How to Buy An Investment Property in New York City

Purchasing an investment property in New York City is a pricy endeavor that eludes many residents. However, for those who can foot the bill and manage the duties of a property owner, the benefits are impressive. Not only does it deliver residual income and accrue equity over time, but with smart decisions, this investment can sustain your family for generations.

No wonder many of the world's wealthiest individuals are connected to real estate. But make no mistake—a property investment represents an enormous commitment, so make sure you understand all obligations and requirements before proceeding.

What is an Investment Property?

If you buy a property to make it your home, you should view it as a place to build your life, family, and 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, it's not technically an investment property unless you use it to generate income.

An investment property is expected to generate a return through rental income, capital return (price appreciation), or a combination of both.

You'll likely benefit from rental income and price appreciation if you hold a property for many years.

In real estate jargon, the capitalization rate or "cap rate" is the 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.

The house-flipping option might only be advisable as a career choice for 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 profitable 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 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 damages your apartment.

Consider that rental income might not be 100% consistent, 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?

Sometimes, rental income might not 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 when your property goes unrented.

If you can't pay the mortgage, it could damage your credit, hurting you financially in the long run.

The excellent news is substantial tax benefits for all property investments in NYC.

For example, depreciation allows you to defer taxes on your rental earnings.

A 1031 exchange can help you defer those taxes even longer when you sell.

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 special conditions apply to a 1031 exchange, 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 money upfront.

Most experts warn against borrowing money for the initial purchase of your investment.

Ideally, it would be best to have a substantial cushion for this purchase.

Consider the costs of taxes in the area you're buying, along with the expenses of upkeep and utilities.

As you probably know, NYC has some of the highest property taxes in the country, at around $10,000 a year, and the highest utility costs.

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 know-how 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 costs 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?

Not necessarily.

It is something to consider in your total cost calculations, but for a $1 million price tag, the tax ($10,000) is only one percent of the total cost.

This property is worth considering if the yield on an apartment with a mansion tax will be better due to low monthlies.

Though a mortgage generally goes down, costs for maintenance tend to go up.

If you’ve invested in a beautiful historic building on 5th Avenue, your monthly expenses could be around $2000 or higher, leading to a substantial cost over time.

Spending more money on an apartment with lower monthly expenses might be better 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.

Older properties may be cheaper, 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 in upgrading mechanicals, appliances, and insulation.

Meanwhile, 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 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 are 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.

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 your goals, 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 incredibly 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 an excellent 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 an excellent 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.

Thousands of beautiful multi-family houses can make a convenient first go at investing.

Hopefully, you will select quiet, respectful tenants to fill the other units!

Apartments with one or two bedrooms are generally more affordable, as tenants looking for smaller units comprise a large percentage of the prospective population.

Bigger units command a higher price, but their vacancy period can be longer as fewer tenants shop for bigger teams.

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 more extended period.

Studios also tend to be a good bet for a first investment as they’re generally in high demand, and filling one with a professional is easy.

Studios do come with more competition for these same reasons. You might consider buying a couple of studios to balance your portfolio.

Remember: rent in NYC is determined by the number of bedrooms, not the size!

Also important to remember are building policies for subletting or renting out apartments.

Where Should You Buy an Investment Property in NYC?

Real estate experts recommend the “tried and true” neighborhoods if money isn't a concern.

In other words, neighborhoods like the West Village or the Upper West Side are iconic and not going out of style any time soon.

People will always be looking to live in these high-brow neighborhoods, mainly 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 enormous: 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 do not see enough apartments for sale in your price range or target neighborhood, consider expanding your search to include “off-market” listings.

Brokerages specializing in investment and commercial properties may also be mine for owners who might be ready to sell.

They can also arrange for you to meet and deal with the owners before the apartments hit the market.

You’ll probably want to steer clear of the celebrated classics to get the most bang for your buck.

Buy something a little off the radar or “far out” in Brooklyn, Queens, or the Bronx. You may collect less rent initially, but you might be surprised by how the neighborhood's demand skyrockets.

Beware, lower-income areas tend to have higher turnover than high-income areas and typically have higher maintenance costs.

How do we identify emerging areas?

Look for 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 vast, sleek, modern buildings dominating Williamsburg and creeping as far south as Flatbush.

Developers invest tons of time and money in 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.

Ideally, you 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 an excellent 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 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 rent hotbeds where it may be easier to rent out your investment.

Avoid areas where the real estate market seems stagnant, or most residents are homeowners. It may be challenging 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 unfriendly to investors, with bylaws strictly regulating sublets.

For the most part, condos don’t usually have bylaws heavily policing owners renting out their units.

ReadWhat's the Difference Between a NYC Co-op and Condo?

Even if you 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 and renting a property 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 and mortgage loans.

NYC REITs focus uniquely on commercial or retail holdings in prestigious properties like the Grand Central Terminal.

A REIT allows investors to access properties that trade like stocks. This provides dividend income as well as diversification opportunities.

They’re also prone to risk in the rising interest rate climate.

Can You Live Off Rental Income?

If you collect a relatively extensive portfolio of around 15 apartments, your rental income will likely be in the six figures.

However, that income shrinks if you’re like the average investor buying only 1-2 properties.

It is generally only suitable 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 most significant 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 annually.

If you rent the apartment for $3,000 monthly, your standard 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 annually!

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 passive income.

And while it isn’t necessarily hassle or management-free, if done right, it 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.