Most New Yorkers can’t afford to buy 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’s a great way to make some extra cash each month. And these days, it's easier to become an owner in NYC because of the coronavirus pandemic.
Many New York City sellers are skittish about life in NYC, the one-time epicenter of the outbreak, and are looking to make a move elsewhere. Now that in-person showings have resumed, and listings that were held back from the market are becoming available, brokers say there are good opportunities, especially for savvy investment buyers who can tap into what New York renters are looking for now.
[Editor's note: This article was originally published in July 2020. We are presenting it again here as part of our summer Best of Brick week.]
There’s increased demand from renters for properties that are a better fit for life in the pandemic in NYC, like apartments with private outdoor space, convenient locations where you don’t need public transportation, and places that are well-suited for extended time at home.
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.
Did you know you can receive a buyer’s rebate from your broker? Buying with Prevu you’ll pocket a rebate of two-thirds of the commission paid to the buyer’s broker at closing. On a $1.5 million condo, you’d receive up to $30,000. Click here to learn about Prevu’s Smart Buyer Rebate.
In this week’s Buy Curious, Julia Hoagland of Compass and Erin Wheelock of 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 has Covid-19 impacted the investment apartment market?
“There is a lot of uncertainty in today’s market due to Covid, uncertainty causes fear, fear can lead to motivation to sell, which creates opportunities for brave buyers,” 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.
“Despite the softness, the vacancy rate in NYC is still low. Over 60 percent of Manhattan rents, providing a deep source of demand for investment property,” Hoagland says.
Wheelock cautions that there's lots of inventory available among rental listings, so may find yourself facing competition from other landlords.
“NYC is an expensive city, so many of those who lost jobs were renters and they can't afford to stay. In addition, as of now, many foreign students aren't coming back to school and therefore the rental inventory will continue to climb and rents will go lower,” she says.
However, Hoagland says the impact of Covid-19 on the job market, from an investment viewpoint, “is a temporary situation that will return to some semblance of a new normal once a vaccine or better treatments are developed.
Where should you look?
Tried-and-true, neighborhoods like Midtown East, Tribeca, Soho, the West Village, and the Upper East Side are recommended. Wheelock calls these “prime Manhattan neighborhoods.”
The Manhattan condo market is favoring buyers, thanks to a glut. The three-bedroom-plus market is especially oversupplied, Hoagland says, compared to one bedrooms. Conversely, studios in areas like Midtown are in greater demand, so sellers have more leverage there.
In general, if you’re looking for a sure thing, you 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?
Condos or co-ops? Which works best?
Although co-ops (which make up about 60 percent 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.”
However, 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 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 are making buyers jump through more 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 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,” 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, 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.
Studios are also in very high demand, Wheelock points out. However, the studio market can be very competitive since it’s on the low end of the market.
Some buyers like to buy a few studios, rather than a single, large apartment to spread their risk around
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. 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 has changed dramatically because 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,” 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
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