Q&A with a New York City Real Estate Investor
We had the chance to work closely with a client this year. As part of our service, we like to answer ALL questions that our clients field. We decided that many of the questions he asked would be valuable for others to see as well as seeing our answers to them.
Enjoy!
Real Estate Taxes:
Are condos and co-ops taxed at different rates?
The tax rates and assessed values are continuously in flux. It’s actually a big issue in the city, since the mayor continues to pursue aggressive affordable housing initiatives, which is ultimately creating a budget shortfall that gets funded by levying a larger tax burden on property owners, regardless of condos/co-ops.
Co-ops will have a monthly fee called maintenance. Within maintenance, you’ll find the tax-deductible component (i.e. the property tax) which is usually somewhere around 50% of the maintenance.
For condos, the taxes are transparent, since the monthlies are comprised of common charges and taxes. Tax rates are based on the location, type of building, age of construction and so forth. For example, if you’re pursuing condos in Brooklyn, many of them have tax abatements that were created to encourage developers to build.
Mansion Tax:
Yes for condos? None for co-ops?
Mansion tax applies to all properties sold over $1,000,000. The mansion tax is 1% of the total purchase price. No distinction is made between condos and co-ops for this tax.
Co-ops do not have mortgage taxes levied on them, but condos do. The mortgage tax for mortgages under $500,000 is 1.825% of the mortgage value, while anything over is 1.925% of the mortgage value.
Cost of Owning a Condo vs Co-op:
What is the overall cost of owning a condo vs co-op after the initial purchase is made?
The costs of upkeep will be dependent on your monthlies. Your monthlies will be made up of the following:
Common charges
Taxes
Financing costs (i.e. mortgage)
Insurance
There is no distinction on these between condos and co-ops.
Getting a Deal:
What is a strategy for getting the best deal?
The best deal isn’t always the best investment. It’s important to find things that make for smart investments (where there is upside potential, rent-roll, etc…) and then understand where the market is trading. Once we’ve honed in on opportunities, we have to act decisively. Yes, sometimes going in and low-balling on things that have been sitting for a while does work, but it should not be the basis for identifying opportunities. We’ve worked with clients who have waited for the market to correct….they’ve been waiting for 2 years and their ability to buy anything has since disappeared.
Financing:
Why do some buildings not qualify for financing?
Here are some reasons that some buildings do not qualify for financing:
Poor financials
Litigation (residents vs. board, board vs. sponsor)
Construction defects
Land-Lease
Higher concentration of rentals vs. owner-occupied
Too many sponsor owned units (that are being rented out)
Don’t appraise for the sales price
Will banks not lend money for a condo or co-op where 1 individual owns more than 10% of the building, or is it just a co-op shareholder thing?
This is no true. Some banks only deal with Fannie Mae approved buildings, while others have other types of programs. Each bank is different. Consider a building that has 8 units- one client of ours owned 2 units in the building. Banks financed, inclusive of smaller community banks and larger ones too like Wells Fargo and CitiBank.
Co-ops are always a bit trickier since they require a bank that will finance in them. Most big banks do. Of course, if a sponsor still owns a large percentage of the building, it could get trickier, but the co-op board will generally know which banks do and don’t finance in their building.
What are the roles of appraisals and inspections in the NYC buying experience?
If I were to buy all cash is it easier for me to “get taken” on a property that would have not have appraised for the selling price had I gotten a mortgage?
Appraisals are essential to get financing. If you buy all cash, you wouldn’t get an appraisal. There is no reason to do so. Appraisals are sometimes good indicators of market value but the correlation isn’t always one to one. We do the job of making sure you’re buying something that is a good investment. We would never recommend paying over what is currently trading on the market. Appraisals essentially do the same thing, although they look at closed transactions as opposed to open listings.
Here is something we wrote about appraisals coming in too low:
https://www.bloomingsky.com/apartment-appraisal-value-is-low
Here is an article we put together about inspections:
http://streeteasy.com/blog/do-you-really-need-a-home-inspection/
If I buy a condo with Blooming Sky as my buyer’s broker, will you find a renter for me? Will you vet the potential renters?
Yes, we are all about relationships and part of that is managing the entire end-to-end experience of you acquiring and maintaining your investment.
We will get a tenant for you, work on vetting them (getting credit scores, recommendations, proof of funds) and then will continue to be a point of contact for anything that comes up throughout their lease.
With a 1031 Exchange, can I defer capital gains when I sell a property by buying another property?
You can only defer the capital gains when you sell an investment property and buy another investment property. However, an investment property can eventually turn into your primary down the line. i.e. Buy it today as an investment and in 2 years move into it as your primary.
What are the pros and cons of buying a place with tenant in place?
We actually wrote something about this here:
http://streeteasy.com/blog/buying-with-tenant-in-apartment-5-things-to-consider/
Should I incorporate to protect some of my assets in the case of a liability issue?
If you’re buying all cash, incorporating is easy, since financing can get trickier with an LLC. We work closely with a real estate lawyer who has helped our clients setup LLCs to facilitate the purchase of their properties. Also, you’ll need to get insurance specific to the property, but that’s not a significant financial burden.
Development:
What about the Brooklyn/Queens waterfront? How is the BQX coming along? Might we see price increases in neighborhoods with the rail in place?
BQX might be 10 years away. I wouldn’t bank on it...just yet. Brooklyn waterfront neighborhoods are getting hotter and hotter, with places like Dumbo and Williamsburg continuing to see price appreciation and good rent rolls. Downtown Brooklyn is also close to all major subways and continues to see upward trajectory.
Long Island City is a bit overvalued. It totally jumped the fence in terms of pricing. It’s all glassy buildings without much grit. Brooklyn has much more of a vibe and also brand recognition. It’s gotten to the point where there is not enough supply in Brooklyn to meet demand. This speaks well for investors.
Check out this read about Brooklyn inventory:
I love the idea of a small place that I could make into cool convertible space –
sliding walls, desks that turn into beds, fold down dining table, etc. I would want the convertible items to be mechanical and not “smart” Any thing computer-operated would only get jammed or “go down” and I would be trapped by my convertible desk and not be found for weeks!
The smart-home revolution is here. Things like Nest sensors and Amazon Echos are becoming more mainstream. However, developers aren’t yet at the point where they’re turning everything into part of the internet of things (IoT) ecosystem. Definitely still a few years away from that going totally mainstream.
There’s always opportunity to play around with space and turn into something that is both trendy and functional without focusing on the technology component of it.
I love the ideas of industrial space turned into residential – a true loft apartment.
Yes, we love lofts as well!
Check out the loft we owned at 50 Bridge and the work we did to it:
https://www.bloomingsky.com/blog-post/2015/2/26/small-touch-ups-big-return