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investments

What to Expect When Buying a Property for Investment Purposes

investing in real estate

Recent stock market volatility have you concerned about your portfolio? Real estate is one of the largest sectors of investment, both public and private. In times of volatility and uncertainty, we are reminded about the safety of a real estate holding. While it could never be guaranteed that something will definitely appreciate in price, the long-term trend suggests that real estate does appreciate in value over the long-run while not being subjective to wild price swings that you might see in an equity.

Many financial planners would argue that real estate should be a holding in any well-balanced portfolio. Additionally, real estate has the potential to create substantial yield while you hold the asset thanks to the ability of renting the property. Thinking about investing in real estate and planning to rent it out? We assist many clients with buying, whether resale or preconstruction, as an investment vehicle to rent out. It is always recommended that you speak to your financial planner and tax advisor to understand the role of real estate in your portfolio and tax situation.

We can help you hone in on an apartment that meets your needs for an investment, and additionally, can help you successfully rent it as we understand what prospective tenants are looking for and what they value.

So, you made your investment purchase and want to rent your apartment, what are prospective tenants looking for? What can you do to extract more value out of your investment?

What Prospective Tenants are Looking For:

Value- The state of the rental market will dictate just how much value a prospective tenant may seek, but value is always something a renter will be looking for. Hire a broker to help position your apartment on the market to remain competitive with other listings in the building and within a similar price range.

  • How much are the application fees? Should you consider paying them as a concession to remain competitive?
  • Will you pay the broker’s fee?
  • What are the building amenities? Is access to them an additional fee?

Aesthetics- While this is something more personal, we do see, however, that the majority of renters are looking for a unit that offers light and some views as well as an overall clean condition. If you bought preconstruction, your unit should be in brand new condition for the first tenant. On the other hand, if you bought a resale unit, be sure to make sure the unit has a clean appearance to attract as many prospective tenants as possible.  They will be paying attention to things such as:

  • Condition of bathrooms, kitchen, and flooring – are edges of doors, counters, etc. clean? Do the appliances function properly? Is the flooring cracked?
  • Does the apartment need a fresh coat of paint?

While some of these may seem like small items, they ultimately influence a prospective renter’s decision to pick one apartment over another, especially if they are deciding between units within the same building.

Ways to Extract Additional Value out of Your Investment:

There are additional ways to squeeze a bit more rent out of your unit and also have an increased likelihood to win over a prospective tenant as they are shopping around. While some of them are an expense upfront, they are some of the most common requests we see from prospective renters. Thus, you will most likely recoup the cost of these investments into your property.

  • Consider building out the closets to maximize storage with systems such as California Closets
  • Install Electric Shades/Window Treatments
  • Ensure the washer/dryer are good machines. It may be worth it to upgrade the machines from the base units that came with the apartment

Hiring a broker will be crucial to maximize the rent received. They are able to position your apartment on the market to appeal to the right audience and spend the time to understand the intricacies of the board package and fees.

  • Price correctly! Rely on your broker’s expertise to price correctly so you can rent sooner rather than later.
  • Get the condo leasing application to review the fees. That way, your broker can speak to prospective tenants about all fees associated with the unit. Additionally, this is important to understand in case you need to offer concessions to remain competitive
  • Good photos matter!
  • Get a floorplan of the unit to place online with the listing

We currently have a wonderful selection of apartments on the market for rent:

50 Riverside Boulevard, 11L

50 Riverside Boulevard, 11L

4 Bed | 4.5 Bath | $24,995/MO - View Listing

One West End Avenue, 28C

One West End Avenue 28C

3 Bed | 3.5 Bath | $14,995/MO - View Listing

188 East 64th Street, 2603

188 East 64th Street 2603

1 Bed | 1 Bath | $3,995/MO - View Listing

Additionally, we have successfully executed leases for our clients around the city including:

  • One Beacon Court - 32C, 39D, and 34B
  • 255 East 74th Street, 5B
  • 20 Pine Street, 1007
  • One57

Questions about investment in property with the goal of renting the unit for income? Contact us to arrange an appointment to discuss your goals and we can tailor a collection of units to meet your needs.

