New Yorkers love to talk about real estate. You can’t walk a few blocks without hearing someone talk about buying or selling an apartment, go to a cocktail party where someone isn’t talking about moving or parents-night-out event where the organizer isn’t discussing his first major real estate investment. So, it’s no surprise that many parents may be considering buying real estate as an investment.
New York City real estate has certainly done very well over the years. The average price of a Manhattan apartment appreciated 50% over the last 5 years. If you look at some of the wealthiest families in the city, you’ll notice that many made their fortune in real estate. While it is certainly not as easy as buying a mutual fund and sitting back and watching it appreciate, real estate can be a great way to diversify your investments. New York City has historically had a low vacancy rate, so few apartments go empty for very long. This can provide an investor with a healthy cash flow, on top of long-term appreciation.
If you’re thinking about becoming a landlord, you might want to consider some of the questions below.
In which neighborhood should I buy a property?
The fringe or up-and-coming neighborhoods will certainly offer more bang for your buck. Because prices are lower in these neighborhoods, you will be more likely to be able to afford the down payment and qualify for a mortgage. The returns on properties in these neighborhoods can be higher than properties in more-established established neighborhoods. Those who invested in certain areas of Brooklyn, such as Bushwick, Crown Heights and Clinton Hill have experienced relatively high returns in recent years, as prices in these neighborhoods have risen.
On the other hand, properties in established neighborhoods may provide a lower return, but they are likely to be less risky. When prices go down, faster-growing areas often drop more quickly than other neighborhoods and can be the last ones to recover. Prime neighborhoods, on the other hand, will provide downside, or volatility protection. Which area is best for you may depend on your appetite for risk.
I am willing to take the risk, but which up-and-coming neighborhood should I invest in?
While it’s impossible to predict which areas will increase in value, there are a few factors that may increase the chance that properties in the neighborhood will appreciate. Increased investment in infrastructure, such as expanded transit options, a new school, or business center are good signs. Also look for other real estate construction going on. Real estate developers usually lead the way in investing in the next up and coming areas based on extensive research they conduct, which you can use to your advantage. However, be cognizant of inventory levels based on the product that will be coming on the market. Finally, look to see if properties in the neighborhood are selling faster than before. These things should give you an idea about whether a neighborhood is poised to break out.
What type of property should I invest in?
While the cost of buying even a small rental building in Manhattan is prohibitive for most, it might be an option in the outer boroughs. Some parents choose to buy a townhouse (or a small multi-family building) and occupy the first 2 floors, making use of the backyard for their kids and themselves while renting out the top 2 floors. An advantage to this arrangement is that you can qualify for lower rates on the mortgage because the home will qualify as be a primary residence rather than pure investment. These properties are often more expensive than condo units; however, the return on their investment tends to be higher. On the other hand, townhouses require more intimate management compared with purchasing a condo unit in a staffed building.
Most landlords will hire a management company or a part-time super to oversee their multi-family investments, which is generally not necessary for a condo unit. Management companies usually charge 7-10 percent of the rent in order to manage the property. Property management services include rent collection, tenant screening, repair and maintenance. Coops are traditionally not meant for investment since most of them have severe limitations around subleasing (Read more about the various types of properties in New York City).
What size unit works best for an investment apartment?
If you decide to purchase an apartment as an investment, smaller apartments (studio to 2-bedrooms) generally work best, as they are typically the easiest to rent out. While an investor can get higher rents on a larger unit (3+ bedrooms), there are fewer renters shopping for these apartments, making it likely for the investor to experience longer vacancy periods.
Will I be able to live off the rental income alone?
You are not likely to be able live off the rental income from one real estate investment. Currently, on all cash purchases we are lucky to see rental income stream of over three percent of your investment in Manhattan. You have to learn the ropes and start amassing a collection of properties to live off the rental alone, and that will take some time. Most parents who are getting their feet wet in real estate investing use it as a means to diversify their investment portfolio. NY real estate has done remarkably well over the long-term so most investors bank on that rather than the short term income.
Should I go for it?
Whether investing in real estate is a good idea will depend on your individual financial situation. Real estate is a longer term investment and cannot be easily sold like a mutual fund or other publicly traded investment, so you shouldn’t buy a property if you will need the money back in the near future. Before you go out and buy your first investment property, neighbors, be sure to work with a financial advisor to discuss how a real estate investment would fit into your broader investment portfolio. A real estate professional can run the numbers to forecast your potential income and expenses from the property, as well as the potential returns on your investment.