Wise investment options exist in every real estate market, but what are they exactly? ESPINAL ADLER Team partners Marie Espinal and Jeff Adler identify and answer all the questions that matter when purchasing an investment property, but more specifically in New York City. 

The February edition of The Apple Peeled focuses largely on purchasing real estate as an investment. There are countless articles, market analysis and raw data that can speak to what properties or situations make for a great investment. Typically, we handle those situations case-by-case and client-by-client, gathering information that leads to an investment that meets a very specific objective. So, instead of asking questions that might lead to answers painted with a broad brush, our “Ask the Experts” Q&A session asked Marie and Jeff about a few less obvious scenarios that might resonate with some of our readers. 

Apple Peeled Question: When most people have outgrown the New York City apartment that they own, they typically decide to sell that unit and use the proceeds from that sale to purchase a bigger/better unit. Are there any scenarios in which it makes sense to hold onto the unit that they’ve outgrown and keep it as an investment property? 

Marie/Jeff: Prices have dropped in NYC over the last few years. Mortgage rates are still really low. There is a ton of beautiful, brand-new inventory in New York City and developers are offering huge concessions that pay for a major portion of closing costs. So, it’s a great time to buy. 

We’ve spoken with quite a few clients who are hesitant to sell their apartment in what is widely considered a buyer’s market. Even though, in many instances, they’d more than make up the difference on the buy-side, they don’t want to take a loss on the unit they currently own. Some of our clients have decided to hold onto their property and rent it out for at least a couple of years until the market shifts back in their favor. That plan allows them to convert their primary residence into a revenue-generating investment property and take advantage of the enormous amount of leverage that NYC buyers have right now.  

This might be a top option for someone in a condo or coop for an extended residency if they have the down payment and cash flow to hold and buy. 

Apple Peeled Question: What If they Need the money from the sale of their property to buy their next property? 

Marie/Jeff: Property owners can tap into the equity in their home without selling it, usually through a home equity line of credit (HELOC) or through a cash-out refinance. It is important to note that banks are less likely to offer a HELOC against a rental property and the terms they would offer on a refinance would be a lot less attractive once the residence is converted to a rental property.  

If you have no immediate plans to sell or rent out your current home, and your mortgage balance is a lot lower than the property’s current balance, it’s a great idea to apply for a HELOC without drawing against it. Having it in place provides tons of flexibility. So, if you change your mind and decide to buy a new place without selling your current home, you could quickly access the equity you have through the HELOC. 

Most people assume that they have to come up with 20% down or more when purchasing a new home in New York City. Against a primary residence, lending guidelines are extremely flexible. There are some lenders that allow up to 90% financing on purchase prices up to $2 million. And, with the massive concessions being offered, a buyer doesn’t need to be quite as liquid as they think to take advantage of the current market.  

Apple Peeled Question: Is it a good idea for first-time homebuyers to consider buying and living in a 2-4-unit property before they purchase a 1-unit condo or co-op? Why? 

Marie/Jeff: Yes!  

Again, this has a lot to do with lending guidelines. The rules are far more flexible for people who are purchasing their primary residence compared to an investment property. Depending on the price point, some lenders will offer up to 97% financing against a property that would be used as a primary residence, including 2-4-unit properties. A buyer could live in one unit and collect rent from the other units.  

If after living in the 2-4-unit property for a while, the owner wants to buy a 1-unit condo or co-op or a single-family home, they could keep the multi-family property and easily categorize the single unit property as their primary residence to take advantage of the same flexible lending guidelines.  

But, if a buyer purchases a 1-unit property first and later decides to purchase a 2-4-unit property without, in almost every instance, a lender will categorize the multi-unit property as an investment, which could require a down payment of 25% or more.   

Apple Peeled Question: Nearly two thirds of New York City’s 8.5 million residents rent their apartments. Doesn’t that imply that rental units would always be in high demand?   

Marie/Jeff: Yes, that’s why we already see rents rising after a 12-18-month slowdown. Despite the abundance of new rentals, they are doing very well again. Long term, it’s always great to own rental property! 

Apple Peeled Question: What factors do you think prevent people from investing in New York City real estate? Is it the uncertainty of the market? Is it the responsibilities that come with being a landlord?  

Marie/Jeff: Not knowing this market firsthand is the biggest thing. Because everything operates differently here.  

Being a landlord and being responsible for the unit’s proper functionality can also be daunting, and there are 20 other totally valid reasons to worry. If you aren’t going to partner with us, then make sure you partner with brokers you trust who can easily connect you to the support network you need to own rental property.  

Owning a rental property is a little bit like getting a tattoo. Once you get the first one, you just want more.  

Apple Peeled Question: How can an investor gain a leg up on the competition? 

Marie/Jeff: The same things you do when you’re buying for personal use. The competition is fierce. In New York City, there’s always a chance you’ll be up against an all cash buyer. So, if you aren’t an all-cash buyer, can you put yourself in a position to waive your mortgage contingency or be comfortable with a much shorter contingency period? Buyers can work with a bank to get a true pre-approval (and not a pre-qualification) before they’ve even made an offer on a specific property. 

Separately, your real estate broker needs to build a narrative and present you in the best possible light. 

Apple Peeled Question: Has your team seen an uptick in investors from out-of-town? Why do you think that’s the case?  

Marie/Jeff: Yes. But only anecdotally.  

The number of foreign buyers in NYC hovers between 15-20%. The global slowdown has hurt NYC at the very top end, but it gets more press than its real effect. We personally are seeing more foreign buyers because after a decade, our reputation is spreading – there’s no team putting this much work into both the quantitative and qualitative factors effecting a real estate purchase. If that sounds self-serving, sorry it’s not — it’s supreme confidence just short of arrogance.