We’ve seen this before – A damp market hits, and all news headlines are about record price drops, increasing inventory, increasing days on market and decreasing deals. What the media doesn’t report on and what we see on the street in markets like this is how many investor buyers we are now working with who are focused on the opportunities that come in down cycles. This market gives investors reason to take advantage and why buyers from around the world make New York City a destination for a portion of their portfolio.
Based on the investor’s objectives, New York City real estate can provide consistent short term and long term gains and manageable risk based on the city’s rental demand. Here’s how.
You should receive a 3 to 4% ROI or net return each year on the rental of your property. Let’s use this example:
100 Main Street, Apartment 1A. You are buying this one-bedroom apartment for $1,000,000. It will cost you about $1,040,000, with closing costs. It will rent for $5,000 a month. It costs $1,000 a month in taxes and $900 a month in common charges, plus an additional $100 a month for insurance on the unit. This will give you a $3,000 monthly profit – an annual profit of $36,000. That’s a 3.46% return on your investment. In NYC, rents increase about 3.5% on average every year. In contrast, taxes and common charges increase about 2.5% yearly. If you continue renting the apartment for 10 years, the rent in your tenth year should be $6,815 a month. The combined taxes and common charges will be $2,498. This will be a $51,801 yearly profit or a 4.98% yearly return. The average return is 4.22% over the ten-year period.
Next is speculative return. This is the profit earned from the growing value during ownership. In almost every case in NYC, this will be your largest gain. The downside of this profit center is that it is only liquid when you sell or refinance the property as well as having the most inconsistent growth. Over the last 70 years, values have risen an average of 7%. However, in some years we have seen a 25% increase and in others a decrease of 15%. So in finite periods, these numbers are all over the place. With a smart purchase, over the long term you can expect your value to double in ten years’ time. Back to our example…
100 Main Street, which you bought for $1,000,000, is now worth $2,000,000, ten years later. After the closing costs – $40,000 for the purchase and $160,000 for the sale – you sell the property for a total profit of $800,000. Now let’s also take out $50,000 for upkeep during the last ten years – a broken AC unit, three paint jobs, floor sanding, rebuilding a small bathroom, and polishing the floors. Now you end up with a profit of $750,000. This is a total of 75% of what you paid for the home or 7.5% a year for ten years.
The final revenue source is the taxes. Everyone’s taxes are different, and while there are several things you can do here, we are only going to discuss depreciation. You can write off about 2% of the property’s value per year, every year. The amount you depreciate will affect your base price when you sell and pay capital gains, but year-to-year it will help you with your profits. Also, there are many ways to cover the lowered base when you file your taxes after you sell. Back to our example…
100 Main Street has a value of $1,000,000. So at 2% you can write off $20,000 each year. Let’s say your tax bracket is 40%. This would give you a real savings each year of $8,000. On a $1,000,000 purchase price that’s .8%. Now, the write off can grow over the years with the value, but let’s keep it simple here – as taxes can get complicated – and just understand that your benefit may be more than .8%.
Finally, let’s look at the profits over ten years. In ROI, it’s been an average of 4.22%. With the sales profit, we get a 7.5% percent and then another .8% for depreciation. This gives us 12.52% return per year for ten years. You would have seen about $750,000 in profit with the sale, $422,000 in rent, and $80,000 through taxes.
This example is very basic good buy. Yes, a bad investment purchase would not yield this, and a great investment could bring you a lot more, particularly in speculative return. Additionally, if you leverage your purchase with financing, it changes the whole picture and could possibly 4X your return, and greater if you refinance out and leverage the property’s value to purchase others and expand your real estate portfolio.
It’s not all gloom when a market slides down. We expect it, and investors look for times like these to increase their exposure.