices are reopening or their children are going back to school in the fall. That fierce demand is enabling landlords to raise rents and offer fewer concessions—and even creating bidding wars. It’s a stunning turnaround from where the rental market was a year ago.
Brokers say there are good opportunities for savvy investment buyers who can tap into what NYC renters want now, like apartments where you can have a home office. A yard or terrace is especially key: Brokers say outdoor space is the number one request from renters.
[Editor’s Note: A previous version of the article ran in July 2021. We are presenting it again here as part of our summer Best of Brick week.]
However, 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. And New York State’s temporary eviction ban, intended to help renters who lost their jobs during the pandemic, left some landlords without income to pay their expenses.
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In this week’s Buy Curious, Julia Hoagland, a broker at Compass, and Erin Wheelock, an agent at Keller Williams New York City, 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? And how did the pandemic impact the investment apartment market?
“Covid inserted a lot of uncertainty into the market last year, which has in large part abated with the vaccine rollout and corresponding return-to-work. While there are still opportunities as prices are not at their highs, interest rates are still low, and the international segment is still largely absent, the window of maximum leverage is closing,” Hoagland says.
She points out that interest rates are at historic lows, which helps the yield on the investment property, if you are leveraging the purchase. “Affordability is greater than it has been in decades,” she says.
But an important thing to understand about buying in New York City, Wheelock says, is that "cap rates don't cover your mortgage." It can be a shock for people new to buying here, but "capitalization rates are typically around 2 percent, and your mortgage can be 3 or 4 percent."
To get a better return on your investment, you're going to want to put more down and "hold it for four, five, or six years until prices come up to match what you paid for it," Wheelock says.
“Some tenants stopped paying rent and never started again. The closing of courts exacerbated the situation, and while we all hope and expect this to be temporary, it has caused some landlords to consider alternatives—like selling or moving into the property,” she says.
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 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.
Wheelock notes that in addition to New Yorkers returning to the city after riding out the pandemic—there’s another group of renters competing for apartments: Renters who got major deals last year and are moving again—like a game of musical chairs.
At the height of pandemic landlords were offering leases with concessions as generous as four months free, Wheelock points out. But when it comes time to renew, those concessions typically evaporate. Some of those renters are being priced out of those apartments because of rent hikes, “which are based on the gross, not the net rent," she points out.
However, Hoagland says the impact of Covid-19 on the job market, from an investment viewpoint, “was temporary.”
“The blue- and white-collar job markets have strengthened remarkably in New York City over the past few months,” she says. For employers in the legal, finance, restaurant and construction industries, “finding employees is harder than it’s been in a long time. As employers look further afield for talent, demand for rentals from incoming residents will provide income sources for investment property owners.”
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Which NYC neighborhoods work best for investment properties?
Tried-and-true neighborhoods like Midtown East, Tribeca, Soho, the West Village, and the Upper East Side are particularly fertile grounds for investors. Wheelock calls these “prime Manhattan neighborhoods.”
The Manhattan condo market is favoring buyers, thanks to a glut. The Midtown three-bedroom-plus market is oversupplied, Hoagland says, compared to one bedrooms. Conversely, studios in areas like Upper Manhattan are in greater demand, so sellers have more leverage there.
In general, 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?
Do condos or co-ops work best as investment properties?
Co-ops make up about 60 percent of available apartments for sale in New York City 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 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 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.
Because of the softness of the market now, co-ops may need to change some rules to attract buyers, but condos will always be friendlier to investors, Hoagland says.
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). Importantly for investor-buyers, you can generally
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 out,” Hoagland says, 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 rent,” Hoagland says, “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, rather than a single, large apartment to spread their risk around
Should you avoid properties 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.”
“Covid transferred a lot of leverage onto renters. Some of this has abated and concessions are fewer now than they were six to 12 months ago,” Hoagland says.
Still, you might find yourself competing with other landlords who are willing to pay the broker fee and offer a free month or two. “This also needs to be considered in the overall financial formula,” she says.
For more information on upfront costs of buying a home in New York City, see Closing costs: A guide for NYC buyers and sellers.
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Can you live off the rental income?
Probably not if you’re buying just a single apartment, say our experts. 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 for a quit-your-day-job thing.
Buying a small, multi-family apartment building used to be the route to that sort of income, but, as Hoagland points out “with the recent 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. So approaching multi-family purchases should be done with care.”
Finally, only you can be sure that you’ll be able to handle the headaches of being somebody else’s landlord. You'll 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,” Hoagland says. 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.
—Earlier versions of this article contained reporting and writing by Leah Hochbaum Rosner and Jennifer White Karp
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