Investing in New York Real Estate

A guide of how to get your slice of the American pie

The idea of accumulating wealth through the acquisition and ownership of property is as American as apple pie. This is especially true for baby boomers, many of whom are paying their kids’ last college tuition bill and are on the cusp of making the last mortgage payment on their primary home. With more disposable income, these boomers are examining their investment portfolios and diversifying into real property, viewing real estate as a solid way to achieve long-term stable returns and enhance the value of their retirement nest eggs. This demographic spike has launched a gold rush of sorts in the purchase of second homes and investment property.

Gobbling up Condos

A huge influx of investors buying residential condominium units are using them full-time or part-time, hoping to make enough money to cover costs and ride the market up,” says real estate attorney Jay Neveloff, a partner in Kramer Levin Naftalis & Frankel and a member of the Practicing Law Institute’s Real Estate Advisory Board. “Condominium units provide a vehicle that these buyers can see, touch and feel to diversify out of the stock market,” he says.

“In New York, and particularly in Manhattan, because the price of entry is so high, it’s hard for individuals to invest in anything other than individual condominiums,” says Martin P. Miner, a partner and group leader of the New York Real Estate Group of Holland & Knight. Miner handles several billion dollars worth of acquisitions and real property dispositions, financing and leasing transactions, and joint venture deal structuring. In this market, he says, groups of friends are raising money to buy a building or two, some purchasing multifamily properties, others settling on small offices or retail units. Conversely, some boomers are investing substantially in office buildings and shopping centers.

The desire to gobble up properties in Manhattan never ends, but now the movement extends to Harlem and the Lower East Side, and to Williamsburg and the South Bronx in the outer boroughs. Why are investors in love with New York?

“People want to be part of a market that historically has gone up and up,” says Neveloff. Of course, the purchase of investment properties in Southern Florida, the Sunbelt, and other resort destinations where boomers spend their vacations also surged. A recent study of the second home market by the National Association of Realtors reports that 23 percent of all homes purchased in 2004 were for investment; another 13 percent were purchased as vacation homes.

“The condo boom peaked in 2005, not just in New York, but in other important markets: Miami, Las Vegas and, to a lesser extent, Washington, D.C., Boston, Chicago and Los Angeles,” says Robert J. Ivanhoe, chair of the National Real Estate Practice of Greenberg Traurig and author of A Real Estate Lawyer’s Role in a White-Hot Real Estate Market. “For the most part, the bloom is now off the rose and investors in condo units, as well as those seeking to buy hotels, rental apartments or office buildings for conversions into condos, have cooled off in terms of their interest,” he says.

“Lenders have pulled back and are financing fewer condo construction and conversion projects, and those they choose to finance are being funded with less leverage, requiring more equity from investors,” says Ivanhoe. “Hopefully this will prevent the condo bubble from bursting and we will ease into a more rational condo market. In the office sector, it appears that the very high prices being paid, and the low returns being obtained, are finally being moderated by a long-awaited increase in office rents, particularly in New York and other selected markets,” he says. “Rising interest rates may cause some stress in over-leveraged purchases as maturity dates approach, perhaps adding an element of distress to the market, and opportunistic investors will be chomping at the bit with tremendous amounts of capital poised to step into the breach.”

Miner says those who want to invest in larger-scale projects should investigate Real Estate Investment Trusts (REITs) as an attractive and popular alternative. REITs pool money so smaller investors can buy larger units or diversify their risk across different types of real estate investments. “If you are really unsure about how or where to invest, REITs afford a lot of opportunity, including liquidity,” says Miner. “Unfortunately, minimizing risk often minimizes return.”

Chewing the Facts

Experts caution that before making any investment, particularly when it comes to real property, consumers should do their homework, which means creating an investment plan and carefully scrutinizing a property before purchase. “The same principles apply whether you are an institution or an individual investor,” says Steven M. Greenspan, managing director and global director of product development of JPMorgan Asset Management Real Estate. He is also a member of the Senior Legal Officers Forum of the National Association of Real Estate Investment Managers, and a member of the American College of Mortgage Lawyers.

Unlike the purchase of one’s own home (which is how most people enter the real estate market), purchasing investment property should be rational, well conceived and business-oriented, says Ivanhoe. He cautions clients to carefully assess the potential risks and rewards of the investments they consider.

“Most people who are successful are smart, thorough, and carefully think through what they want to do,” adds Miner. “Then they stay on top of the details, both large and small. They’re flexible when circumstances change, but it’s never a haphazard approach.”

Place Settings

Whether it’s home ownership or investment property, the same old adage applies: location, location, location. “Buyers need to decide on a geographic area that will sustain growth,” says Miner. “Generally, they will also have a plan of some sort — either through construction, financing or leasing — to enhance the value of the property and maximize their investment.”

Greenspan advises investors to “carefully analyze a property’s location, tenants, leases, physical condition, financing, taxes and competitive set, among other factors, to assure that their investment objectives will be met.” Buyers also need to have confidence in the individual or entity that manages and operates the property. “If you don’t have effective on-site management, it will adversely affect your investment,” says Miner. “That’s one of the reasons it has become tougher for individuals to invest on a standalone basis.”

From the onset, investors need an exit strategy, cautions Miner. They should envision an “investment horizon” that sketches out the length of time they intend to hold onto the property. It might be five years, 10 years or indefinitely. “There’s one person I know who looks for trophy properties: once-in-a-lifetime, unique pieces that don’t come on the market very often and are held long-term,” he says. “But only looking for trophy properties forecloses you from more than 99 percent of the market,” he adds.

“I think real estate is a terrific investment and a great way to diversify but you need to think though all of the costs, including the costs of the sale,” says Neveloff. “You have to consider all of the factors to decide whether the investment is worthwhile.”

It’s not just the little guys that use real estate to diversify financial portfolios. “Institutional investors, such as pension funds, continue to diversify beyond the equity and fixed income markets in search of investments that have the potential to provide comparatively high and stable yields, such as certain types of real estate,” adds Greenspan. “If consumers view pension funds and other institutions as professional investors — who are either more likely to spot trends or who pay people to [spot trends] before others do — they should take notice of this continuing trend toward increasing real estate allocations,” he says.

Digesting the Information

“The real estate market is more complex than ever before, as are the financial structures involved in large transactions,” says Ivanhoe. “Buyers have less time to act, to negotiate a contract or a loan, and to perform due diligence.” The stakes are high, and data and risks must be uncovered, assessed and addressed in a compressed timeframe, he points out. Moreover, burgeoning documentation requirements cut across contracts, financing, tax and land use issues. Given all the landmines, investors should consult an experienced real estate attorney who can help them mitigate risk.

Neveloff points out that a transactional attorney is more than just a lawyer: He or she is also a counselor and advisor who can help an investor execute a vision, and who serves as an informed, objective sounding board to discuss all the complex issues — financial, legal and other — that may arise. “An experienced real estate attorney is able to seamlessly integrate the many important tasks and documents which are required for a real estate transaction,” says Greenspan.

“The buying and developing of real estate is a team effort. Everybody has different roles to play, sometimes overlapping, as key members of the team,” says Miner. “But it’s hard to imagine doing real estate without lawyers involved,” he says. “Thank goodness, you can’t do it without lawyers.”

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