How to Buy An Investment Property in New York City
Buying an investment property in NYC is out of reach for many New Yorkers, but for those who can afford the expense and handle the responsibilities of being a property owner, an investment property can be a home run.
The long-term benefits include passive income and equity growth, and if you play your cards right, this investment might even sustain your family for generations.
After all, real estate has produced some of the world’s wealthiest people.
Of course, an investment property is a huge commitment, so it’s best to know what you’re getting into first!
What is an Investment Property?
If you buy a property for the purpose of making it your home, then you should view it as a place to build your life, your family, and a future.
Yes, your family’s gorgeous brownstone is likely a good investment that may increase in value over time, granted there are capital improvements and the market is going your way at the time of resale.
Remember that there are no promises that you will make your money back, let alone a profit for your home.
You may even have to wait some 30-50 years before selling to make a good profit, taking inflation into account.
However, unless you’re using it to generate income, it’s not technically an investment property.
An investment property is one that’s expected to generate a return, whether through rental income, capital return (price appreciation) or a combination of both.
If you hold a property for many years, you’ll likely benefit from both rental income and price appreciation.
In real estate jargon, the capitalization rate or “cap rate” is the amount of money generated by renting out the property divided by the purchase price.
The higher the cap rate, the better the investment.
How to Make Money from an Investment Property
While stories of house-flipping dominate reality TV, rental income is a far more typical use of an investment property.
Home values don’t tend to shoot up overnight, and putting in a lot of repairs on a fixer-upper will cost you time and money.
In fact, the house-flipping option might only be advisable as a career choice to those who are very handy or have a background in house construction.
Rental income, however, can generate a monthly paycheck for the average joe, and serve as supplemental income while also helping you squash that mortgage bill on your new property purchase.
NYC is One of the Best Places to Invest
A robust job market means people can afford to pay high rents and a constantly burgeoning demand for rentals means low vacancy rates.
This makes NYC one of the best places to buy an apartment for rental income.
NYC property is likely to be a profitable investment when rented over a long holding period.
It’s such a good bet that the typical real estate investor in NYC only purchases 1-2 apartments.
Risks of Investing in One Property
A word of caution: experts say that buying just one investment property for rental income is like putting all your money in one stock.
What if your tenants flake or some disaster happens that renders the building un-rentable for months at a time?
Or worse, you have an uncooperative tenant who not only withholds rent, but also damages your apartment.
Consider the fact that rental income might not be 100% consistent, and even if it is consistent: dealing with tenants requires work.
Are you willing to answer a tenant’s call in the middle of the night? Can you afford to pay someone to perform repairs or maintenance work?
In some cases, rental income might not be enough to cover mortgage costs, property taxes and repairs.
Ideally, you should be able to cover mortgage costs without rental income.
Think about it: there may even be a month or two where your property goes unrented.
If you can’t pay the mortgage it could damage your credit, which will hurt you financially in the long run.
The good news is there are substantial tax benefits for all property investments in NYC.
For example, depreciation allows you to defer taxes on your rental earnings.
When you sell, a 1031 exchange can help you defer those taxes even longer.
A 1031 exchange is when you sell your investment property to exchange or swap for another one of comparable value.
It is important to note that there are special conditions that apply to a 1031 exchange, however, which includes a time limit on how long you have to make the second purchase.
Consider All the (Hidden) Costs of Investing
Aside from repair costs and ongoing maintenance expenses, an investment property requires a ton of money upfront.
Most experts warn against borrowing money for the initial purchase of your investment.
Ideally, you should have a substantial cushion for this purchase.
Consider the costs of taxes in the area you’re buying along with the costs of upkeep and utilities.
NYC, as you probably know, has some of the highest property taxes in the country, at around $10,000 a year, and the highest utility costs in the country.
Even if you’re not buying a fixer-upper, undoubtedly your property will need some work done, and repairs can be pricey.
Don’t underestimate the costs of renovation and ongoing maintenance!
It might be easier to hire a property management company and have them handle things like repairs and rent collection, especially if you have a full-time job and may not have time or the knowhow to do everything that needs to be done to your property.
While this may be an extra expense, a good property manager will put together a yearly budget and can put out an annual report on expenses and revenue.
Costs and Parameters of Investing in Real Estate in New York
The mansion tax kicks in when you purchase a unit in NYC for $1 million or more, which, unsurprisingly, is not that rare of an event in this inflated real estate market. It’s no longer a flat fee, but increases incrementally with the value of your property.
Read more on the New York Mansion Tax and how it can affect you.
