Real estate investing 101: How to get started in today's market
A lot of industries suffered from investment decreases during the Great Recession - but New York City real estate doesn't seem to be one of them.
For those who didn't lose their money during the downturn, real estate remained an attractive and exciting business, while others who wanted to up their income found that kind of investing to be lucrative if they played their cards right.
Patrick Lilly, a senior vice president at Corcoran, said, "When push comes to shove, you always need something to eat, you always need something to wear and you need some place to live." But, "it's kind of hard to invest in food, it's hard to invest in clothing, but it's not hard to invest in real estate."
For those who aren't familiar with the real estate business, investing may seem pretty difficult. But we spoke with Lilly and a few other experts to put together a guide to investing for beginners.
What you need
"A lot of money," not just for the down payment, but also as protection against delinquent tenants, said James Famularo, managing director at New York Commercial Real Estate Services.
When President Barack Obama raised the capital gains tax to 18% last year it made real estate investing even more expensive, Famularo said.
Lilly, who also has an associate broker's license, agreed that investors need to prepare for larger down payments due to property values in the current market.
"Let's say you wanted to spend $100,000. That's hard to do in Manhattan. Property's just not that cheap in Manhattan," he said.
Lilly advised trying to obtain the most you can in a loan from a bank, adding that most lending establishments require investors to put at least 20% of their own money down on a property up front.
Famularo said lenders also want investors to have a source of income so they know mortgages will get paid, and that he's seen them ask for 25% to 30% down payments from those who have good credit, and up to 50% from those who do not.
Where to look
Our experts advised starting with the outer boroughs before investing in Manhattan, especially if you don't have a big bankroll.
However, for those with experience who want to look in Manhattan, Famularo said pay attention to the dead areas that have major businesses lined up to move in.
"You can't go to Fifth Avenue and 59th Street and expect to buy a bargain," he explained.
But, he said a strip around 2nd Avenue and 30th Street that was dead when he first bought into it experienced a boom when national retailers came in.
"I had stores there that I couldn't give away for free," he said. But recently, national names such as Fairway, Staples and T.D. Bank opened in Kips Bay, making the neighborhood more attractive and resulting in dozens more stores coming in.
Alex Karalanian, a senior sales associate at Citi Habitats, said that Harlem is a good place to look right now, noting that prices in the uptown neighborhood are up 25% - the highest in the whole city.
In addition, values will continue to rise there in the next 20 years, he said.
"You have to think in the long term."
What to know
Lilly said smart investors do a lot of homework in advance.
"To figure out what's the best property to buy, you need to look at about 100 properties in order to put two offers in," he said, referring to the advice as an investor "rule of thumb."
But Karalanian said working with a broker makes things easier.
"If I'm a good broker," he said, "I'm going to take you to see the five best apartments in your price point."
A real estate agent will ask you where you want to invest and show you properties in those areas. He or she should give you a list of available mortgage brokers and attorneys.
A broker will also get an idea of your financials, gauge your level of seriousness, and ask key questions beforehand, such as whether you're able to shell out a down payment and, if not, how you plan to get the money together to do so, Karalanian explained.
Real Estate Investment Trusts
If you don't want to invest on your own, there are options to go into the market in a group.
Real estate investment trusts, known as REITS, are a hedge fund in which individuals invest their money and a team of people acquires and manages the properties and the leasing.
"If you walk through a building that's controlled by a good REIT," Famularo said, "rest assured that when you walk through the lobby, it'll be shiny, the doorman will be well-dressed, the bathrooms will be well-cleaned."
He noted that most of the high rise buildings in midtown and downtown Manhattan are controlled by REITs.
Adelaide Polsinelli, Senior Director at Eastern Consolidated, a successful REIT in New York City, said if you're doing your own homework, go online and look through REIT portfolios: their financials, track record, and whether they stick to traditional investing or take more risks.
"The higher the risk, the higher the return," she advised.
Another helpful tip from Polsinelli is to reach out to the customer affairs departments for individual REITs and ask specific questions.
A broker will give "recommendations of which REITs they suggest based on the tolerance of the individual investor for risk," she added.
Investment groups, on the other hand, usually consist of around four people who pool their money together to make investments.
However, sometimes these plans result in lawsuits, Famularo warned, "because some real estate investors have different ideas on how to grow the company."
"Sometimes it's great, sometimes it's a big mess," he said.
Co-ops represent about 85% of New York City's housing stock, according to Citi Habitats.
Investors generally take stock in co-ops or condos when dealing with single units, or renting out or flipping single apartments. They will usually start with one and then acquire a few more depending on their success.
Although co-ops are more abundant, Karalanian said he recommends investors look at condos since they don't require board approval. While condos might be more expensive up front, maintenance and taxes are usually cheaper in the long run.
"You can get in and start renting it out right away," he explained, adding that condos usually have stronger resale values than co-ops.
The goal of real estate investing should be to turn a profit. A good rate of return, Lilly said, is 5 to 10%.
But a fixer-upper might earn you 1% until it appreciates in the next five to 10 years, he said.