What’s it like to purchase an investment property in New York? In this month’s At The Core, we interview our very own past clients, taking a deeper dive into their personal experiences of buying and owning a NYC investment property.
A few years back, Marie received a call from a client who was about to embark on a special mission. He was selling an investment property in California, and he would use the proceeds from that sale to buy up to five properties in New York City – four investment properties and one primary residence. To cap it off, all of the investment properties needed to be identified within 45 days so he could take advantage of a 1031 exchange, which would allow him to defer paying capital gains taxes on the property swap.
The client got our team’s information through a past client, but he was completely transparent in that we’d face stiff competition for the right to represent him during this property search. He was highly intelligent and highly analytical. He told us, “Who I go with is dependent upon the analysis and strategies that are put before me.”
Everything was on such a tight timeline and Marie was just about to leave for a family vacation in North Carolina. She set aside the time to complete a robust analysis. She and Jeff identified 10 properties and set up a grid so the important numbers for each could all be compared side-by-side.
“We laid out all the numbers on a spreadsheet to develop a visual,” Espinal said. “We gave credit and assigned values for different attributes of each property.”
The hard work paid off. They got the job. Espinal remembers her client’s original mandate: “This is how much money we’ll have to invest,” he said. “Divide it amongst however many properties make sense but find the best investment opportunities.”
A few of the properties that we originally targeted went into contract before the California property was sold, but in less than 45 days, The Espinal Adler Team located four investment condos that made complete sense, each in a different Manhattan neighborhood. We also found an Upper West Side co-op that was perfect for the client’s personal needs. All five deals were negotiated, and they all closed quickly.
Identifying the right investment property is a different undertaking for a real estate broker compared to helping someone find the perfect place to live. It’s way less emotional and it’s all about the numbers.
“First and foremost, when you’re purchasing an investment property, you are ‘property agnostic’” Espinal said.
What does that mean?
The quality of a unit and the quality of the product stays constant, but so many traditional factors become irrelevant. The neighborhood is irrelevant. There are no discussions about the marble countertops or the 4th floor vs. 5th floor.
Gary Reisman and his wife Donna already lived in Manhattan when they purchased a Brooklyn condo purely for investment purposes in 2017.
“It’s a less emotional buy,” Reisman said. “You’re just looking at the numbers… What will your monthly outlay be and what can you rent it for.”
We helped them find a unit at 550 Franklin because it had a 25-year tax abatement in place and, according to Reisman, it “made the numbers work.” The monthly carrying costs were completely covered by market rent. It also helped to see that the developer was creating a neighborhood with parks and restaurants from Franklin all the way down to Barclay’s Center.
For the typical investor, Espinal said it’s all about cap rate and rate of return, and how much liquidity is required, and the net operating costs. “It’s very black and white,” she said.
Unless it isn’t.
For the well-versed investor that’s buying property number three or four, that’s how it is 100% of the time. But the first-time investor isn’t always far enough removed from a more traditional property search, so there might be some lingering emotion clouding their judgement.
“It’s difficult to evaluate a property that way,” Espinal said. “It’s the broker’s job to point out why a property is a good or a bad investment.”
Some of the traditional factors might also apply in what Espinal referred to as a hybrid investment situation, in which a client will buy a property using all the tools and formulas for determining its merits as an investment, but they leave open the possibility of someday moving into the property themselves. It’s a less pure version of an investment property search because priorities get rearranged which can throw-off the normal balance.
In this type of situation, Espinal said she approaches the situation transparently. “I might say to the client, it would be unjust for me to say I’m going to deliver the property with the absolute best cap rate because a personal component was added to the equation.”
Pollidoros Trejos is a fomer New Yorker whose career brought him and his family to Houston. But the idea of eventually making it back to New York is appealing, so certainly, his search fell into that hybrid search category where we were primarily in search of the best investment, but there was a more specific set of parameters. Trejos knows the city well and said there were definitely some areas of the city that he was more interested in than others.
“I value the optionality quite a bit,” Trejos recently told us. “If I were to live (in New York), it’s probably ten years from now, so I have a longer-term view. But I did think, this could be my place.”
Trejos ultimately purchased an amenity-rich, 2-bedroom, 2-bath condo in Lincoln square that works from a numbers standpoint as an investment, but is also a place he can see himself living in a decade from now.