Nov 2018 Real Estate Report


Look Who’s Buying

We’ve seen this before - A damp market hits and headlines are about record price drops, increasing inventory, and days on the market. The media, however, fails to report how investors focus on opportunities arising during down cycles. New York City real estate can provide consistent short and long-term gains with manageable risk based on the city’s rental demand. Here’s how:

1) A rental property can give a 3 to 4% ROI each year. For example, you purchase 100 Main Street, Apartment 1A for $1,000,000, totaling $1,040,000 after closing costs. The apartment rents for $5,000 monthly. Subtract taxes and common charges ($1,000 and $900 a month, respectively) and insurance ($100 monthly), and net a monthly profit of $3,000 – $36,000 annually. That’s about a 3.5% return on your investment. In NYC, rents increase annually about 3.5%. Taxes and common charges increase about 2.5%. Continue renting for ten years and rent in your tenth year would be $6,814.50, with taxes and common charges running $2,497.75. This gives you an annual profit of $51,801, or a 4.98% yearly return.

2) In almost every case, your largest gain will come from the speculative return (profit earned from the growing value during ownership). The downside is that it’s only available for cashing in when you sell or refinance the property. Also, while values have risen an average of 7% per year over the last 70 years, it’s been inconsistent; some years have seen increases, while others have seen decreases. With a smart purchase, however, expect your value to double in ten years’ time. Back to our example…

100 Main Street is worth $2,000,000, ten years later. After closing costs – $40,000 from the purchase and $160,000 from the sale – you sell for a profit of $800,000. Subtract $50,000 for upkeep during ownership – a broken AC, painting, a bathroom rebuild, etc. – and your total profit is $750,000, roughly 75% of what you paid for the unit.

3) Lastly, we have taxes. Everyone’s taxes differ and while there are several things you could do, let’s talk depreciation. You can write off about 2% of the property’s value per year, every year. Back to our example…

100 Main Street is valued at $1,000,000. At 2%, you write off $20,000 annually. If your tax bracket is 40%, that’s an annual real savings of $8,000. Additionally, this write off can grow over the years with the value, increasing your savings.

Finally, let’s look at the total profits over ten years. You have $750,000 in sales profit, $422,000 in rent, and $80,000 through taxes, or 7.5% in sales, 4.22% in ROL, and .8% for depreciation. That's a 12.52% return per year for ten years.

This example is just a basic good buy. If you leverage your purchase by financing, you change the entire picture and could significantly increase your return. So you see, It’s not all doom and gloom when the market slides down. We expect it and investors are looking for it in order to increase their exposure.


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© 2018 by Jacob Warfield