What is BRRR? Everything you Need to Know

BRRR Real Estate Investing

We recently wrote about the most common questions we get surrounding real estate transactions. Along those lines, many clients ask us about investing in real estate as way to create a portfolio that generates passive income. There is one strategy that is particularly popular among real estate investors known as “Buy, Rent, Refinance, Repeat”, or BRRR. Owning a home is one of the biggest escalators to wealth and the BRRR strategy is a way to invest in real estate and increase the scope of an overall investment portfolio.

Why has this become such a popular strategy?

This strategy has become very popular, especially in the low rate environment we have seen. Lower rates translate to a lower monthly mortgage payment. Given that rents remain the same or increase year over year, a lower monthly mortgage payment means the owner if profiting more the tenant’s rent than with a mortgage with higher monthly payments.

The BRRR strategy is based on leverage, and thus not suitable for all. It is important to access your risk profile and determine your ability to take on additional debt in the form of mortgages is sustainable and wise. Because a mortgage is viewed as “good debt”, there can be tax benefits in having on. It is important to speak with a qualified tax adviser as to what you may be able to deduct in mortgage interest and how your property will be viewed by the IRS – investment or vacation properties can fall into different categories. We discuss that in more detail here.

What is this strategy based upon?

The premise of this strategy is to purchase a property (ideally at a discount to fair value to capture more equity), finance it, and find a tenant to secure cashflow on this property. Once a tenant is in place and the property is producing positive cashflow, the owner refinances the property which essentially takes the payment back out. Refinancing allows the owner to then roll these funds to facilitate the purchase of another property. The cycle continues from here.

By getting a mortgage at historically low rates, rental profits increase as your tenants' rent covers the cost of a (lower) mortgage payment, and you, as the owner, keep the difference. Income + price appreciation overtime can lead to nice profits.

What Implications Should I Be Aware Of?

It is important to understand that what works for one buyer or investor may not be ideal for you and your personal situation. It is easy to fall in the typical investment trap of “my neighbor told me that X is a good area to buy in so I bought there as well.” Arm yourself with a qualified team from a tax adviser to a real estate broker to you can ensure you are getting the best advice and insights in each area of the process.

Additionally, when it comes to financing and the products available, there are many options. Getting a mortgage product that is suitable for you is an important aspect of this strategy. Most investors hone in on a 15 or 30-year option, but explore all the products your lender of choice offers. Tradeoffs exist with both options such as speed of building equity, interest paid on life of loan, and interest rates. Your broker and knowledgeable Mortgage Broker will be able to help decide what option may be best for you and you real estate investment goals.

It is also important to recognize that there may be times where the rental market, and thus your ability to rent the property, may be challenging. Ensure that you can continue to hold the property in the face of it sitting empty until you can find a new tenant.

Interested in hearing professional stories on this strategy? Victoria was included in an insightful article published by The Real Deal where many top brokers talk about their successful real estate investment. Read the full article here: Brokers Place Their Bet .

5 Common Questions About Investing in a Home

5 Things to Know When Investing in a Home

Buying a home is one of the largest decisions and financial transactions in many people’s lives. Because of the scale of this transaction, stress and anxiety level can go through the roof with the question – Is this the right decision for me? Is this the home I should be investing in?

Whether a first-time home buyer, or a seasoned real estate investor adding to your portfolio, questions arise during every transaction. In our experience working with buyers, sellers, renters, and investors across all experience ranges, here is a list of the most common questions we get asked when it comes to investing in a home. 

Was housing crisis during the financial crisis just a black swan event to be put behind us, or did it show that homes are not the safe and profitable holdings?

Not all those that purchased homes during the crisis of ‘08 were negatively impacted, however, the ripple effect did bring down the overall market. Those that were hit hardest were buyers that stepped up to buy properties they could not afford, largely amplified by mortgage lenders who had much more relaxed lending guidelines and approved individuals for mortgages they could not truly afford. The latter was largely responsible for the subprime mortgage crisis during this time period.

The crisis revealed the dangers of over leveraging. While a mortgage can be a great thing, taking on too much debt can lead to many issues, especially in a home purchase. A large majority of those severely wiped out by the housing crisis mortgaged the purchase of the home with minimal equity down, thus they had no skin in the game so to speak and we were willing to just walk away from their payments as a result. This is why so many homes went into foreclosure.

