I was running numbers for an international investor interested in $1M properties in Manhattan the other day and I thought the findings were pretty remarkable. ROI (return on investment) is the index that shows how much of the original payment the investor will be able to get back year after year. In my analysis of five sample properties Downtown the ROI was about 16% with financing.
Considering that 5% ROI is typically regarded as a good investment, 16% seems to be too good to be true, but the numbers don’t lie.
Let’s consider that an investor buys a $1M 750sf one-bedroom apartment Downtown with 20% down at 4.5% interest rate. Let’s say that monthly real estate taxes and common charges are $600 and $700 respectively, for a total monthly cost of $1,300. An apartment like this could be rented for about $4,000 per month, so the net profit would be $2,700 per month, or $32,400 per year for a ROI of 16%. And this does not include appreciation.
Now, according to today’s data, the average PPSF (price per square foot) in 2013 went up by 31% compared to last year. To be conservative, let’s say that in 2014 the PPSF will go up by 20% and the apartment will be worth $1,200,000. It follows, then, that the investor will get the $200,000 appreciation plus $32,400 in net profit from renting, minus $36,000 paid in interest on the mortgage ($3,000 per month) for a total of $196,400. The closing costs of this transaction (about 5% of the purchase price) would be neglectible, as they would be amortized over the life over the investment and offset by tax deductibility, the benefits of which are not discussed here. So, with the appreciation and mortgage in mind, $196,400 would get the investor 98% of the original investment back just after the first year.
A skeptic may say that a 20% yearly increase in PPSF is not guaranteed to continue forever, which may be true, but it will continue for long enough to get the investor his money back and then some. With the World Trade Center and Fulton Transit Center opening soon, I expect the property values Downtown to keep increasing sharply for at least the next 7 years, making it an excellent investment.