On episode #318 of The Creating Wealth Show, Jason welcomes Rapid Realty CEO, Anthony Lolli, on to talk about real estate investing in New York City. New York City?! Has Hartman lost his mind? Simmer down out there in Platinum Properties Investor Network land. Jason hasn’t lost his mind and he hasn’t turned to the darkside. This is no recommendation to buy NYC but Mr. Lolli’s comments offer great points to ponder for real estate investors looking for the best investment.
Let’s Get Biblical – Not Really
Before delving into the discussion with Lolli, Jason spent some time reminding us of the importance of one of the commandments. Not THAT list of commandments! We’re talking about Jason’s own Ten Commandments for Successful Investing. The one under the spotlight today is #5, “Thou shalt not gamble.”
Speculation vs. Investing
To understand how successful, low-risk income property investing works, we first need to have a working knowledge of these two terms. Let’s take speculation first. With any investment, speculation is when you buy an asset and hope that it appreciates in value, at which time you sell it for more than you paid. The fly in this ointment is that no one really has any idea how much, if any, a property will gain in value over a given period of time. While the real estate market moves in cycles, figuring out when it begins or ends or how long it will last is like throwing darts blindfolded. Speculation is nothing more than educated guessing.
Why Jason Likes Cash Flow
On the other side of the coin, in opposition to speculation, we have cash flow investing. With this, the real estate market cycle isn’t as much of a factor. Via the miracle of landlording you have a tenant in place that needs a place to live all the time and graces you with a monthly check that, if you screened your purchase properly, should cover all associated expenses (including the mortgage), and leave you with a little left over.
The Crux of the Commandment
At the heart of Jason’s fifth commandment is the reminder that “a property must make sense the day you buy it.” That means that nothing spectacular needs to happen in the market in order for the strategy to work. Once the right property is in place in your portfolio, let the reliability of cash flow take over to make you quietly, reliably financially independent over time.
How do you know if a property is a good candidate for positive cash flow? One method that Jason uses is Property Tracker software. Property Tracker allows a prospective buyer to quickly enter income, expenses, and mortgage information and receive back an estimate of the profitability of the property. You can get help in making accurate estimations by contacting one of Jason’s Investment Counselors. They are all well-versed in getting the most out Property Tracker.
Investing for cash flow is not perfect, but it’s pretty darn reliable.
The following discussion is at least three years removed from the present day. The real estate market has most certainly changed. Don’t make a buying decision based on outdated information!
New York City: Great for Renters!
Anthony Lolli joins Jason from New York City to talk about the real estate market in America’s largest urban area. The discussion of this high-priced market illustrates why Jason never has, and likely never will, recommend that market as a good idea for income property investors. All things considered, it turns out to be a pretty good deal for renters.
The Problem Lies in the Numbers
The trouble with buying rental property in New York City comes down to numbers, specifically the rent-to-value-ratio (RVR). One of Jason’s favorite screening tools for a property is that it should have at least a 1% RVR. For example, if a property is listed for sale at $100,000, you need to be able to get at least $1,000 in monthly rent in order to end up with a positive cash flow. Anything less and you will likely not earn enough to cover the mortgage payment, maintenance, repairs, insurance, vacancies, management fee, and a hundred other small expenses associated with landlording.
Rent-to-Value in New York
Jason went to work picking Anthony’s brain to establish a real life scenario in New York City. Let’s price a three bedroom condo unit in a family friendly area – not the lap of luxury but not a cesspool of squalor either. According to Lolli, a place like this would rent, on the low end, for $2,500 and sell for $700,000. Run that through a calculator and you come up with a RVR of about one-quarter of one percent, a far cry from Jason’s lowest acceptable number of one percent.
We can immediately see why, though still expensive, New York City is a bargain for renters and a kick in the kidney for landlords. The numbers just don’t work when you’re looking to implement a cash flow style of income property investing. Expand this exercise into singles’ friendly environs like Tribeca or Soho and the RVR is even worse.
Did You Know?
Near the end, the talk turned to some interesting real estate terms. Cash for Keys is a common term but how about zombie foreclosures or a nondo? The former is an attention grabber. What the heck is a zombie foreclosure? It’s a term used for a foreclosure where a homeowner abandons the property but a legal foreclosure never takes place. Normally a harshly worded (perhaps “threatening”) letter precedes the departure. The bank literally scares the homeowner into leaving.
The bottom line is that utilities, etc remain turned on and costs accumulate in the vacated homeowner’s name. The benefit to the bank is that they don’t have to take possession of the property and functioning lights give it a lived-in appearance while they try to sell it.
A Final Thought
Though Jason strongly suggests against buying rental property in New York City, if you’re ever in the area and need good, solid real estate advice, you could do worse than Anthony Lolli. Find him at www.AnthonyLolli.com or www.RapidNYC.com . (Image: Flickr | hjjanisch)
More from Jason Hartman:
The Jason Hartman Team