Any market, financial or otherwise, is subject to a crisis, however, the housing crisis has resulted in more restrictions imposed on lenders, and is certainly more prevalent in the back of buyers’ minds as they asses what they can afford.

Now that home values have recovered, what's the smartest home owning strategy going forward? Is it safe to assume a home will steadily appreciate?

Plain and simple – buy what you can afford! Consult with a mortgage advisor to receive a pre-approval letter if you are financing your home purchase. The pre-approval letter will reveal in what price range you should be shopping.

Time horizon is certainly a contributing factor to price appreciation. Because of the additional costs of a real estate transaction, a timeline of at least 5 years is usually a standard outlook to outweigh the costs of buying versus renting. This, of course, varies from market to market, and even neighborhood to neighborhood. If you envision yourself staying put for quite a while, we tend to see real estate prices appreciate over a long time horizon.

Is it safe to assume the home will be a substantial asset for funding retirement through a downsizing or reverse mortgage?

Owning a home is credited as one of the largest contributions or “escalator” to wealth. With that being said, substantial price appreciation can be observed on homes owned for multiple decades. Upon retirement, some individuals do not need the large family home they used to raise their families, and downsize. Downsizing generally results in additional gains pocketed from the price appreciation of the original home versus the price paid for the new, smaller home. Again, this is very market dependent as a smaller home in a different market may not equate to a smaller price tag all the time.

As to whether the additional “income” from a home sale can fund retirement, that is something the client should consult their certified financial advisor in regards to as everyone’s financial situation and needs in retirement vary.

As a young investor, what do I have to do to ensure I will be able to successfully purchase a home?

For many young couples looking to purchase their first home, the largest obstacle in achieving that is coming up with the down payment. There has been a definite shift towards this being a large struggle over the last decade as more and more young couples are burdened with large amounts of student debt given the increased costs of education. They are then forced to rent, which can be costly, and have minimal bandwidth to save for a down payment with all their various financial obligations.

A minimum 5-year timeline is reasonable in most markets in order to cover the costs of the transaction on both the buy side and the sell side if moving down the road versus price appreciation over that timeframe. Of course, the longer one stays in the home, the more the transaction costs are spread out over time which is coupled with additional time opportunity for price appreciation.

It does not necessarily always make sense to reach for the most expensive home. If buying the most expensive home they can afford means tapping out their budget and being on the line with meeting monthly expenses, this is probably not the wisest decision. Instead, buyers should look to purchase something in their price range that they love yet still allows them to live their daily lives while meeting financial obligations.

What kinds of misconceptions and fears are you seeing in the market among all your clients?

Working with buyers in the current NYC market, we would identify a lack of urgency as the biggest commonality across different price points. Buyers have an advantage over sellers in the current market as well as a large selection of inventory including both resale and new construction. This can lead buyers to stretch out a search as they feel what they are looking for will “still” be there.

In regards to young people taking on debt – as referenced in some responses above, we think the young buyer’s mentality towards debt has definitely changed living through the financial crisis as well as coupled with the increasing amount of student debt. As a result, some can be apprehensive to take on additional debt with a mortgage. However, talking through some of the advantages of mortgages, such as tax benefits, as well as reviewing the myriad of products available with a mortgage broker can alleviate some of these upfront concerns. We are seeing younger people having to rent longer than their predecessors given the inability to save for a down payment rather than aversion to taking on debt in the form of a mortgage.

 

What to Consider Before Buying a Vacation Property

Buy a Vacation Home

Victoria was originally quoted in The Wall Street Journal about What to Consider Before Buying a Vacation Home.

You've decided to make the plunge and purchase a vacation home. Buying a second home is a great way to accumulate additional wealth, and as an investment, generate cashflow in the interim. There is a laundry list of things to consider before buying your vacation. Speak to your real estate broker and qualified tax adviser before making your investment decision. 

We've created a list of some of the most important things to consider and ask before you buy your vacation home. Purchasing a vacation home as an investment vs. for strictly personal use is certainly a different process. We focus on a purchase as the former. 

