The Complete Guide to Buying Investment Property in NYC Guide

Buying your first investment property in NYC?  We’ll go over the pros and cons of investing in real estate vs the stock market, the tax benefits of real estate investing, how to calculate returns from rental properties, and challenge some commonly accepted advice such as buying investment property in an LLC. 

Should I Invest in Real Estate or Stocks?

Before buying your first investment property, you need to carefully consider whether it makes sense for you to invest in real estate vs stocks, and more specifically whether it makes sense to buy a rental property in pricey metropolitan centers like New York City. 

You’ll need to understand that, unlike stocks, real estate opportunities are much harder to identify and transact. Unlike stocks where you can deploy capital instantly without moving the market, a piece of NYC real estate can take months to identify, negotiate, and close. Furthermore, there’s no certainty of execution until the deal closes, and neither party is even bound to transact until a purchase contract has been fully executed. 

Real Estate Is Illiquid

Stocks and bonds are relatively liquid and you can usually exit your investment within the same day if you need to. However, real estate is one of the most illiquid asset classes. 

Real estate may sit on the market for months without producing a buyer. As a result, if you do decide to buy real estate, you should be prepared to wait for months before being able to sell your property. 

Other factors to consider:

  • Lifestyle considerations — unless your company is large enough to employ property managers, repairmen, and janitors, you’ll need to live close by to your investment property. Stocks allow you to live anywhere in the world.
  • Work after closing — you’ll need to find and screen tenants, run credit and background checks, make repairs, and follow all local rules and regulations regarding rentals — all while stocks require no work at all.

Tax Benefits of Buying Investment Property

The best thing about buying investment property in NYC is the list of tax benefits for landlords. As an investor, you can write off all expenses associated with your investment property against the rental income of the property. This includes:

  • Property taxes
  • Common charges or maintenance
  • Mortgage interest
  • Depreciation
  • Miscellaneous costs associated with repairing or maintaining your property

The biggest kicker here is depreciation, which is a non-cash expense. According to the IRS, investors can depreciate a residential rental property fully over 27.5 years. That means you can depreciate just over 3.6% of the property’s cost basis every year! This is huge in the context of low cap rates in places like Manhattan and Brooklyn. 

Most gross rental yields on investment properties in Manhattan are under 3%, which means you are almost guaranteed to carry a paper loss on any rental property in the city. 

Furthermore, if you qualify as a “real estate professional” under IRS rules you can offset an unlimited amount of investment property losses against your other active income, which can be proven by Section 469(c)(7)(B): 

  1. More than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and 
  2. The taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates. 

Once you qualify as a real estate professional, you’ll still need to demonstrate material participation in each rental activity, or all of the rental and real estate activities combined. The IRS offers seven tests for material participation:

  1. The taxpayer spends more than 500 hours on the activity in the tax year. 
  2. The taxpayer’s participation in the activity constitutes substantially all of the participation of all individuals, including those who are not owners. 
  3. The taxpayer spends more than 100 hours on the activity in the tax year, and this amount is not less than the participation of any other individual in the activity, including non-owners. 
  4. The taxpayer’s total participation in all significant participation activities combined exceeds 500 hours. 
  5. The taxpayer materially participated in the activity during any five of the past ten tax years. 
  6. The activity is a personal service activity, and the taxpayer participated for any three years preceding the tax year. 
  7. Based on all reasonable facts and circumstances, the taxpayer materially participated on a continuous, consistent and substantial basis in the tax year. 

Even if you don’t qualify as a real estate professional per IRS rules, you can still offset a portion of your investment property losses against your active income. And because rental property losses are considered passive losses, if you don’t qualify as a real estate professional, you can also offset these losses against any passive income such as dividends and capital gains from stocks. 

Calculating Returns on Buying Investment Property

Calculating your returns, yields, or cap rates when buying investment property in NYC is quite simple. You’ll first need to figure out how much you can rent out your investment property for. You can do this in various ways, from inspecting actual signed leases for the unit to looking at rental listings for comparable properties online. 

What’s Your Cost Basis?

The next step is to determine your cost basis. Some folks choose to take a simplistic approach and will ignore their NYC closing costs and simply use the purchase price. 

However, if you choose to incorporate your closing costs into your cost basis, you can estimate them with a Closing Cost Calculator for Buyers in NYC. To be even more conservative, you can include your closing costs for selling as well. You can estimate your seller closing costs with a Closing Cost Estimator for Sellers in NYC

If you’ve decided to renovate your rental unit, you’ll want to add your cost of renovation to your cost basis as well. Oftentimes an investment property may not be in marketable or even habitable condition, and renovations will be a prerequisite for renting it out.

Unexpected Costs with Buying Investment Property

It’s easy to get caught up with static return calculations when buying your first investment property. It’s way too easy to forget that life happens, and that there could be unexpected repairs, fees, taxes, and assessments that come up. 

As a landlord, you face downside risk if anything breaks in the apartment and you or your handyman will need to go in and fix it. You can mitigate this risk by including language in your lease agreement whereby the tenant will take care of all repairs and maintenance under $50, for example installing a new light bulb. 

Some larger costs to keep in mind, however, include:

  • Large appliance repairs and replacements (many of which are not covered by insurance).
  • Building repairs.
  • The cost of vacancy.

Buying Rental Property in an LLC

Should you follow the commonly accepted wisdom of buying property in an LLC as an investor? While the benefits are obvious, such as privacy from having your name indexed in public records to limiting your liability to the specific property, it’s important to consider whether the cost and hassle of maintaining an additional LLC are worthwhile. 


If you’re considering options and now sure which way to go, please get in touch! We have experience helping clients in many ways and can offer you tips!

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