Posted by Wei Min Tan on February 9, 2024
Manhattan‘s skyline reflects ambition, and its real estate echoes the sentiment. But for investors, the game revolves around two strategic plays: pre-construction condo flipping and buy-and-hold condos in Manhattan. Choosing between them requires understanding the intricate nuances of each.
Pre-Construction Flipping: Building Profits, Not Walls
This strategy involves making a 20 percent down payment to secure a unit in a new development. Subsequently, the focus is on observing the development progress as the building takes shape. The plan is to sell the unit after completion or after renting it out for 1-2 years, potentially yielding a profit of 15-20 percent. The allure is undeniable:
- Lower Entry Cost: Unlike traditional flipping, where substantial upfront capital is required for both purchase and renovation, pre-construction flipping doesn’t necessitate the buyer to come up with renovation expenses. And while waiting to sell, the owner can always rent out the property.
- No Holding Costs: While the construction unfolds, the investor is free from the burdens of mortgage payments and maintenance fees. These holding costs can eat into profits on traditional flips, but here, one reaps the benefit of time without incurring additional financial pressure.
- Built-in Appreciation: New Manhattan developments often see price increases once they’re finished. This built-in appreciation is essentially a result of time passing while the owner waits, typically 1–2 years after putting down the 20 percent down payment. It acts as a natural boost to returns, requiring minimal effort on the investor’s part.
- High Buyer Demand: New units in desirable locations often find buyers without difficulty. This ensures a reliable exit strategy, as eager purchasers from all over the world are drawn to the latest additions to the urban landscape of Manhattan. This could potentially enable capitalization on the hype, facilitating a quick sale.
Read Wei Min’s article: Investing in pre-construction new development
Client’s condo at The Sutton in Midtown East, booked at pre-construction staged, waited for completion and then rented out immediately.
But like any ambitious play, pre-construction flipping comes with its own set of challenges:
- Long Wait Times: The capital is not producing returns while it’s locked away for the duration of construction. This can span 18 months or even longer. This extended wait period requires patience and the ability to manage the investment timeline accordingly.
- Financing Challenge: It’s essential to secure the remaining 80 percent of the purchase price at completion. While the initial deposit may be lower, it’s crucial to have access to capital when closing to avoid any potential obstacles in executing the exit strategy. This is because the buyer is required to complete the purchase at closing; one cannot simply assign the contract to someone else before closing. Therefore, having the necessary funds to cover the remaining 80 percent plus closing costs is necessary to finalize the purchase.
Read Wei Min’s article: Risks with buying new launch condo property project in Manhattan
Buy-and-Hold: Steady Income, Steady Nerves
This play takes a longer-term perspective. Purchasing an existing property, renting it out to tenants, and enjoying a predictable monthly income stream that builds wealth over time. While the thrill of quick profits might be less pronounced, the stability and security offered are undeniable:
- Passive Income: Rent checks roll in like clockwork, providing financial security and a buffer against economic uncertainties. Unlike the ups and downs of flipping, this consistent income stream allows planning for the future with greater confidence.
- Lower Initial Cost: Compared to pre-construction flipping, existing properties can be less expensive, particularly when significant renovations aren’t necessary.
- Diversification Potential: Owning multiple properties spreads risk across different locations and tenant pools. This diversification not only protects the investment from sudden market fluctuations but also provides options in case of vacancies or unforeseen tenant issues.
Read Wei Min’s article: Buying property in New York to rent out
Client’s luxury condo in Soho with the buy and hold strategy.
However, managing rental properties isn’t a passive endeavor. The responsibilities require dedication and effort:
- Management Responsibilities: Dealing with tenants, responding to their needs, handling repairs, and maintaining the property all require time and attention. While one can hire a property manager to handle these tasks, it comes at an additional cost, impacting the overall profit margins.
- Vacancy Risk: Empty units translate to lost income. In volatile markets, vacancy periods can significantly impact the returns and require having contingency plans in place to weather such periods.
- Renovation Costs: Older properties might necessitate renovations to attract and retain tenants. These unexpected costs can add to the initial investment and potentially disrupt rental income stream, requiring flexibility and adaptability in financial planning.
Choosing Your Play
- Pre-construction Flipping: Ideal for risk-tolerant investors with access to significant capital who seek potentially high returns within a shorter timeframe and are comfortable with long wait times and a competitive market.
- Buy and Hold: Perfect for those who favor long-term income stability, prefer manageable risks, and are comfortable with ongoing management responsibilities.
When considering pre-construction flipping or buying and holding condos in Manhattan, it’s crucial to conduct thorough research, seek expert advice, and understand your risk tolerance and financial resources. Whether one opts to flip for future gains or hold for stability, ensure the decision is informed by having a strong team on your side.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale