Is It Time To Buy New York City Real Estate Properties? 7 Reasons To Buy And 7 Reasons To Stay Away!

James Altucher made a light splash a couple of months ago when he published an opinion piece titled “NYC is dead forever.” James is a trader, investor, writer, and entrepreneur who has lived in NYC since 1994.

I’m sure there are people out there who agree with James’s assessment of the state of New York City, especially given the exodus out of the city because of the coronavirus. Even President Trump, who is a native New Yorker and has traded off of the reputation of the city to his own advantage, recently labeled New York City as a “ghost town”.

Do I believe NYC is dead forever? Heck NO! As a native New Yorker and someone who still lives here with my family, I believe New York City can weather this storm caused by the pandemic. But the city does feel different today than it did before the pandemic gripped this city.

NYC does feel less vibrant to me. It feels darker and gloomier. I also feel less safe despite living in a family friendly neighborhood in Manhattan. More retail spaces are empty and there are generally just less people around.

A lot of the advantages of living in New York City are not available today. Proximity to work is no longer a benefit when I am working from home. The world class museums and performance venues such as Lincoln Center and Broadway are closed. World class restaurants are also closed or are serving a modified menu. 

New York City Real Estate Price Update – Third Quarter 2020

NYC has experienced a decrease in real estate pricing as a result of the pandemic. Both rentals and sales have taken a hit. This comes as no surprise to me given early on New York City was the epicenter of the pandemic in the US. 

When it is a huge disadvantage to be in a population center, especially one with a concentration of infection cases, people fled from New York City. The tourism industry also grinded to a halt. With less demand for housing, real estate pricing fell. 

StreetEasy published their Q3 2020 Market Reports. The report provides a great table showing the year over year change in median rent and sales prices (both recorded sales and asking price) for different neighborhoods in New York City.

A few data points from this report:

• The headline finding is that the Manhattan median rent falls to less than $3,000, the lowest point in 9 years. This goes all the way back to 2011.
• 44.7% of the rental listings on StreetEasy in Manhattan during the 3rd quarter saw discounting by the landlord to attract renters.
• Manhattan as a whole saw the median rent come down 12.10% year over year.
• The other boroughs were not immune as Brooklyn and Queens also saw rent decreases. 
• Sales data for some neighborhoods show a double digit decrease which other neighborhoods saw increases. 

My Own Experience And Observation Regarding The New York Real Estate Market

I own 20 plus rental units in New York City. Based on my own experiences, the rental market is really tough. I had to rent a couple of vacant units during the pandemic. One went for a discount of 12% early during the pandemic when compared to prior year. And another one, more recently, went for a decrease of 23% compared to what it rented for a year ago.

Also, just based on my discussion with real estate brokers and based on what I’ve seen, a 10% decrease in sales price is probably where the Manhattan market and the better Brooklyn real estate market is at compared to pre-COVID-19. This is a broad stroke statement. Real estate is localized, even within New York City.

I purchased a multi-family building during this time as well. The purchase price is 9.4% below what the seller received as an offer a year ago before the building was taken off the market and the transaction fell through. Obviously, I have no way of truly finding out if that was indeed the price received by the seller a year ago, but at least that was what the seller’s agent mentioned.

I have also observed that the higher up on the price spectrum, the greater the discount. 

This all leads to the question – is it a good time to buy New York City real estate properties / rentals or should someone stay away?

Buying real estate is a personal decision, regardless if you plan to use it as a primary residence or as a rental property. 

But I have outlined 7 reasons I see as to why one should stay away from New York City real estate. Additionally, I have outlined 7 reasons why I think it is a good time to buy real estate properties. 

7 Reasons To Stay Away From New York Real Estate Properties

Reason #1: Secular Shift To Work From Home

I believe there is already a secular shift to work from home in white collar jobs even before the strike of COVID-19. The pandemic accelerated the shift to a remote work environment.

Technology has allowed people to work anywhere in the world and still be connected to each other. While I don’t believe online interaction is as effective as in-person, it can serve as an adequate substitute for some jobs.

After seeing how well companies can operate with a remote workforce, I believe CEOs of those companies will allow for continued remote work even after the pandemic is behind us.

This shift away from living where the jobs are is detrimental to New York City as a city with high paying jobs.  

One of the big benefits for me living in Manhattan is to be closer to work. That is a big reason why I can justify paying a higher price for a smaller space. 

If I can work from home most days, then that benefit disappears.

If people are also spending more time at home, they naturally want a home that feels more comfortable. A bigger sized house with a front yard, a backyard, a gym in the basement, and a pool in the back is a lot more preferable than being cooped up in a 900 square foot apartment surrounded by noisy neighbors.

This shift to a work from home environment is bad for New York City real estate.

Reason #2: Real Estate Is Immovable And Is Exposed To Taxes And Fees Dedicated By Politicians

There is a lot of talk about the widening economic divide between the top 10% and the rest of the population. 

With trillions of new dollars unleashed into the US economy from loose monetary policies to fiscal stimuli, risk asset prices have reflected the influx of money. Given the top 10% are holders of such risk assets, they are the ones who benefit greatly from the price increase and have seen their fortunes rise during this pandemic.

This is in stark contrast to the millions who are unemployed during this time. This pandemic widened the economic divide. 

To counter the widening of this divide, New York City real estate owners make for a great target by politicians. Why shouldn’t the people who have pay more to support the people who are struggling? What better way is their than to tax real estate more?

It is not like a property owner can just pick up a lot of land or building and move it somewhere else.

Therefore, New York has been increasing the taxes and fees associated with a real estate transaction and holding real estate. 

Mansion tax used to be only 1% on any property sold for over $1 million. Mid-2019, the mansion tax % changed to a tiered structure with 1% being the lowest rate and can go up to 3.9% on a property sold for over $25 million.  

New York has also enacted increases to transfer tax as well on New York City real estate transactions. 

Being a New York City real estate holder exposes you to the whims of politicians to charge more and more taxes for transacting or holding real estate. 

Reason #3: Regulations and Laws Shift to Protect Renters

As a New York City landlord, my job has gotten harder and harder. This is because of increasing regulations and laws to protect renters.

For example, when renting a residential unit, I can no longer ask for more than 1 month rent in advance and a 1-month security deposit. 

And there is regulation in place for up to a 90-day notification period to my tenants if I want to raise their rent by more than 5%. 

Eviction is a pain to deal with in New York City, even for non-paying tenants or tenants who are troublemakers. 

The rules and regulations are more and more onerous on the property owners and more and more friendly for the renters.

There is also a recent regulation passed that disincentives landlords from renovating or fixing up their properties because the cost cannot be recouped back in higher rent.  

I don’t see this trend reversing out anytime soon. This will make New York City a less desirable place for people to invest their money in real estate.  

Reason #4: Potential Attack On Foreign Investors

As a triple A international city (some rankings put NYC as the #1 city in the world), there are many people who want to own a piece of New York real estate.

“If you can make it here, you can make it anywhere.” Who doesn’t want to prove their mantles by saying they have some association to New York City? What better way is there than to own a piece of real estate here.

There are a lot of foreign buyers, and I include both out of state as well as out of country buyers in this category. Some of those wealthy foreign buyers want to own a second home and use a New York City apartment as a pied-à-terre.

New York politicians have been discussing for years now a new tax on pied-à-terre. If this new tax gets passed, it will surely dampen the interest from foreign buyers into NYC real estate. 

When that happens, there will be less demand for properties.

Reason #5: Even With A Few Years Of Price Decreases, NYC Real Estate Is Still Expensive

Despite the decrease in real estate prices over the past few years, and the price drop exacerbated by the pandemic, New York City is still one of the most expensive places to own a property.

Unsurprisingly, NYC is one of the top 3 most expensive cities to buy a home and is behind a couple of cities in California. 

The median sales price of Manhattan condo/coop still hovered above $1 million in the 2nd quarter of 2020 according to Samuel Miller Inc., a real estate appraisal and consultant firm.

That is still over 10 times the median household income in Manhattan. This ratio is a lot higher than the house price to median income for all of the US at under 4 times.

Reason #6: There Is A Budget Shortfall And The City Is Highly Dependent On Income Taxes Of The Top 1%

The city, similar to many cities, is experiencing a sizable budget shortfall for this year and a projected multi-billion dollar deficit over the next 2 years. In order to make up for the budget shortfall, higher income tax rates might be on the horizon. 

New York City already has one of the highest income tax rates in the country. Not only does New York State imposes an income tax that can go up to 8.82% at the highest income bracket, New York City also imposes an income tax. 

The highest tax bracket in NYC is 3.876%. A resident of New York City at the highest income bracket can expect to pay 12.7% in state and local income taxes.

Raising income tax rates will surely drive more people out of New York City, thus lowering the demand for housing.

The budget shortfall might also result in increased taxes and fees on real estate transactions. This will also result in decreased pricing. 

1% of New Yorkers account for 46% of the income tax revenue collected. If people in the 1% start to flee New York, it won’t be pretty.

New York City is also highly dependent on the income tax received from employees in the financial services sector. 

The financial services industry is one that can allow employees to work remotely. The huge dependency on this one industry can further hurt one of the key revenue sources for New York City.

This can result in more budget shortfalls in the future resulting in more tax increases. More people will flee NYC and thus higher taxes will need to be imposed on a smaller base.

This can lead to a nasty death spiral.

Reason #7: People Might Be Shifting To Other Options

When weighing to buy New York City real estate or not, I believe people also look at other options. If those options become more attractive, people will just buy elsewhere.  

Those options are looking better in today’s environment.

Suburbs Offer More Land, More Space, And Better Schooling

Certain suburban neighborhoods around NYC have gone up in value during this time with stories of bidding wars 10% above asking price when a desirable house hits the market.  

Who wouldn’t want to have more land, more space, and better schooling for their kids for a fraction of the cost when compared to living in NYC?

If there are more and more people opting for the suburbs, then more and more businesses might follow suit. Some of the amenities found in NYC such as a variety of good restaurants might start popping up in those suburban areas. This in turn can make those suburban areas more desirable.

Lower Rent Makes Buying Less Attractive To Renting 

Rents have come down in NYC, especially in certain neighborhoods. Rents coming down north of 20% can make renting a more affordable option than buying.

You get to enjoy the benefits of living in NYC without having to save for a down payment or worry about fixing a leaky roof that a property owner has to navigate.

Moving Down South 

More and more people are moving to another state, especially to states down south. 

Places such as Florida and Texas can offer better weather, a lower cost of living, significantly lower cost to purchase a house, and no state income tax to boot.

Even President Trump gave up being a New York resident and has opted to be a Floridan instead. 

7 Reasons To Buy New York Real Estate Properties

Reason #1: Secular Shift To Gig Economy/Service Sector

With advancements in technology, more and more jobs will be automated.

This shift will continue and the change to jobs and people’s lives will be disruptive. There is a shift to being self-reliant and having to fend for oneself more and more.

The rise of the gig economy is one result of this trend. I believe there are just more opportunities for gig workers in a high-density population center, like NYC, then in the suburbs. Take a gig job such as a dog walker. It is probably easier to be a profitable dog walker in NYC than in the suburbs.

Also, technology has a difficult time in replacing certain service jobs. Take plumbers for instance. It is unlikely technology will put a plumber out of a job anytime soon. 

Therefore, population centers will be the place for human service jobs in the future.

Reason #2: Younger Generation Craves Being Part Of The Crowd

There have been millions who protested racial inequity in the United States. 

According to a survey done by the Pew Research Center taken back in June 2020, adults in the age range of 18 to 29 make up 19% of the US population but 41% of those who attended a protest or rally focused on racial equality in the last month. 

This shows me how much the younger adult population wants to be involved and be a force for positive change. They want to join with others in creating a movement.

What better place to be connected to each other, to inspire each, and to be part of something better than to be in a population center such as New York City?

I believe the younger generation wants to be part of something dynamic and to be part of a crowd moving in the right direction. 

New York City is definitely a dynamic place with a large population for the younger generation to share ideas and connect.  

Reason #3: Low Mortgage Rate Makes The Cost Of Ownership Cheaper

Mortgage rate is at its historic lows. When the price of obtaining a 30-year fixed rate mortgage hovers around 3%, the cost of ownership becomes a lot cheaper.

I like the low cost of financing and mortgage rate as a primary home buyer and even as a real estate investor.

If I buy real estate today in New York City, I will surely try to take advantage of such low rates by putting as much down to avoid PMI and financing as much of the property as possible. 

I think if you are a long term holder of real estate, the low mortgage rate does provide an attractive reason to buy and hold.

Reason #4: Real Estate Prices Are Already Heavily Discounted, Especially At High Price Points

The New York City real estate market has already experienced a decrease over the past few years. Some say the decline in pricing started back in 2015/2016 time frame.

The pandemic exacerbated the decrease in real estate pricing even more. All told, prices have come down 20 to 25% off its high just a few years ago.

This can serve as a great entry point for buyers. We all like to acquire an asset at a discount and 20 to 25% off recent highs achieved less than 5 years ago is a nice discount to have. 

