CAP rates: how to analyze your NYC property investment

Could your money be working harder elsewhere or is NYC real estate a good investment for you? Condominiums and townhouses are typically the best way to purchase an investment property in the city as they have fewer restrictions on rentals than most co-ops. Yet determining if that is a smart financial move can be confusing.

Each property has its own unique features and benefits, making it hard to do an apples-to-apples comparison. One of the best ways to compare the yield on a property is by using a Capitalization Rate (CAP rate) formula. It is based on the premise that you make money when you buy real estate and you collect it when you sell.

The formula for a CAP rate is simply the net operating income divided by the purchase price. When calculating your net operating income, you want to take a look at how much rental income you will receive in a year and subtract your annual common charges, real estate tax and your mortgage payments.

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For example:
123 Main Street, Apt A purchase price = $1,250,000

Projected monthly rent = $5,000 ($5,000 x 12 = $60,000)

Monthly common charges = $1,250 ($1,250 x 12 = $15,000)

Monthly taxes = $1,000 ($1,000 x 12 = $12,000)

Net Income = Total Income ($60,000) – expenses ($15,000+ $12,000 = $27,000) = $33,000

CAP rate for 123 Main Street = $33,000/ $1,250,000 = 2.6%

Once you have formulated your CAP rate you need to understand what a good CAP rate is for the market. In Manhattan a CAP rate between 2-3% is common and a 4+% CAP rate is considered great. If you hear of markets where the CAP rate is significantly higher, bear in mind there could also be significant risk in the market. Real estate is hyper local and New York City has a long history of attracting investors looking for low risk.

At the end of 2022, the median price of a Manhattan property had declined by 8%, which may give you pause. While an 8% decline in property values sounds like a big drop, nationally the average price downturn was closer to 35%. When we compare how NYC home prices fared compared to other asset classes, 2022 was a great year for NYC real estate. The stock market was down about 20%, tech stocks were down by as much as 50% and if you invested in crypto you could have lost as much as 80%. Overall, the NYC real estate market continues to be a safe haven for investing.