Although Manhattan—the nation's hub for finance, fashion, and entertainment in New York City—is famous for its high rental costs, the pandemic put a temporary brake on that status. With remote work being the new norm, it would be easy to assume that the decreased demand for residential rentals would resume. However, the opposite is occurring.
This past May saw median rents in Manhattan reach a record high for the third month in a row, according to the New York Post.
And this trend isn’t unique—residential rent continues to climb across the country, whether you live in Auburn Hills, Mich. or Saint Pete Beach, Fla.
The Many Reasons Why
There are several theories on why rent is increasing in New York City’s smallest borough and beyond. Some renters claim landlords are exaggerating demand to charge more rent. Others assert that properties are being taken off the market – a practice known as “warehousing” – so those that remain will go for higher prices.
Economists will give you the common-sense response that higher interest rates convert prospective buyers into renters.
Regardless of the reason, renters constitute the majority of residential dwellers in New York City. Crexi rates New York City as the number one city for multifamily investing in 2023, partly because it is a “city of renters, 67% of households in the Big Apple rent rather than own. Rents have increased 27% year-over-year, offering a predictable income stream that any real estate investor would seek.”
Rounding out Crexi’s top ten are Raleigh/Durham, Nashville, Charlotte, West Palm Beach, Charleston, San Diego, Boston, Denver and Greenville.
Tips for Property Investors
As rents continue to climb and the influx of people to New York City persists, a valuable opportunity presents itself for real estate investors. However, before investing in New York City’s real estate market, it’s essential to conduct thorough research.
When looking to invest in or develop a multifamily rental project in New York City—or anywhere else—the number-one consideration is location. Start by creating a comprehensive financial plan and pinpointing desirable neighborhoods that align with your budget. A lot of new construction in a particular area is a good sign. Look for growth potential. Communities with a burgeoning social infrastructure, such as shops or restaurants will draw new residents.
While a particular area may be desirable, make sure the specific property you have in mind is not an outlier. Stay clear of buildings with structural or environmental issues. A checkered ownership history may be a red flag. And obtaining favorable financing is paramount.
It’s important to remember that patience is key; approach your investment with a long-term perspective, understanding that success won't come overnight.
A significant tax advantage of investing in residential rental real estate is the opportunity to depreciate both the building and its contents. In addition, compared to other investments, real estate allows for the deduction of tax losses and receipt of cash distributions beyond your initial investment, provided they are backed by "qualified nonrecourse financing." However, it's essential to note that upon exit, these benefits will be recaptured into income. While these provisions offer tax deferrals, they are not entirely tax-free.
For more information on investing in residential real estate, please contact one of our specialists.
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