May 31, 2006

The Starter/Investment Property

A: I would define a 'Starter/Investment Property' as a type of investment strategy that would look something like this: BUY ---> REPLENISH ACCOUNTS ---> RENT OUT ---> BUY BIGGER & REPEAT ---> SELL DURING NEXT FRENZY.

The goal of this investment strategy will be to start small, keep your credit perfect, buy bigger, and eventually own a few rental properties that would be constant source of monthly revenue while at the same time having the tennants build your wealth for you. Then wait patiently for a good selling opportunity!

To do this properly means sacrifice and discipline to buy a property that you wouldn't necessarily would want to live permanently in, but is in a location prime for rental income (i.e. near bars/restaurants/parks/subways); as tenants will pay more money to be closer to these city amenities.

FIND THE PROPERTY

This is the tough part. When looking for a starter/investment property you must focus on keeping the monthly payments as close to $1.00/sq. ft. as possible; if its under $1/sq.ft. then be careful the asking price was not raised to compensate). Try to do this without sacrificing the proximity to the above mentioned city amenities!

With a rental property some property features pay more than others. For example, an alcove studio on a prime street in a W. Village walkup might ask the same montly rent as a small 1BR in a luxury hi/rise in the Upper East! So, location NOT luxuriousness of building is what pays off here.

Try your best to pay for location, light/views, and raw space before shelling out your $$$ for renovations, roofdecks, and doormen!

BUY IT

Devise a bid strategy and take into account a possible seller reaction. Play a game in your head to see where the negotiating might go and plan accordingly based on what your target price is. Don't be afraid to low ball; just don't expect a good response if you bid 25% below asking! DO NOT STRETCH YOURSELF ON THIS FIRST PURCHASE! Remember that the goal here is to eventually buy another property and rent this one out!

Get your price and sign that contract (read my post, "My Offer Was Accepted! Now What?")!

RECOVER FINANCIALLY

After flopping down X amount for your downpayment plus X amount for transaction closing costs you may feel a little depleted. Not to worry! You are on the right path to building wealth using the tax advantages of homeownership as a historical guide!

Take the next 1-2 years to recover financially and replenish your liquid assets! Don't start spending your money on vacations and unnecessary goods just yet, as the job is not done. Your goal RIGHT NOW should be to save up enough money to buy your next, bigger property!

If it takes you 5 years to get back to where you were before, than so be it! The apartment you just bought is not meant to be sold right away; rather the ideal situation will be to rent out the unit for monthly revenue until the next selling opportunity!

BUY BIGGER & REPEAT

After a few years have passed and your liquid assets after taxes have built up again, it's probably time to start considering buying a bigger apartment and rent out the initial starter investment property. Be sure to learn the products in your target market so that you can bid accordingly.

SELL DURING THE NEXT FRENZY

The entire goal of this strategy is to build wealth for yourself by adding rental properties to your portfolio; hopefully in addition to a new bigger property that you now own and live in. If you have succeeded in doing this in a 5 year period, than you are in great shape so far.

The last step of the puzzle is to WAIT for the next buyer frenzy to hit NYC where you will look to sell 1 or all of your properties and take profits. Uncel Sam offers you 2 tax advantages when you sell so that you can get out of paying capitol gains taxes on the profits from the sale.

TAX BENEFITS:

1. 1031 Exchange: Allows a tax payer to defer the paying of taxes on a gain when an investment property is SOLD & a new property of like or greater value is PURCHASED. In other words, if you first purchased a property for $400K, and then 1 year later sold it for $500K, you can then defer the payment of taxes on the $100K capitol gain in this transaction, as long as you purchase another property worth $500K or more.

2. Primary Residence Tax Benefits: If you have lived in your property, as your primary residence, for at least 2 out of a period of the last 5 years, you will not have to pay capitol gains taxes on the profit when you sell. This benefit equals up to $250K of tax-free gains for singles, and up to $500K of tax free gains for married couples. Of course, this is dependent on how you filed your last tax return; single or married.

Finally, here are some apartments/buildings you should keep an eye on if this strategy meets your investment needs:

1. 200 E 27th Street (Murray Hill) - This drmn/elev building is in a good location in Kips Bay, close to subways and bars/restaurants, and has a liberal Co-op board policy for renting units out (2 years live in; 2 years rent out). Monthlys are on the low side and the building has a great roofdeck and small gym in basement. It might be a perfect fit for the starter/investment property for those who can't afford a condo.

2. 333 E 46th (Turtle Bay) - This Cond-op gives you the flexibility of condo rules with the low closing costs of a co-op. You are still buying shares in a corporation. Close to the UN, you should be able to get decent rental income from those looking to stay close to where they work!

3. 173 Bleecker St (Greenwich Village) - The broker's website sums it up nicely: High ceilings, exposed brick walls, oak floors, Southern exposures...it has it all!! This adorable 1 bed is the perfect starter and a great investment as the flexible co op board permits subletting, pets, pied' terres' and assisted purchases!This walk up building is located steps from NYU and all transportation.

Posted by urbandigs at May 31, 2006 8:08 AM

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