NYC Investment Property Overview
An investment property is any property used to generate income. Depending on how long you hold the property, you can make money in one of two ways. The first way is to rent the property out and receive a monthly rental income. The second way is generating a return by selling the property for a higher price than what you purchased it for. (i.e., "price appreciation"). Typically, real estate investors use a combination of both.
Types of Investment Property in New York
The most common types of residential investment property you can buy in New York City are condos and co-ops, but there are also more traditional options including 1-4 family properties (single-family residences, and townhomes), multi-family (apartment) buildings, mixed-use buildings, and commercial properties used for business purposes are all considered investment property if purchased with the intent of generating income.
Is Investing in NYC Property a Good Idea?
NYC property tends to be an excellent investment as it's easy to rent out and appreciates in value. Over the past 10 years properties in New York City have appreciated at an average rate of 7% annually, and there are few signs of a slowdown. Land is extremely limited in the city, so prices are likely to continue to rise.
Does House Flipping Work in New York?
Flipping is a strategy in which an investor holds the property for a short period of time (typically less than one year) and sells the property for a profit. You can flip a property in one of two ways. The first is through price appreciation. The second way is buying a house that needs repair and fixing it up before reselling it for a profit; this popular strategy is often called "fix and flip." Fix and flips used to be fairly common in New York City's outer boroughs and certain up-and-coming neighborhoods like Harlem, but are becoming harder to come by nowadays as most of these areas have gentrified rapidly, with many old homes and apartments having already been renovated. It's also important to note that renovating in NYC can be quite complicated as you'll need various permits and permissions from the department of buildings.
What Is the Cap Rate for Investment property?
The cap rate is the amount of cash flow you will earn from renting out the property divided by the purchase price. The higher the cap rate, the better the investment.
How Do You Calculate the Cap Rate On Investment Property?
To calculate the cap rate on investment property, you will first need to figure out your annual expected cash flow. (I.e., rent – common charges, maintenance, property expenses, and any other additional cost). After you come up with that number, you then divide that cash flow number by the purchase price of the property.
Please note, when calculating the cap rate, you do not need to include any monthly mortgage payments into the calculations.
Can Investment Property Be Depreciated on Your Taxes?
Depreciation is one of the most significant benefits of owning an investment property. The value of the structure (not the land) can be depreciated over 27.5 years.
How Is Depreciation Calculated?
Let's say you bought a property for $200,000, and your share of the land under the building was worth $50,000. That means the property has a tax basis of $150,000. The IRS will allow you to depreciate that amount ($150,0000) over the course of 27.5 years, which turns out to be approximately $5,454.55 per year.
This is a great financial benefit. For example, you rent your property out for $1000 per month, and all your other expenses come to $300. Your net rental income would be $700 per month or $8,400 per year.
However, since you also have $5,454.55 of the depreciation, the investment property will bring in $8,400.00 of cash but only $2,945.45 of reported income because you can deduct depreciation.
What About Other Tax Deductions?
The IRS allows you to deduct any expense that is considered "ordinary and necessary" for an investment property. This includes property taxes, repairs, and management fees. Most expenses that you can deduct for investment property are not deductible for your primary residence.
Financing Investment Property in NYC
Most banks, wholesale, hard money, and non-bank specialty finance lenders provide loans for investment properties. However, no matter the lender, you should always expect to pay more for an investment property.
First, it is important to realize that investment properties typically require larger down payments of at least 20 -30%.
Additionally, you can expect to pay approximately 0.5% - 1% more in interest than you would for your primary residence. The market conditions, your assets, and your credit score will determine what interest rate you are eligible for, especially when financing through a traditional lender.
One of the benefits of buying an investment property is the availability of different types of financing opportunities. This is mainly because the ability-to-repay rule doesn't apply to investment property. The ability to pay rule is the good faith determination that you can pay back the loan. Under the rule, lenders must generally find out, consider, and document a borrower's income, assets, employment, credit history, and monthly expenses.
Investment property is eligible for an asset-based loan (typically offered by non-bank portfolio lender), which is where the lender considers the income the property will generate as the basis of qualifying you for the loan. This type of financing is especially beneficial to self-employed individuals or small-business owners who don't have consistent W2 income.
Buying Investment Property With an LLC
There are a few reasons to use an LLC for rental property. The main reason to purchase property in the name of an LLC to limit your liability. For example, if someone injures themselves in the apartment and you own it in your name, they can come after your personal assets.
The other reason to buy property in the name of an LLC is privacy concerns. This is especially true when buying a higher-end property. In New York City, property records that detail the history of your home are public information. Therefore if someone wants to look up your property information, they can by merely searching public records for your name. However, if you purchase the property in the name of an LLC, your identity is shielded from public records.
Condo vs. Coop as Investment Property in NYC?
Typically, investors in NYC should focus on purchasing condos, townhouses, or single-family homes. Most investors should steer away from a purchasing coop because they usually have restrictions on renting (or "subletting") in their bylaws. A co-op proprietary lease can often require you to live in the property for a set amount of years before the property is even eligible to be rented out. And even after it is rented out, you can typically only rent for a max of 2 years at a time.
In any event, condos are also easier to renovate and buy over single-family homes and co-ops. Moreover, condos are typically attractive options for students and foreigners.
Where Should You Invest in NYC?
The truth is no one really knows what the next "it" neighborhood in NYC will be. However, you can look at certain clues about the neighborhood and demographics to hypothesize on whether you are making a smart decision. Unless you are a prominent investor, with a substantial financial backing, then investing in Manhattan may be out of reach. And, while it's probably too late to jump on the Long Island City, Brooklyn, and Harlem bandwagon, there is still great potential in the outer boroughs, especially the Bronx.
Investing in NYC Bottom Line
Investing in NYC real estate is a safe and effective way to diversify your portfolio. The city's housing market may not provide the highest cap rates, but is renowned as a safe haven worldwide. If you decide to invest in New York City real estate, it's important to keep in mind that like most other real estate markets, you'll make more profit the longer you hold the property. Real estate prices in NYC are always on an upward trajectory, so the be in it for the long game.