Welcome to the world of investing in NYC! Whether you’re a first time investor or adding new properties into your portfolio, there are some key factors to know before investing. Just like in anything else…investing in NYC is different from investing anywhere else in the country. What do you need to know and where should you look? Here is an easy breakdown of the need-to-know pieces to help fill the NYC investing puzzle.
Generally investing anywhere in NYC is a good idea and Manhattan is usually the best bet because it has the strongest and most consistent market. But over the past decade the outer boroughs have made some major headway! Namely, my home borough of The Bronx! Its being dubbed as “The Last Frontier” in terms of the remaining investing opportunities available in the city. Later in this article I’ll show you why.
A few questions to consider before we get started:
- What type of investor do you want to be? Short Term (quick cash) or Long Term (buy and hold)?
- How much initial capital are you able/willing to invest?
- What type of property do you want to purchase? Townhome/apartment? If you’re looking at apartments your best bet is to look specifically at condos. Generally coops are not as renter-friendly and have stricter subletting rules to deter investors.
Ok now lets start with the costs…because “if it don’t make dollars, it don’t make sense.” 💸 There are two main factors to consider before starting the property search:
Cap Rate or Capital Investment Rate: This is the percentage of how much you will net after operating expenses. There are two ways in which cap rate is used by investors. One is to value a property they want to sell based on the current market cap rates for recently sold comparable properties. The other is to determine if the asking price of a property is reasonable when considering a purchase.
ROI or Return on Investment: This is the percentage of profit you will make vs. the percentage of investment.
Here are a few initials costs to consider when buying a property :
- Closing Costs (Mortgage fees, Attorney fees, board fees, etc)
- City & State Transfer Taxes
For more on closing costs, click here.<<<<<<<<<<
some monthly costs you’ll have after your purchase:
- Mortgage payment
- Monthly common charges
And lastly, here are some ongoing costs to be prepared for:
- Property management:. Are you prepared to self-manage? If not, you’d probably want to buy a condo where there is an on-site manager/super/doorman. If none exists you’d need to look into hiring a third party property manager.
- Vacancy/Rent Loss – anticipating lag between leases/ no tenancy
- Assessment/capital improvements in building
- Townhome costs: Water & Heating, and Common Elements
So now that you know the costs you can determine what is realistic. For the purpose of this article, we’ll be buying a tax-abated 2 bedroom + 2 bathroom condo in The Bronx (Williamsbridge) for the incredible price of $245,000, which has monthly common charges and taxes of $316 (combined). Don’t believe this exists? Check it out here. Completely unheard of anywhere else in the city! Now lets say you are a long term/buy & hold investor (5+ years) who is looking for a 4-5% cap rate, which is a pretty nice return for a NYC investment. Using this example lets breakdown the potential Return of Investment & Cap Rate:
- Determine how much rent you could get for this unit. Right now a comparable report shows that a 2 bed in the area is around $1700/month. The rent also depends on the location (proximity to transportation) and the finishes (how renovated the unit is).
- Determine your ROI. Use this ROI calculator. If you invest $245,000 and expect a return of $300,000 after 5 years, you’d have an ROI of 22.45% and an investment gain of $55,000. If you held the property for 10 years and expected a return of $345,000 you’d have an ROI of 40.82% and an investment gain of $100,000. Got it?
- Determine your Cap Rate. This one is a little trickier. Here is a good article to guide you through. Start by estimating your annual rent roll and then subtract your annual expenses. For this example lets use an annual rent of $20,400 ($1700 per month) and annual common charges and taxes of $3792 ($316 monthly). $20,400 – $3792 = $16,608. This is your net operating income, which is how much rental income you net after expenses. Now divide your net operating income by the sales price. $16,608 (net operating income / $245,000 (sales price) = 0.67%. This is your cap rate. Your cap rate is going to be most important in helping you determine whats a good deal. With this information your broker (me ☺️ ) will help you to run a search of comparable properties in the area to determine the going cap rates and to know for sure that you are getting a good deal. Cap rates are subjective to the comparables of the neighborhood so this information is crucial to beginning your search.
Whew! That was alot. Want to know more about investing in NYC? Send me a message and we can set up a time to chat. Also look out for some upcoming blog posts on the subject!
Thanks for reading!