Return on Investment (ROI) in Real Estate simply refers to the profit and loss made on your real estate investment. The formula is your net profit from the investment divided by the total investment cost multiplied by 100%.
A lot of factors impact your ROI, yet you will not know your actual ROI until it is time to sell. Most people want to understand what kind of return on their investment they can expect in NYC before they purchase.
This article is going to share insights and tips for getting the best ROI possible on your Manhattan real estate purchase whether you are in the market for a Harlem brownstone or looking at Murray Hill condos.
The ten-year report (2013-2022) published by The Corcoran Group report shows an annual growth rate of 3.8% for all apartments market wide in Manhattan. There are great disparities between neighborhoods and that is largely due to new developments impacting the overall pricing in the area or the increased popularity of a neighborhood.
The average ROI on real estate in the United States, according to Forbes, is 10.6% for residential properties. While Manhattan may seem like a laggard in comparison, it doesn’t experience the wild price fluctuations (up or down) that other parts of the country experience. NYC is a slow moving, dependable market, making it attractive to global investors.
Why is the NYC ROI so low?
Many renters look at this low 3.8% ROI number and feel they will be better off renting to keep their money in the financial markets, which show a much greater return. However, any analysis requires that you also factor in the annual amount you spend on rent which has an ROI of zero!
Average rents are high, and it is very easy to spend $60,000 annually for a one bedroom. The best real estate agents in NYC will be able to help you break down the components and figure out how to maximize your gains. They can also tell you which neighborhoods are most likely to post greater gains based on local knowledge of upcoming new developments and city plans to improve the area.
When purchasing real estate, remember that you make money when you buy wisely, and you collect your profit when you sell. Breaking down the components of the formula and managing each one is the secret to maximizing your return. The net profit from Investment includes any rental income generated from the property minus any operating expenses.
If you are simply living in the home and not renting it out your profit will stem from property appreciation. Typical expenses include property management fees, maintenance costs, property taxes, insurance, and utilities.
Your total investment cost includes the total amount spent on acquiring the property, including the purchase price, closing costs, renovation or improvement costs, and any other associated expenses.
Understanding each component as it relates to the property of your choice is how you control your ROI and not simply by purchasing what appears to be the least expensive property on the market. New York City is certainly one of the most expensive real estate markets in the country but that doesn’t mean it is necessarily overvalued. For example, when looking at Upper West Side apartments for sale the median price is $1,225,000. In other parts of the country, you can get far more than a two-bedroom apartment for your money, so if you are choosing to purchase in NYC be sure you are doing all you can to maximize your ROI.
Let’s start with your expenses. No matter which building you decide to own, there will be monthly costs associated with it. Finding a building which is run efficiently and not necessarily the one showing the very lowest monthly charges is the key to a good investment.
If a building shows artificially low monthly costs because they are not building up their reserves you could be hit with a large assessment when it is time for critical capital improvements such as replacing a roof or boiler. This will have a negative impact on your ROI.
Is the building energy efficient? In NYC the city gives a building a rating but be aware that it reflects energy usage and not necessarily efficiency.
The other cost is real estate taxes. While not negotiable they are certainly lower in Northern Manhattan than other parts of the city. Another approach is to choose a building with a tax abatement which can save you thousands of dollars over the time in which you own your property.
If you are strictly an investor and do not plan on living in the property, your rental yield compared to your expenses is crucial to understand as this will have a huge impact on your ultimate ROI. When comparing properties on this basis you will want to use a Capitalization Rate (CAP) formula which is your net income divided by the purchase price. Typical CAP rates for NYC are 2.5-3.5%.
Like ROI, the rates are lower than many other parts of the country because the risk associated with price fluctuations is lower. As a homeowner enjoying the property for yourself it is not necessary to calculate the CAP rate although many buyers like the additional information.
Ultimately your ROI is not guaranteed based on historical returns but understanding what factors ultimately impact your gains is critical to making a good decision when it is your time to purchase NYC real estate.
Reach out if you have any questions about real estate in New York City.