So should you steer clear of properties subject to this tax?
It is definitely something to consider in your total cost calculations, but in the case of a $1 million price tag, the tax ($10,000) is only one percent of the total cost.
If the yield on an apartment with a mansion tax will be better due to low monthlies, this property is certainly one to consider.
Though a mortgage generally goes down, costs for maintenance tend to go up.
If you’ve invested in a beautiful historic building on 5th ave, for instance, your monthlies could be around $2000 a month or higher, leading to a substantial expense over time.
It might be a better idea to spend more money on an apartment with lower monthly expenses than vice versa.
Think about the worst-case scenarios for your New York City property--are you in a flood zone like the Rockaways?
What would happen to your property during a blackout?
Will you need to pay for utilities or will that be left up to your tenants?
Have the windows been optimized to prevent drafts in the winter?
Does the radiator leak or make noise?
Preventative renovations can help combat future tenant complaints, and lead to less maintenance down the road.
Older properties may be cheaper to purchase and property taxes may be lower than newer or brand new developments.
However, because of the more rundown state of a building, you may need to invest more money upgrading mechanicals, appliances, and insulation.
Whereas a newer development may be market-ready and may be able to fetch higher rent prices.
Plenty of price/cost comparisons and calculations need to be made in order to determine the solidness of an investment and which one is right for you.
Getting Started in NYC Real Estate Investment
So you’ve done the calculations and you’re ready to take the next step. Congrats—an investment property is an exciting milestone.
You might want to consider working with a realtor who is highly experienced in investment properties while selecting your first property.
Look over their CV or ask for case studies and references from clients they worked with on investment properties in the past.
A realtor who has experience in your desired neighborhoods is a huge plus.
They’ll likely be able to tell you who’ll be renting, vacancy rates and all about the resale market.
Let them know what your goals are, i.e. if you plan to fix it up and sell it, or rent it over a long period.
Ask fellow investors if they can recommend a realtor.
You want this person to be as well-connected as possible: a realtor who’s especially well-versed in the investment community may even be able to find you plenty of off-market properties.
No, you don’t NEED to hire a real estate agent to start investing, but an agent can help answer all your questions, assist you in meeting your specific real estate goals and negotiate a deal.
If you’re looking to try out being a landlord, renting out your own home on Airbnb (if it’s legal) may be a good way to get your feet wet.
When in doubt, start small.
Some renters purchase a duplex or a multi-unit property and live in one of the units.
This can be a good way to get started in the real estate investment circuit, and it’s certainly better than throwing your money in a black hole, aka, paying rent.
There are thousands of beautiful multi-family houses that can make a convenient first go at investing.
Hopefully you select quiet, respectful tenants to fill the other units!
Apartments with one or two bedrooms are generally easier to rent, as tenants looking for smaller units make up a large percentage of the prospective population.
Bigger units command a higher price but their vacancy period can be longer as there are fewer tenants shopping for bigger units.
That said, the tenant mix for larger units can be less transient, as it encompasses the population with families who want to settle for a longer period.
Studios also tend to be a good bet for a first investment as they’re generally high demand, and it’s easy to fill one with a professional.
Studios do come with more competition for these same reasons. You might want to consider buying a couple studios to balance your portfolio.
Remember: rent in NYC is determined by number of bedrooms, not the size of bedrooms!
Also, important to remember are building policies for subletting or renting out apartments.
Where Should You Buy an Investment Property in NYC?
If money isn’t a concern, real estate experts recommend the “tried and true” neighborhoods.
In other words, neighborhoods like the West Village or the Upper West Side that are iconic and not going out of style any time soon.
There will pretty much always be people looking to live in these high-brow neighborhoods, especially because they’re close to universities.
In short: these come with less risk. You know what you’re signing up for.
Up and coming or fast-growing neighborhoods like Crown Heights or Inwood tend to provide higher cap rates and appreciation potential, whereas the celebrated classics provide downside/volatility protection.
Of course, all New Yorkers know the price difference is huge: in Inwood or South Brooklyn, one can get a 1, 2 or 3 bedroom for the price of a studio in lower Manhattan.
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.
Brokerages that specialize in investment and commercial properties may also mine for property owners who might be ready to sell.
They can also arrange for you to meet and deal with the owners before the apartments hit market.
If you’re looking to get the most bang for your buck, you’ll probably want to steer clear of the celebrated classics.
Buy something a little off the radar or “far out” in Brooklyn, Queens, or the Bronx. You may collect less rent at first, but you might find yourself surprised by how demand in the neighborhood skyrockets.
