Can You Make Money In The New York City Real Estate Market?
Simply put, yes, you purchase value add assets that are well under market rate rent and well below P/S/F basis in growing neighborhoods. The business plan is straight forward with a 10 year outlook for tenant turnover and adding that cash flow to your coffers for the next price dip. There is just no getting around the fact that New York City will always be a liquid area and that the market is what it is in terms of equity pricing. The business however of generating revenue off of stable, well positioned value add multifamily in New York City is always a money maker. With a little bit of a longer horizon and enough equity into the deal the projects will always generate cash flow and increase in equity through principal payments in the debt.
Where people go wrong in these markets is frankly aggressive pricing on both a price per square foot basis on entry and looking for an exuberant exit, for a lack of a better word this is called greed. Its not that the whole market has gotten greedy but a number of individuals have become greedy in this market place and it will create turbulence because it always does. I mean there is a lot of money in selling condos for an excess of $3,000 per square foot and over $5,000,000. Ultimately though these items commanded high pricing because of the rarity of owning something like this. When its the common occurrence it is no longer rare and will ultimately collapse the pricing. So since we all know this will be one of the causes of the next correction (not collapse) lets dive deeper into how to make money in this market right now.
We are looking at making our money through value add assets in New York City and the surrounding area's. Targeting assets in areas with long stability is always preferred, venturing too far out into unknown territory in hot markets can lead to complete pricing collapses and drying up of your tenant base. When targeting these value add assets the business model is to target buildings well below current free market value. Not off by 10% compared with FM but below 25-30% and preferably with longer term current ownership. When you are able to get in with below market rent it provides stability and a constant tenant no matter the economic conditions. You also jack up your down payment slightly to 35-40% to allow yourself some cushion. With pricing you should also be well below price per square foot for the area and not at exuberant pricing due to the idea of "long term development". This model almost never works because to change an ENTIRE tenant base over the course of your lifetime is a miracle in and of itself (unless its commercial with a demo clause). You can play with selling the air in the future but a lot of the time this doesn't make sense selling the air by itself. So stay at a low price per square foot basis as well with below market rate rent.
Now you have your building get that fixed rate loan with a 20-30 year amortization and the rate should be fixed for at least 10 years. This is because it is safer to know your payments especially when they are this low in interest. Then as your asset begins to generate money stock that capital away and wait for the next downturn, you gave yourself equity cushion in your building with that 35-40% down so that even if pricing takes a hit you are still okay and best yet your building wont be hit nearly as hard or at all given the tenant base is conservative and below market. Best case scenario is the next downturn you have equity in your property AND in your account from the asset generating cash.
So keep it smart in this market and pick your battles. You can make money just don't allow yourself to fall into greed. Stay calm look for assets generating constant cash and make money so you can buy the next correction AND be sitting in a btter position then your competitors.