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

I’m a big fan of real estate. There are reasons why the word “real” is the first word in real estate. 

It is something tangible we can all see, feel, and, more importantly, use.

Can you envision a world where we don’t need a property to provide a roof over our heads and a home to call our own?

I can’t. That’s why I’m even a bigger fan of residential real estate properties. 

Humans have been putting down roots and forming their own place to call home for 10,000 years.

I can’t see people all of a sudden think to give up on home living anytime soon.

There is a reason why I own more than 20 rental units. 

The benefits to owning real estate are plentiful. I believe real estate should be the cornerstone of your investment portfolio.

Most of my rental units are located in New York City. 

As a native New Yorker, I believe New York City is the greatest city in the world.

Where else can you find world class museums (Metropolitan Museum of Arts, American Museum of Natural History, The Guggenheim Museum), world class theater (Broadway, Lincoln Center), world class shopping (Madison Avenue), world class restaurants (five 3 starred Michele restaurants), the most famous street in the world (Wall Street), diversity of people and food, and the shining beacon of freedom around the world (Statue of Liberty)?

I continue to look to add to my rental holdings here in New York City.

While there are many benefits to buying rental real estate properties in New York City, there are also numerous risks.

It makes sense for any investor to be fully aware of what they are getting into when purchasing rental properties in NYC, especially in a COVID-19 world.

The Risks With Making A Real Estate Purchase In New York City Today

Coronavirus Related Risks – Hopefully Short Term

New York City has a lot of COVID-19 cases. 

There are over 200,000 cases currently which amount to over 10% of all US cases.

Because of the huge number of COVID-19 cases, there is a moratorium on non-essential business to stop operating. 

This is to limit the number of people from commuting and congregating in order to prevent the spread of the coronavirus.

Certain industries associated with real estate investments have been deemed to be non-essential or modifications have to be made to standard practices in a COVID-19 world.

Limited Ability To Physically Check Out Property

Initially, Governor Cuomo of New York State deemed real estate agents to be a non-essential service.

That means real estate agents couldn’t show houses to their clients.

But Governor Cuomo soon reversed his decision and made real estate agents an essential business.

Even with the new designation, changes to standard practices have to be made. 

Real estate agents can no longer host open houses. 

That makes it harder to go and check out properties. 

While there is still the possibility of having an in-person walk through, a lot more reliance is placed on pictures and videos for the condition of the property. 

Now offers are made on a property prior to seeing the property in person. In a pre-COVID-19 world, the buyer would get a chance to check out the property in person at an open house before making an offer.

This can lead to coming in too high for a property with defects not identified in any of the pictures or videos. 

Additionally, if a unit is occupied, the tenant might have more of a hesitation to show the unit to a prospective buyer.

This can result in the buyer buying an investment property without the ability to check out the condition of one or more units. 

Tenants Might Be Facing Current Difficulty In Paying Rent

Over the past 2 months, about 40 million new Americans filed unemployment claims.

This isn’t a surprise when states across the US decided to put shelter-in-place orders and stop all non-essence businesses from operating.

Those businesses are forced to shutter their doors and lay off employees in order to survive.

With so many Americans out of work and with so little saved heading into the pandemic, they are highly reliant on unemployment checks to put food on the table and to make rent payments.

Not everyone qualifies for unemployment even though the government has expanded who can receive it.

For those unemployed without financial assistance from the government, they might not have money to pay their rent.

Given the financial hardship faced by so many, as a buyer of New York City rental properties, you might inherit tenants who are behind on rent payment and might not have the ability to pay their rent in the foreseeable future.

Heck, there are some who might even use this pandemic as an excuse to not make rent payment even if they have the funds or income to do so. They believe a rent strike is justified.

As a New York City landlord, I’ve experienced delinquencies across my rental units.

The month of April was tough on me with 40% of my tenants delinquent on rent payment. The other 60% made rent payments throughout the month.

It became better in May when 80% of my tenants made their rent payments and only 20% did not. 

June isn’t off to a good start so far. I will need to see how this month turns out. 

But with the small business loan program running out, at least one of my retail tenants told me rent for this month and going forward would be challenging. 

Moratorium On Evictions

With so many people delinquent on rent payments, there is a huge concern by those tenants as well as politicians in New York of mass evictions.

This is especially true for a city like New York where renters make up nearly two thirds of its population.

Who wants to see tons of people booted from their homes with nowhere to go but the streets? 

I don’t think anyone wants to see that.

To address this potential issue of mass evictions leading to a spike in homelessness, New York implemented a moratorium on evictions.

The moratorium on evictions has been extended to August 20th with certain opportunities for landlords to process evictions starting on June 20th.

That means if a tenant cannot make their rent payments all the way through to August, the landlord would not be allowed to start the eviction process.

Keep in mind that eviction is also a process in New York City and routinely can take months.

This makes buying a rental property in New York City all the more risky now. 

There is no recourse a landlord can take currently on non-rent paying tenants.

Who knows, maybe the moratorium on evictions will be extended longer. 

