Most people can’t afford to buy a New York City condo 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, a result of buyers who are holding off making a move amid economic uncertainty and rising mortgage rates. They’re parking themselves in the rental market—and willing to pay more for rentals. At the same time, many NYC renters are finding themselves priced out of their pandemic deals and are hunting for apartments, also generating demand that is causing rents to rise.
For these reasons, brokers say it is an especially good time to be a real estate investor. In addition, more condo developers are tapping into what buyers want now—like outdoor space and work from home amenities.
[Editor’s Note: A previous version of the article ran in July 2021. We are presenting it again with new information for July 2022.]
But be aware: Changes to New York’s rent laws—which impact rent-stabilized as well as market-rate apartments—have transformed 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.
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, 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 apartment size to consider, 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 what type of return on my investment can I get?
Mortgage rates are double what they were a year ago and rents are at an all time high—for example, the average rent for a Manhattan apartment hit $5,000 a month in June. The dollar is exceptionally strong right now, removing competition from international investors. These factors combine to maximize yield for all-cash investors, who are enjoying an advantage over buyers who need more expensive financing, Hoagland says.
However, at some point, when the Fed’s moves calm inflation, mortgage rates may drop and buyers (who have been parked in the rental market) as well as renters who want to become buyers—will return to the sales market.
“This dynamic might lead to lower rents and increased vacancy, so as with all investments it’s important to focus on unique assets in prime locations that can weather a market shift. Apartments facing parks are somewhat recession proof: The only two guaranteed views in Manhattan are those of a park and those of a brick wall,” she adds.
But an important thing to understand about buying in NYC: "Cap rates don't cover your mortgage if you’re looking to buy with a mortgage," Wheelock says. 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." Now with rents rising, and prices more negotiable, you can see 3 percent to 3.5 percent returns, and in some rare cases even 4 percent.
To get a better return on your investment, you're going to want to put more down, or even all cash, she says.
"Hold it for four, five, or six years until prices surpass what you paid for it," Wheelock says. “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 was waiting for interest rates to go up in order to snag some cash deals, this is your moment.”
Then there's the problem of not making anything at all. Hoagland points out that the now-expired eviction moratorium changed some investors’ views on being a landlord.
“Several investor clients have approached us over the last six months about selling as opposed to re-renting, citing the exceptionally tenant-friendly legal environment, the lack of ability 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,” 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 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.
Wheelock notes that following the wave of New Yorkers returning to the city after riding out the pandemic—there’s a new group of renters competing for apartments: Renters who got major deals last year and are moving again—like a game of musical chairs.
It's one of the main reasons rents are rising, she says, adding that it feels like the amount of people who need to rent is five times more than usual.
At the height of pandemic, landlords offered leases with concessions as generous as four months free, Wheelock points out. But when it comes time to renew, those concessions typically evaporate, as is the case now. And rents are going way, way up: Many 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. Some rent hikes are 30 percent or even more.
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, Bushwick, and Bed-Stuy. If you want to buy something limited and in high demand (and are prepared to shell out more) look in Tribeca and the West Village.
For new development where renters can live large with lots of amenities, consider downtown Brooklyn, Fort Greene, Dumbo, Williamsburg, and Clinton Hill. For neighborhoods where you can get a discount, look at Washington Heights, Central Harlem, Yorkville, Hell’s Kitchen, and Midtown East.
(Want more detail on these areas? Check out “The best NYC neighborhoods for real estate investors in 2022.")
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 apartments scooped up after just a few days on the market?
The real estate attorneys at Woods Lonergan have decades of experience successfully representing buyers and sellers in every type of transaction. "We mobilize quickly to guide you through every aspect of your purchase or sale, from home inspection to contract negotiations and closing", says managing partner James Woods. To learn more about Woods Lonergan or schedule a free 15 minute consultation, click here of call 212-684-2500
Do condos or co-ops work best as investment properties?
Co-ops make up about 70 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 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).
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 renter 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.
Fight back against rising mortgage rates. Work with a local expert from Prevu, the brokerage that saves New Yorkers an average of $23,000 per transaction. You’ll pocket a rebate of two-thirds of the commission paid to the buyer’s broker at closing. Click here to learn about Prevu’s Smart Buyer Rebate.
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.”
For more information on upfront costs of buying a home in NYC, 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 approach multi-family purchases with caution.”
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.
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