1. Value appreciates over time due to inflation and rent increases.
2. Higher returns through leveraging good debt. If a property appreciates by 10% but the property is purchased with 60% debt and 40% equity, the return on investment (ROI) on that 10% is magnified to about 25 percent. Reason is that while the 10% is based on the total price of the property, the equity that the investor actually puts into the property is just a fraction of the total property value. The property’s 25 percent return is better known as the return on equity (ROE).
3. Depreciation. This is a phantom expense. While not a real expense to the investor, it effectively decreases taxable income that is reported to the IRS. For example, a 4% real estate income may still be close to 4% on an after tax basis. However, a 4% dividend on stocks, since it’s fully taxed, may be 3.2% after tax. This is a significant advantage of property investment.
4. Tax deferral of gain-on-sale when proceeds are re-invested under 1031 rules.
5. Diversification. Property returns is not correlated with the stock market.
6. Lower risks. Cashflow from investment property is stable because people try their hardest to meet rent payments and the lease period ensures predictability of the income stream. In contrast, stock market performance is quite influenced by market psychology which is totally out of the control of the average stockholder.

Reach out to Wei Min for an intro chat, tan@castle-avenue.com

Deal Example: Halcyon in Midtown East.  Represented multiple buyers at price points between $1.7 million to $5 million.   Reserved at pre-construction stage.  Rented at premium rents upon completion.  Close to United Nations, Citigroup Center, Blackstone, Blackrock, Chase.

1. Appreciation is driven by (i) rent increases, (ii) market demand, (iii) inflation
2. Rent Increases. In commercial investment property, the property’s price is a multiple of rents collected. This is similar to a stock’s PE ratio whereby a stock’s price is determined by the company’s earnings. Hence, the more an owner can collect in rent, the higher the asset’s valuation. An investor can increase rents by buying buildings with under-market rents, improving the building to justify higher rents and increasing rents as result of inflation.
3. Market Demand. Market demand drives appreciation because of desirability and limited supply. Our Manhattan, New York focus is driven by market demand. Since Manhattan is an elite, international city, the demand for Manhattan property comes from New Yorkers and high net worth people from all over the world. Being an island with very tight real estate regulations, the supply of new condos in Manhattan is limited and this further increases desirability of Manhattan real estate. As demand increases, investors are willing to pay more for the same property. As example, the average price per square foot of a Manhattan apartment (condo/coop average) increased from $328 in 1997 to $1,647 in 2023. On multifamily properties, market demand refers to investors willing to pay more for the same property with the same rental income.
4. Inflation. Real estate price increases consistently exceeds inflation. As price of goods increase, real estate price and rents increase as well. In the market demand example, the average price per square foot appreciated 402% from $328 in 1997 to $1,647 in 2023. While real estate appreciates at this rate, salaries do not. Hence, it is important to have assets whose values exceed inflation. If one relies on salary and money market savings account to grow one’s balance sheet, then it would be a shrinking balance sheet in real (after inflation) terms.

Weimin’s interview with Aidan Booth, online entrepreneur and property investor

1. Cashflow is basically rent minus expenses. As long as rent exceeds expenses, an investor will have a cashflow. For example, if a property collects $100,000 in rent and pays $80,000 in expenses, the investor has a cashflow of $20,000.
2. Depreciation. The beauty is that this $20,000 is likely not taxed. Reason is that the IRS allows depreciation which is a phantom expense for tax reporting purposes. A residential property can be depreciated over 27.5 years or 3.6% per year. Assuming the property value was $1 million at purchase, this means the annual depreciation expense is $36,363. The owner in this example would report a LOSS of $16,363 ($20,000 – $36,363).
3. Cashflow is driven by rental income relative to price of property. For example, a $1 million property that collects $50,000 a year in rent will have a higher cashflow than one that collects $30,000 in rent.