Vacancy Will Rent At a Discount

COVID-19 is definitely not helping with rental demand in New York City.

I know many families who are fleeing NYC to the suburbs, especially families with little kids who are renters in NYC. 

They might have been wavering between staying another year in the city or moving to the suburbs. 

This pandemic basically sealed the deal for a lot of them to say it’s time to get out.

Why live in an apartment building with 15 units per floor in a high density area.

Let’s move to the suburbs where I can get a bigger house, maybe a pool, and tons of privacy.

Unemployment has also lessened the demand for units. 

Even those employed might have the ability to work remotely at this point. 

I know of employed people working in the financial services industry who gave up their current apartment in New York to live in a beach town or migrate to other States right now for the summer months because they are working remote.

This means your vacant unit will sit longer in the market place and will rent for a lower price.

Landlords are holding onto a potential double edged sword. 

If the rental unit is currently occupied, the landlord might run into a delinquency in rent payment with no eviction recourse. Or if the unit is vacant, the landlord would have to settle for a longer vacancy period or a significantly reduced rent.

Challenging To Renovate 

Only certain types of contracting and construction work are considered essential in New York.

Renovating a one unit vacant apartment by updating the kitchen and bathrooms is not considered an essential service.

This means that when buying a building that needs work or an update, that work cannot begin yet. 

When acquiring a rental property, the buyer would have to factor in the time when the apartment will sit vacant until renovation work can begin.

This will affect the rental property’s return profile in the short run.

Additionally, once contracting work starts back up, there might be a strong demand for contracting work and a short supply of contractors.

Some contractors might wait a bit longer to re-enter the job market because of continued fear of COVID-19.

Also, the backlog of contracting work would drive up demand. 

All this should result in renovation projects taking longer and ending up being more expensive.

COVID-19 Has An Adverse Impact To Rental Property Financing Terms 

I’ve seen headline news on how low mortgage interest rates are nowadays.

The Federal Reserve Bank is certainly providing a lot of liquidity to the financial system. 

But interest rates on rental property mortgages might be a different story.

While interest rates on rental properties are still historically low, they bounced up due to the pandemic.

From recent discussions with my mortgage banker, interest rate for a rental property spiked up about 3/8th to one-half of a percent more. I was recently quoted a mortgage rate of low 3’s for a 10/1 interest-only ARM.

The loan-to-value also went down. This is the amount of mortgage the bank is willing to lend compared to the value of the property. 

A 65% loan-to-value (LTV) means the bank will provide a $650,000 mortgage on a $1,000,000 property. The buyer would need to put down 35% or $350,000 in this example.

Once again, from discussion with this mortgage banker, the LTV went down from 65% to 60%.

This means the bank wants the buyer to put more money down. 

Who can blame the banks at this point?

With all the risks I’ve highlighted above facing a buyer of rental properties, the banks also have the same concerns as a lender to those buyers.

The lower mortgage amount and a higher interest rate certainly reduce the return profile of a rental property in New York City.

Benefits Of Being In Urban Cities Such As New York Might Diminish 

There might be a longer lasting impact of this pandemic on the real estate market of New York City.

The benefits of being in an urban city might be greatly diminished when we return back to normalcy.

I know one of the biggest benefits when I was deciding to either live in Manhattan or move out to the suburbs is the proximity to my work office location.

By being close to the office, I can drastically cut down on my commute time and free up 2 hours of my day to spend with my family.

The discretionary time (not spent on sleeping, eating, working, or showering) I have during a workday is around 4 hours. If I have to spend an extra hour or two commuting, that reduces my discretionary time by 25 to 50 percent.

It’s a huge benefit to be in Manhattan close to work for me. 

But what happens if my job switches permanently to a remote work situation now that it is proven can be done?

That once huge benefit of being close to work goes away. 

Then the prospect of the suburbs looks a lot better when compared to living in Manhattan.

Additionally, with people now spending more time ordering food, toiletries, and supplies online, there might be less of a desire to shop in person.

That also makes living in an urban area less attractive since one of the benefits is that we are close to restaurants, convenient stores, and a CVS.

Also, people might decide it is best to have private space than to be in an apartment building with a thousand other people.

Conclusion

This pandemic has definitely made buying rental real estate properties in New York City more risky. 

But nonetheless, I am still looking to pick up a rental property. 

However, I want to make sure the price is reflective of all the new risks I am assuming on the rental property.

I will not pay the same price for a rental property today as what I would pay prior to the pandemic.

There are still a lot of sellers listing their rental properties at pre-COVID pricing.

Hopefully, they will start to adjust pricing to reflect the new reality.

To The Audience: Are there any additional risks you can think of when buying a rental property today? Are you currently looking to buy a rental property? If yes, what discount do you expect to receive now when compared to pre-pandemic?

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SoM @ SportofMoney.com

Many people work hard to better their physical and mental health. What about their financial health?

I started this blog back in 2019 to help people better their financial health as well.

My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.

I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.

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