Buying property is a big purchase and a big decision. Before you purchase property in NYC, you need to ask yourself an important question – can I rent it out? While you might not intend to rent it out immediately, knowing if you have the option to do so in the future is important, as one of the biggest benefits of owning property is the potential to generate rental income.
But in order to do that, you need to make sure that your property complies with all local laws and regulations. In this blog post, we'll take a look at what you need to know about renting out your NYC home.
The first thing you need to know is that there are different types of residential properties in NYC. The most common types of residential investment property you can buy in New York City are condos and co-ops, but there are also more traditional options including single family residences and townhomes, multi-families and apartment buildings.
So how does this affect your purchase?
Here are 6 things to keep in mind purchasing a property:
TYPE OF PROPERTY
The type of home matters. Townhomes, multi-families, and apartment buildings can be rented out without any restrictions from ownership, because you’re the sole entity. However, co-ops typically have tighter restrictions and a more stringent approval process. Often co-ops limit how often you can rent out the property or restrict it entirely for a certain period of time after purchasing. For example, a common "sublet policy" is you can sublet for two out of five years and only after living in the unit for two years. Whereas, condominiums don’t have these restrictions, you can begin renting it out right away. While each condo building typically does have an application, the approval process is much simpler than in a co-op. There’s no interview required, and they don’t cap on the number of years you’re allowed to rent it out. Since the price point to purchase a multi-family or apartment building is more than most investors just starting out can afford on their own, we’re primarily going to focus our discussion on condos.
RENT RATES - THINGS TO CONSIDER
You’ll need to figure out how much you can rent out your investment property for. Right now rents are at an all time high. However, at some point, when mortgage rates drop, buyers (who have been parked in the rental market) as well as renters who want to become buyers—will return to the sales market. This dynamic might lead to lower rents and increased vacancy, so as with all investments it’s important to focus on unique assets in prime locations that can weather a market shift.
You also have to be able to afford holding in order to afford investing in NYC. At the height of pandemic, landlords offered leases with concessions as generous as four months free. When it comes time to renew, those concessions typically evaporate, as is the case now.
Just be careful when calculating your returns that you don’t forget about the unexpected cost of vacancy in case you can’t rent out your apartment for a period of time.
FINDING A TENANT
The best way to mitigate the risk of vacancy or the cost of a bad tenant is to screen prospective tenants extremely carefully. Working with a licensed real estate broker, they should conduct a credit check and background check to qualify their financial standing as well as see if they’ve ever litigated against landlords before, or been evicted before. Brokers go the full mile in requiring a slew of paperwork from prospective applicants. Standard supporting documentation includes tax returns, bank statements, pay stubs, letters from employer, landlord reference letter and photo ID. You’ll want to see that a tenant earns an annual salary equal to 40 times the monthly rent.
If you’re considering renting to students or international residents without US credit, or someone who’s self-employed or retired, you’ll want to ask for a guarantor. Landlords typically look for the guarantor to be located in the tri-state area or to be a relative who can provide proof of income that is twice the income requirement for the prospective tenant, or roughly 80xs the monthly rent.
Enlisting a professional broker to handle the marketing of your apartment will also assist in screening tenants — and at no cost to you if the tenant pays the broker fee. Brokers can also execute the terms of the lease in accordance with board approvals, supply the forms, and collect deposits.
An important thing to understand about buying in NYC is that cap rates typically don't cover your mortgage, if you’re looking to finance. To get a better return on your investment, you're going to want to put more down, or even all cash. It can be a shock for people new to buying here, but cap rates are typically around 2 percent. Now with rents rising, and prices more negotiable, you can see 3 percent to 3.5 percent returns, and in some rare cases even 4 percent.
In NYC, you’re purchasing with the intent for appreciation. Hold it for four, five, or six years until prices surpass what you paid for it. Over the past 10 years, properties in New York City have appreciated at an average rate of 7% annually. If you are the person who was waiting for interest rates to go up in order to snag some cash deals, this is your moment.
Look to purchase where young renters want to live. The Lower East Side and the East Village are still top choices for young renters who like the authentic, "gritty" feel of living Downtown. Plus, sale prices in these neighborhoods took a major hit during the pandemic, but rents are still through the roof - giving an investor a really nice return. The same holds true for Brooklyn neighborhoods like Bushwick and Bed-Stuy. The purchase prices have started to come down but rents have never been higher.
Another great option is to buy in a new development with lots of amenities. Renters are drawn to new buildings because for many New Yorkers it’s a way to enjoy nicer finishes and perks that they could not afford if they were buying. These renters want apartments with washers/dryers in unit, impressive kitchens, spa-like baths, rooftop access, 24/7 doormen, and fitness centers. Head to Downtown Brooklyn where there are a slew of new condominiums surrounding the Barclays Center with a long list of luxury perks. This neighborhood is a great place for investors to look because it’s connected to all major subway lines, and amenity-rich buildings garner top rents that give higher returns than what’s typical in NYC.
When you’re investing, look at what is happening down the block and in the neighborhood. It’s all about what the future holds, what’s coming to the neighborhood that would entice renters, why people would want to pay a premium.
SHORT TERM RENTALS
Although condos can’t prohibit leasing, the bylaws will require minimum and maximum lease terms and might also have rules against vacation rentals. So if you’re a condo owner and considering renting out your apartment short term, you may want to think again. Renting an entire apartment for fewer than 30 days is illegal in NYC, unless the owner is present during the stay. This means you can’t Airbnb your apartment for short periods of time if you live elsewhere, despite the availability of many such apartments on Airbnb and similar short-term rental sites.
Purchasing an investment property is a big decision—but if you do your research and know what you're getting into, it can be a great way to make some extra money while also diversifying your portfolio. Just make sure that you understand all the restrictions and responsibilities that come along with being a landlord before taking the plunge!
If you’re looking to purchase, we’d love to work with you to find the perfect investment property to add to your portfolio