Focusing on Manhattan, New York properties, we are one of New York’s top agents. We have held top corporate roles, owned investment property and owned businesses, factors that serve to provide the client with a well rounded and experienced agent and advisor. We will assist you full cycle from the buying process at the beginning to renting to tenants to the eventual sale.

Our focus is on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale

Wei Min on CNBC and NY1

Read more:  Best New York Property Agents

All investments carry different risks and rewards. Diversification ensures that one’s portfolio is balanced and one is not over-exposed to the risks of one particular type of investment. Since income producing property is not correlated with the broader stock market and the income stream is relatively stable, it provides a good source of diversification to the investor.

REITs do not provide as good a diversification tool because values fluctuate with the broader stock market. Further, REITs typically invest in very large buildings to justify their large overhead expenses. These properties, since they are being competed for by institutional investors, typically have much lower returns. Finally, the investor does not receive depreciation and tax deferral benefits with REITs.

1031 exchanges are used to defer taxes on capital gains by exchanging an old property for a new like-kind property. This is an excellent way of preserving capital and growing a portfolio. Reason is that funds that otherwise would be used to pay taxes can be allocated to productive assets. Castle Avenue would coordinate 1031 exchanges, utilizing qualified intermediaries, for our clients.

Ask Wei Min about state of the Manhattan market, tan@castle-avenue.com

Deal Example: 40 Mercer in Soho.  $3.2 million for one bedroom.  Represented investor client seeking ultra luxury property in Soho.  40 Mercer was designed by Jean Nouvel and is one of Manhattan’s most exclusive buildings, commanding premium prices and rents.  

Owning property is like owning a business but with a better risk profile. Key risks are delinquency, vacancy and unexpected repairs. Unlike a traditional business whose value can decrease to zero, real estate is a tangible asset whose value usually does not decrease significantly.

Benefits and risks of Manhattan real estate

Taxes are reported via a Schedule E (if the asset is owed under an individual’s name) or via a K1 (if owned under an LLC). In either case, the income from the asset is flowed through to the taxable income of the investor. This means the profit or loss is added to the investor’s overall income stream and the total amount is taxed once. This is more advantageous compared to stock dividends or REITs where there is double taxation.

Read more: Foreign Buyer Guide To New York Property

Below is the process for buying a condo in Manhattan, New York. The process is similar for those buying the condo as an investment property or as a residence. Main difference is that for investment property buyers, downpayment required by the lender is usually higher.

Estimated Time to closing after identifying property：

With Financing: 10 to 12 weeks
All Cash: 2 to 3 weeks

1. Obtain pre-approval from lender (1-5 days)
   Lender can be U.S. bank or overseas bank
2. Identify Property (2 days – several months)
   Property viewing can be a pleasurable or tiring experience. Make sure you work with a broker who will filter the properties to maximize productivity of your time.
3. Make offer and negotiate price (1 week)
   Your broker’s negotiation skills are critical. Experienced negotiators will obtain many favorable financial and non-financial terms for the buyer.
4. Execute contract (1-2 weeks)
   The agreed upon terms are provided to both parties’ attorneys who will prepare the contract. The buyer’s attorney will perform due diligence on the property prior to the actual contract execution. Once everything is agreed upon, the contract is executed. At this time, a 10% deposit will be required from the buyer to be held in escrow by the attorney.
5. Apply For Mortgage and Obtain Commitment Letter (6-9 weeks)
   The buyer applies for a mortgage and the lender will perform its due diligence, including appraisals etc. Consequently, the lender will issue a commitment letter.
6. Submit condo package to condo board for approval (1 to 4 weeks).
   This is concurrent with Step 5.
7. Schedule Closing
   At closing, all parties – buyer, seller, bank, attorneys, brokers, will come together at a table. A lot of paperwork is signed and funds will be provided to the seller in exchange for the buyer getting legal title to the property. The deal will be completed at the table and usually no future follow-ups are necessary.

Deal Example: 111 Murray Street in Tribeca.  Buy decision based on location opposite Goldman Sachs and building being the latest super tower in Tribeca where rents are at a premium. 