Beware, lower income areas do tend to have higher turnover than high income areas and typically also have higher maintenance costs.
How to identify emerging areas?
Look for an increased investment in architecture, expanded transit options (i.e. the new Q line) or new schools.
If there’s lots of renovation happening in the neighborhood that’s a good sign.
You’ve probably seen the huge sleek modern buildings that dominate Williamsburg and are now creeping as far south as Flatbush.
Developers invest tons of time and money getting intel on where to invest, and you can capitalize on their research.
Check the Days on Market (DOM) for listings on StreetEasy or Zillow. If the DOM is declining, that’s good.
You ideally want to choose a neighborhood where most homes are being scooped up after just a few days on the market. This means there’s lots of demand.
Word of mouth, though less certifiable, can also be a good way to identify up-and-coming areas.
Where are your friends-of-friends all moving?
Where are people saying they have a sweet roof deck?
In NYC, it’s only a matter of time before the waves of demand (and, let’s face it, gentrification) spread beyond established hot spots.
Areas of North Manhattan, South Brooklyn and Western Queens are getting increasingly more attention as a result of their convenient access to public transportation and low prices relative to other parts of the city.
Even St. George, Staten Island and the Bronx are getting attention for their value and relative convenience.
If you’re more interested in space than the convenience of an inner-city apartment, the outer boroughs are the place to go for suburb-size dwellings.
You might also look for neighborhoods that are set to receive an onslaught of new buildings.
Northwest Chelsea, for instance, is slated to get an increase in supply because of new developments.
Also, find neighborhoods with a high ratio of rental listings versus sales.
These areas are usually rentals hotbeds where it may be easier to rent out your investment.
Avoid areas where the real estate market seems stagnant, or where most residents are homeowners. Chances are, it may be difficult to rent out your unit(s).
Condo or Co-op?
Focus on condos. Co-ops, though generally less expensive and more available, are not the best option for an investment property as they often don’t allow subletting.
Generally, co-ops tend to be very unfriendly to investors with bylaws strictly regulating sublets.
Condos for the most part don’t usually have bylaw heavily policing owners renting out their units.
To find out more on the topic, read What's the Difference Between a NYC Co-op and Condo?
Even if you happen to find that rare co-op that’s amenable to your needs as an investor, its rules are subject to change at the next board meeting.
There’s also usually a lengthy approval process that calls for financial disclosures, character references, and a personal interview with the co-op’s board.
So, you might not want to go through all the trouble when you don’t even plan on living there.
Usually an apartment will say whether it’s investor-friendly, if not, ask the listing agent.
Other Ways to Make Money by Investing in NYC Real Estate
Aside from buying a property and renting it out immediately (sometimes known as a turnkey property) you might try investing in a Real Estate Investment Trust.
A REIT allows investors to invest in commercial or residential property as well as mortgage loans.
NYC REITs tend to uniquely focus on commercial or retail holdings in prestigious properties like the Grand Central Terminal.
A REIT allows investors to access a group of properties that trade like a stock. This provides dividend income as well as diversification opportunities.
They’re also prone to risk in rising interest rate climate.
Can You Live Off Rental Income?
If you collect a fairly large portfolio of around 15 apartments, chances are your rental income will be in the six figures.
However, if you’re like the average investor buying only 1-2 properties, that income shrinks.
It is generally only good for a small amount of passive income. Compare sales prices to what you can rent it for so you don’t over-leverage yourself.
Depreciation is one of the biggest benefits of rental properties. The value of the structure can be depreciated over 27.5 years, shielding most of your rental income from taxes.
Say you bought a condo for $800,000 and your share of the land under the building was worth $250,000.
That means the apartment itself has a tax basis of $550,000. The IRS will let you depreciate that over 27.5 years or $20,000 per year.
If you rent the apartment for $3,000 per month and your common charges and other monthlies are $1,000.
Your net rental income would be $2,000 per month or $24,000 per year.
But since you also have $20,000 of depreciation, your reported income will only be $4,000 per year!
Depreciation is deducted from the amount you paid and lowers your cost basis.
If you sell the property after eight years, you will have accumulated $160,000 of depreciation so the IRS will say your “cost basis” is $640,000.
That will be used to calculate any capital gain.
If you have the time and money to spare, investing in NYC real estate can be an excellent way to generate some passive income.
And while it isn’t necessarily hassle or management-free, if done right, can provide you with a stable income for all your years.
The more you know the better off you’ll be! Choose your unit wisely, and happy hunting.