Is it better if you live close to the property to do chores, show it, etc.?

Proximity to a property is always helpful, as it allows the you to easily access it, check up on it, and be able to respond more quickly to any issues that arise If you are not close the property, consider hiring a broker to handle the rental, property manager to oversee the property and fix any problems, liaise with local plumbers, gardeners, etc. If you are renting the property for income, you always want to ensure a seamless process for the prospective renters. 

If you want to own a home located a significant from your primary residence, be aware of potential challenges. The main challenge of remote ownership is dealing with the property over the phone, email, etc. and not face to face very often. Any interaction with those overseeing the property will be "digitally."

What investors is this ideal for, and who should not get involved?

Vacation homes can hold sentimental value for a lot of owners/families, thus those that get attached to the property are not ideal to have a vacation rental as the objective is to have it rented out during the peak-season times of the area to generate maximum income. Vacation home investments are most Ideal for someone that can meet the full tax deductibility rules of a vacation home so they can take full advantage of the home from both a price appreciation standpoint as well as from the rental income received while holding the property.

It is also important to have the mindset that owning a vacation home for an investment does not mean its a "vacation" for you- expect all the unexpected that arises when multiple people are rotating throughout the property and treat the property from the "Im on vacation" mindset.

What would be your advice to someone thinking of property hunting this spring and summer?

In the current market in vacation destinations such as The Hamptons, there is more leverage towards the buyer as the seller is dependent on the market one is looking in. We work in The Hamptons because of its proximity to the city and the preferred location for a second home for many NYC residents. If you are considering buying a vacation property in The Hamptons now, it is a buyer's market in the area, especially at high price-points. While there market has picked up a bit on the East End, there remains a large amount of high-end inventory that has been spending a longer time on the market....this works to the buyer's favor.

If you are considering looking for a rental for the summer season, it is always important to be thorough with your search and always start your search earlier than you would expect! When you decide on a property, be sure to double-check items such as who is paying utilities? is it your responsibility as the tenant to pay for expenses such as pool heating, gardner, housekeeping, etc?, Are pets allowed? 

If you are considering a longer-season rental, see if there is negotiability in the price. Owners are often willing to provide a better rate to someone that commits to renting the full season (Memorial Day through Labor Day) vs. someone who wants to rent a single week in July. 

New Construction in Southampton, a popular location for vacation investment homes

New Construction in Southampton, a popular location for vacation investment homes

Are lenders welcoming to people buying second properties?

Every lender has different "rules", but generally if you are purchasing a second home and are in solid financial condition, the lender should not have a problem providing a loan. Given the increased risk to the bank of having a second mortgage, they may make you provide an increased downpayment so you have some "skin in the game."

What are the tax rules? To get the most tax benefit, do you have to limit your own use of the property?

Rental Property taxation can get complex, and we always refer clients that are looking to make a vacation home purchase decision of tax related questions to their qualified tax advisor. However, we see vacation homes generally fall into 3 types for taxation purposes:

Type 1: Rented more than 2 weeks with substantial personal use. The home was rented more than 14 days in the year and personal use exceeds the greater of 14 days or 10% of rental days

  • Type 1 homes are considered personal residences for federal income tax purposes, and thus owners can use the up to $1M worth of mortgage debt deduction (can be used on up to 2 personal residences)
  • Rental income for this type is taxable, however, allowable deductions are often able to offset the rental income

Type 2: Rented more than 14 days and personal use does not exceed the greater of 14 days or 10% of rental days

  • Type 2 is considered a rental property for federal tax purposes, and generally any rental income will be subject to taxation
  • Taxes for a rental property are complex as deductions are limited by the passive loss rule
  • If you are on the threshold of a Type 1 vs Type 2 property, it may benefit you to get in more personal days to move into Type 1

Type 3: Rented less than 15 days with more than 14 days of personal use

  • Considered a personal residence plain and simple
  • Rental income for this type does not have to be reported!
  • As a result, you cannot deduct direct expenses in this case
  • As one can see, taxes vary on the usage of the home, but it is hard to say which scenario may be advantageous for one vs another. It is important to expect that if you are looking to purchase the vacation home strictly has a rental property, you should expect to pay taxes on the rental income