Weimin’s article, Investing in Tribeca real estate

For investment purposes, a condo is recommended because of higher appreciation potential and flexibility in renting out. Co-ops are buildings whereby the apartment buyer buys shares of the building. As such, co-op owners usually need approval from the building to perform any renovations. More importantly, co-ops usually restrict ability to rent out. For example, many co-ops only allow renting 2 years out of every 5 years. For the investor, this means restriction of income potential.

Almost all condos in Manhattan are freehold property (as opposed to leasehold).  The only exception is Battery Park City and a few buildings here and there.  The concept of freehold vs leasehold is more of a British system.

Investing in a Manhattan penthouse apartment

For condo apartments, the main monthly expenses are taxes, common charges, insurance and depending on whether financing is used, mortgage principal and interest. Primary residence owners may get a tax abatement which dramatically reduces the monthly tax amount. Without abatement, annual taxes are often between 0.5 to 1 percent of the property’s value. Common charges average $1 to $2 per square foot per month and it goes up or down depending on number of units and amenities. Insurance is roughly $500 to $1000 per year and on a monthly basis, a relatively smaller expense item.

The major expenses for a building are property taxes, insurance, repairs and property management fees. Property taxes and insurance are lower relative to a condo when comparing size and value vs the amount paid. While a building does not have common charges, there are repair expenses. For example, the owner would have a large repair bill when repair of the roof, facade, heater, boiler or windows are required.

At purchase:
With financing, closing costs are around 6-8 percent of loan amount depending on whether it’s a resale or new development.  Refer Closing Costs and Stamp Duty.

If all cash, closing costs are about 2 to 5 percent of price.

Every month – condo:
Common charges approx $1 to $2 per square foot per month
Property taxes approx 0.04% to 0.08% of property value per month. About 0.5 to 1 percent of property value per year.

Every month – building:
Property taxes approx 0.08% of property value per month. About 1 percent of property value per year (high estimate)
Property management 3 to 9 percent of gross rent collected.
Repair, maintenance expenses as needed.

Every year:
Accountant fees $1,000 to $2,000 per year.
Legal fees as needed
Income taxes (usually wiped out by depreciation)

At sale: Capital gains tax. Refer below.

New York investment properties that our investor clients buy are divided into condos (residential) and buildings (commercial or residential). Residential condos are popular especially amongst international / overseas buyers because of the simplicity of ownership. Condo ownership requires minimal maintenance as the monthly common charges paid basically covers the required maintenance activities. A tenant or renter who has issues while staying at a condo can easily call the building staff to fix the issue at hand, eg leaky toilet or ineffective heater. Comparatively, if an investor owns a building, the investor needs to address issues like the roof, boiler, heater etc that may need repair. Obviously there are advantages and disadvantages of owning a condo unit vs a building. Here is a rough breakdown:

Condo: Upside – ease of ownership, simple to understand. Downside – lower rate of return

Building: Upside – higher rate of return. Downside – more management intensive, higher cost of entry

Weimin’s analysis, Manhattan property review.

1. Commercial property yield in New York (Manhattan) is driven by price point. The lower price point properties, less than $20 million, generally transact at 3-4 percent yield.
2. The higher price point commercial properties, more than $30 million, would have a higher yield , perhaps 8 percent or more. Reason is that at a higher price point, there are fewer players which decreases demand. Also, buyers at the higher price point are often institutions that put a lot more pressure on sellers from a pricing perspective.
3. The value of commercial property is driven by yield. Similar to a stock’s PE ratio. The more the landlord can obtain in rent, the higher the value because a set multiple, in this case rental yield, would be applied.

