This is the 1st in a series of articles for buyers who are considering buying a Manhattan apartment as an investment. 

I  once read an article where someone commented that NYC property is like a Swiss bank account for investors because it’s considered so low risk and certainly will go up in the future. But where do you buy and for how much? Should you get a loan or pay CASH? Here’s some advice that may help you to decide.

So let’s say you have $1 million just as an example and you want to invest. What are your options assuming you will not live there? Click through for guidelines.

 

1- Determine if you are going after short or long term gains.

2- Buildings with low common charges and taxes will increase your return but be wary of soon to expire tax abatements.

3- New construction will be more expensive per square foot and may have already topped out as far as prices.

4- Getting a loan increases your leverage

5- Seek the advice of a knowledgeable broker, attorney and CPA especially for foreign nationals.

 

Let’s take a closer look at each item:

Short or long term gains- Typical returns will be around 3% per year on most properties. So if you invest $1 million in an apartment you can expect to net close to $30,000 annually. With mortgage rates so low and if you qualifiy for a loan you can purchase two $1 million  apartments with your $1 million cash by getting loans. Based on current interest rates and rental prices, you can have your mortgage and all charges covered by your rental income. So $2 milllion in apartments and 0 cash flow annually or one $1 million apartment and a 3% return. See the example below which may help you to decide:

Scenario 1 (1 apartment)

Purchase Price                           $1,000,000
Rental income (monthly)             $3800
Common charges (monthly)       $986
Taxes (monthly)                                   $438
Net income (monthly)                      $2376
Annual net income                             $28,512
Annual return                                         2.85%  

Note the above scenario does not take into account appreciation and the substantial tax advantages of owning investment properties.

Scenario 2 (2 apartments)

Purchase Price                           $1,000,000
Down payment                             $500,000
Mortgage                                          $500,000
Rental income                                   $3800
Common charges (monthly)       $986
Taxes(monthly)                                    $438
Net income (monthly)                     $2376
Monthly mortgage*                           $2316
**Based on 3.75% 30 year mortgage***

In the second scenario you can use the same $1 million investment to buy two apartments and have the tax deductions of the mortgage interest plus the tenant pays your mortgage! But your nearly 3% cash flow in the first example is gone.

2- Lower common charges and taxes increase your returns- There are several buildings where the combined monthly charges are around $1 per square foot. They include CPW towers aka Park West Village located at 372,382,392 and 400 CPW. Also the Atelier at 635 W 42 street which has many amenities is among those low cc and tax buildings. Additionally, many buildings in Harlem are tax abated so the lower monthlies increase your bottomline.  In the example above, I used an example where the monthly charges were about $2per square foot which is about average for a Manhattan condo. So a 700 sqft (60m2) apt with about $1400 in common charges and taxes.

Typically, NYC buildings with soon to expire tax abatements will not make the best investment because you know that the taxes are going up to the market value and the higher charges will reduce your return and also negatively affect the future purchase price. So buying a property with less than 5 years left on the tax abatement would not be advised unless it was a very good price.

3- New developments will be more expensive per square foot and may have topped out as far as values depending on the price segment. A tax abated building like One Manhattan Square with a huge amenity package or even Waterline Square on Manhattans Upper west side could be an interesting investment for a 5-10 year term.

4- Getting a loan increases your leverage. See the sample scenarios above. If you need the cash flow, then you buy one NYC apartment and you will have $1 million in real estate assets.

But in the second scenario, you have the same $1 million in equity but control $2 million in real estate assets. Each year, the tenants will be paying down your mortgage. In 10 years your mortgage will have gone down from the original $500k and the price will have appreciated but the appreciation will be multiplied because you have two properties.

5- Seek the advice of a real estate broker who is well versed in all markets, and investment purchases who may be able to connect you to a lender, and an attorney. You should also seek the advice of your CPA for the tax benefits specific to your situation/income.

The Author-  Brian Silvestry , a licensed real estate broker, has been selling residential and commercial real estate since 1999. He has sold in every neighborhood from Battery Park City to Washington Heights.