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. Originally Published January 31st, 2007.

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 tenants 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 walk up might ask the same monthly 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, roof decks, 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 down payment 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. Uncle Sam offers you 2 tax advantages when you sell so that you can get out of paying Capital 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 Capital 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 Capital 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. 151 East 20th Street (Gramercy Park) - 5 floor prewar elevator building in Gramercy Park. Pied-a-terres and sublets allowed without board approval, as noted in central systems. Desirable location where good products are very hard to find. Should get good rental income.

2. 110 Thompson Street (SoHo) - 6th floor walkup building between Spring & Prince Streets allows pied-a-terre's and sublets; however exact sublet policy is unknown. This designer studio is in a great location and is in renting condition as is. Although its a hike up, this one probably wont last long.

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