Buying property in New York to rent out
Posted by Wei Min Tan on March 4, 2019
Buying property in New York (Manhattan) to rent out is an investment diversification strategy for many global investors. Manhattan tenants are very high credit quality and the income stream would help pay the mortgage while the property appreciates over time. Here are 5 key points to consider as it relates to buying an apartment (condominium) to rent out.
Buying property in New York to rent out gets low yields
Since Manhattan residential condominium is an appreciation play, the rental yields are low, around 2 to 3 percent. This assumes an all cash purchase after deducting operating expenses. This low yield is normal for a top tier expensive city like Manhattan or London.
Our clients who buy all cash get the 2 to 3 percent yield while the property appreciates over time. For clients with a mortgage, the rental income helps pay the mortgage.
High rental demand
The vacancy rate in Manhattan is about 2 percent, compared to the U.S. vacancy rate of 7 percent. Everyone wants to live in Manhattan because the address comes with certain social status. It is common for recent graduates to share a one bedroom apartment just to be in Manhattan.
Since property prices are so expensive, about 70 percent of Manhattan residents rent (the opposite of the U.S. where about 65 percent own).
Tenants at a condominium typically stay a few years because of the high cost of moving, which entails broker fees, board package fees and moving fees.
Keeping local demand factors in mind
The New York market is geared towards locals hence a foreign investor needs to know what local renters find desirable. For example, having a doorman is important especially to receive packages that people order from Amazon. Having a roof deck or resident lounge is important for entertaining.
On the contrary, having a swimming pool is less important because the pools in Manhattan condos are very very small and nobody here swims. An out of town investor needs to decide a good buy based on what the local market finds attractive, not based on what the investor finds attractive.
Tenant credit and screening
We typically require tenants to have income of 40X monthly rent. For example, to rent a $4,000 apartment, the tenant needs to make $160,000 per year. The entry point to rent a studio condo apartment is $2,500 per month, which means tenants need to make at least $100,000 per year. At this income level, tenants usually have very good credit scores and history.
Screening of tenant is very important. This refers to looking at the income, credit history and financial strength of the tenant applicant. Not all brokers screen tenants diligently. The worst case scenario for a landlord owner is having a delinquent tenant and consequently having to evict a non-paying tenant. This will take between 6 to 9 months in the tenant-friendly court system of New York City.
Get an expert in this niche
Get an experienced broker who focuses on this niche of helping investor buyers identify a good property and then renting it out. There are so many niches in Manhattan real estate. There are coop experts, condo experts, multifamily experts, “experts” who do everything etc.
We focus on investor buyers in the sub $3 million price point who buy to rent out. This starts from identifying the right investment property, managing the transaction to closing and after closing, managing the rental marketing to eventually putting in a well qualified tenant.
Ultimately, buying a New York property to rent out is an excellent long term investment strategy. Yes, the yields are low and perhaps less than what one gets from a savings account in a foreign bank. But a Manhattan property appreciates well, and is a blue chip asset to have in one’s portfolio.
1) Greenwich Club in FiDi. Corner apartment with double height, 17 feet ceilings makes this apartment very voluminous. Buyer client purchased with tenant in place. It has since been re-rented to another long term tenant.
2) 200 Chambers in Tribeca. Top building commanding top rents. This corner unit has dual exposures to the N/E. Whole Foods is behind the building. Always rented to high quality tenants.
3) 959 First Avenue, client purchased at pre-construction stage. Amazing interiors and the reservation deposit was only 10 percent, maximizing leverage and minimizing risk for buyer.
Article was updated March 4, 2019
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