The drop in pricing is even more pronounced on the ultra-luxury high end real estate market. 

I came across an article recently that Jennifer Lawrence, the Oscar winning actress, sold a New York City penthouse for a gigantic loss. She purchased the Upper East Side penthouse for $15.6 million in 2016 and sold it recently in July of this year for $9.9 million. 

That is a 36% discount over when it was purchased 4 years ago. If the real estate market returns back to its high, the recent buyer on the $9.9 million purchase price will see a 60% price increase.

If you like a 20% discount, a 40% discount is significantly nicer. 

Not to mention the influx of capital by the Fed and US Treasury. I believe prices for risk assets will continue to rise. It is just a matter of time before New York City real estate prices reflect the increase in supply of cash.

Reason #5: NYC Will Recover From Pandemic 

New York City and New Yorkers are resilient. 

We will recover from the pandemic and will come back stronger than before.

Look at history for evidence of this. The Spanish Flu a century ago was also highly infectious, deadly, and caused a lot of pain in both people’s health and in the economy.

But New York City got through it and remained a top global city.

New York City also bounced back from the 9/11 attack.

This city has been around for centuries and will continue to be around for a long time.

Reason #6: New York City Will Still Be The Greatest City In The World

Most of the great benefits of living in New York City before the pandemic will come back and remain intact after we have the pandemic behind us.

Think about all the world class museums, parks and zoos here. They are still around and will continue to be around.

What about Broadway shows and Lincoln Center performances? I have no doubt they will come back. Those live events can only happen in population centers. And I believe people still crave attending live performances. 

All the world-famous landmarks such as Central Park, Times Square, and the Statue of Liberty will still be around. Tourism will come back to the city. It isn’t a matter of if, but when.

The restaurants and nightlife will also return. I can’t see a group of people in their 20’s heading over to Scarsdale for some fun on a Friday night.

There is no doubt in my mind companies will ask their people to come back to work in the office when the pandemic is behind us. There might be lower numbers, but still a majority will ask for their employees to come back.

The opening up of the economy will fire up the job opportunities which will in turn add to the attractiveness of being in New York City.

Reason #7: Certain Neighborhoods Are Still Gentrifying

There are neighborhoods in New York City going through gentrification. 

Many of them happen to be in Brooklyn and Queens. 

Gentrification brings a new set of opportunities and return profile to investors and buyers of real properties.

Some of those gentrifying neighborhoods, like the rest of New York City, have taken a hit on pricing.

The effect of gentrification alone can produce an outsize return for the future if you are willing to live with the risk today.

This can present an attractive investment opportunity for real estate investors. Not only can you acquire properties at a lower price, those properties have the potential to be home runs in the long run because of gentrification. 

My Recommend If You Want to Acquire New York Real Estate Properties

Currently, I would advise against anyone from buying a primary residence in New York City unless your hold period is at least 10 years. 

There are a lot of uncertainties with buying in New York City. But what is not uncertain is the transaction costs with buying real estate properties.

A 10% transaction cost is a huge hit to return. In general, real estate returns at the rate of inflation. It might take 4 years just to get back to even given the transaction cost in our current low inflation rate environment.

Therefore, a longer holding period allows for a longer runway for the property to appreciate in value.

If you don’t believe you will live in the property for 10 years or more and you still want direct exposure to New York City real estate, then I would suggest renting your primary home and buying a rental property instead.

By investing in a rental property, you hopefully can get cash flow in addition to real estate market exposure.

Additionally, now you are not tied into a home for a decade. You can rent a New York City apartment for as long as it makes sense for you and then move on to a bigger one or a different location as your own circumstances change.

In my mind, this gives you the greatest flexibility with your living arrangement and offer the opportunity to have exposure to New York City real estate.

To The Audience: Are you a believer in New York City real estate? Are there any additional reasons to buy or stay away? If you have recently purchased a NYC property, what led you to buying?

Related Posts – Real Estate Topics

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The 9 Reasons Why Buying An Owner-Occupied Rental Property Is A Good First Step Into Rental Real Estate Investing

5 Ways To Acquire Real Estate For Less Than Market Value

How To Maximize Rent And Other Considerations For A Vacant Rental Unit

Hidden Expenses To Owning Real Estate

How One Person Built A Real Estate Empire With Little Money To Start

The Risks Of Buying Rental Real Estate Properties In NYC During The Pandemic

Real Estate Should be Cornerstone of Your Investment Portfolio

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SoM @ SportofMoney.com

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