1. New York property (Manhattan condo) as an investment would have a gross rental yield of 4 to 5 percent. After paying for common charges and taxes, the net rental yield reduces to about 2 to 3 percent.
2. Manhattan, New York property is not a yield but rather an appreciation game. An investor buys in Manhattan New York for the long term appreciation potential. Demand for Manhattan property is global, coming from all over the world. Manhattan is a brand and the vacancy rate is less than 2 percent, relative to the U.S.’s 10 percent average. Inflation would mean rents and property values will increase.
3. A yield strategy in the US would mean investing in a midsize or small city. For example, Syracuse, New York is a college town with a yield of 10 to 15 percent. From personal experience, the appreciation from a city like Manhattan far outweighs the rental yield cashflow from a midsize or small city.

Every month, an owner pays property taxes, which is part of the city’s way of generating revenue. Property taxes amount to about 0.5 percent to 1 percent of the property’s market value per year. This tax is paid regardless of whether the investment property is profitable.

On an annual basis, the IRS allows an investment property owner to depreciate property. Essentially, this means allowing a phantom expense, which often results in no taxable income. As such, no income taxes would be due.

1. Primary Residence: The IRS allows a seller to sell his primary residence in which he has lived 2 out of the past 5 years and take capital gains tax free of up to $250,000 (for single) and $500,000 (for married filing jointly). The 2 years out of 5 years rule does not have to be continuous as long as it was used as primary residence during that time. One way an investor can capitalize on this is to buy property, rent it out and move back in for the last 2 out of five years prior to sale.
2. Investment Property: Investment property held for more than 1 year will qualify for long term capital gains tax treatment. This means a maximum tax rate of 15% at the federal level. If held less than 1 year, the maximum federal tax rate is about 36%. However, we strongly discourage buying property with the intention of selling in less than 1 year. Buyers should intend to hold at least 3 years.
3. Many investors use the “1031 exchange” to defer payment of taxes. This requires exchanging the old property for a like-kind new property within a set period of time. Effectively, this strategy uses funds that otherwise would be used to pay taxes to leverage and buy more property, magnifying the return potential.
4. We will recommend our preferred CPA and attorney to clients so that they receive the most accurate information.

Manhattan condo capital gains taxes

For U.S. residents, downpayment for an investment property is usually 25 percent or more. For overseas or international buyers, downpayment requirement is usually 40 to 50 percent. In addition, banks will require a liquidity cushion, eg 10 – 18 months of monthly payments in liquid assets. These higher downpayment requirements are result of the credit crisis.

1. For each $100,000 financed at a 6% interest rate, monthly payment is $600 per month at 30 year amortization
2. For each $100,000 financed at a 6% interest rate, monthly payment is $844 per month at 15 year amortization

1. The buyer’s agent, being an expert in the field, will be able to identify the right property and negotiate the best price and terms for the buyer. If the buyer is not represented by an agent, the seller’s agent only has the seller’s best interest in mind. This puts the buyer at a great disadvantage.

A Buyer’s Agent for New York Condominiums

1. Firstly, sellers should use an agent because an agent has the market expertise to price the property correctly. In some cases, sellers think their property is worth more than the market price. By pricing the property correctly, it minimizes carrying costs associated with no bids from potential buyers. Other times, sellers underprice their property because of lack of market information and limited marketing channels. For example, a property seller may price a property based on what locals typically pay without knowing that there is a larger international buyers’ market that would pay a higher price. Reason is that the return expectation of certain international buyers is LOWER than the return expectation of a local landlord. A good agent would know the right price for the seller’s property.
2. Secondly, a good agent has the skills to present the property to bring out the property’s strengths. This may include in-person presentations when showing a property, staging, and for commercial properties, focus on upside potential of financials.
3. Can a seller market a property himself/herself? Yes of course, but the success rate is very low. Effectively, the seller is taking a side job (as a property agent). A “part-time” property agent would definitely not have the connections, presentation skills and market knowledge of a seasoned agent. Further, the seller should factor in the cost of his/her time to learn and to do the job of an agent.

What We Do

We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale

Wei Min’s media interviews by CNBC, CNN, New York Times on the subject of investing in Manhattan property

Notes:

This article was updated Feb 28, 2024

Always consult your tax or legal professional as individual circumstances vary.

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