When investing outside your home city – each market across the nation has its positives and negatives, some local issues, and each city is constantly evolving. Today we will look at New York real estate, and try to learn some of the nuances, and understand how to navigate arguably the most competitive and difficult market in the US.
To jump right in – what are the pros and cons to investing in New York Real Estate? Starting with the downside…
Cons: New York gets a bad reputation mainly due to the following.
- Tax Structure: Both on the property and income tax side of things is higher than in many states.
- Politics: The political landscape swings every few years and can affect investments
- Demographic shifts both by neighborhood locally, but also nationally
- Unfriendly to new landlords or developers
- Lack of New Land for Development
- Price to enter the market.
- Generally litigious and the insurance expenses are high (action over coverage, etc).
- Navigating construction unions and general market corruption
While the above are very true, and may seem like something to avoid, one must realize this is generally true for most metropolitan cities in some way – there are always obstacles (otherwise everyone would do it).
Pros: If we shift focus to the positives and stick to fundamentals of real estate investing, we should acknowledge some aspects that make it great.
- NYC has a population of 8,336,000 and growing – not decreasing.
- The city firmly has the highest GDP in the nation.
- Vacancy rates tend to be significantly lower than the national averages (~1.4%)
- The Covid Boom cities that took off in 2020 and 2021 were overbuilt, and numerically are on the decline (for the time being) as markets slowly revert to less remote work.
- Wage Growth and Population of high-income earners in NYC is booming.
- Increasing steadily since 2020
- Typically outpaces the national market
- Post Covid Growth in the outer boroughs growing rapidly with some neighborhoods in Brooklyn surpassing Manhattan valuations.
- New York has top 10 Year over Year Rent Changes at +2.9% while many secondary markets are now declining.
How can one navigate through the NY complexities?
Keep it simple – and try to void high risk situations.
- Invest in “As of Right” Assets. Target assets that comply with all applicable regulations with NYC and a way to avoid politics and bureaucracy – so special approvals are necessary.
- Tax Class Protected Mult-Family Buildings – these are buildings that cap the increase in property taxes to a certain % per year, usually under 6%.
- Low Allocation of Stabilized Housing – Avoid primary assets prone to political fluctuations, rent caps and potential negative sentiments.
- If possible: Avoid government subsidies – The NY market has changed over the last 10-15 years, and the cost of subsidies is high. Not as a general cost, but via the limitations placed on an asset with subsidies.
- Be an Expert in Your Market – Know what expenses should be, who to call when, and how to navigate hurdles and bumps as they arise.
- Access to the RIGHT Deals in a Competitive Market – As one becomes more experienced in a market, sellers become familiar with you (and know you will close a deal) – long term relationships allow access to the desirable off-market deals, or assets that distressed.
- Understand Comps and Market Shifts – Know what is trending and where people want to live. What neighborhoods are on the upswing, and which are trending in the wrong direction? What area is getting new parks, which area has a coveted school, new access to transportation, and / or new job / sector growth.
Again, just because you hear comments to stay away from California, Chicago, or NYC (or any other major metropolitan city), it is first important to see what those barriers of entry are before you decide.
A seasoned investment firm can use this as an opportunity by navigating the market carefully – but investors should also understand how the cities they invest in operate, and any firm should be able to explain to investors how they tackle the obstacles in their market.