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For investors, third-tier single-family and multi-family homes, until recently, were all the rage. However, as competition has surged thanks in part due to institutional investing, cap rates have decreased. These days, the potential downside to investing in these properties is limited appreciation, experts told Inman.
In fact, when thinking of a second home, one shouldn’t think of sun or ski vacation homes exclusively. Urban centers, which have experienced significant price growth, have become an intriguing place to invest.
“Why not be ahead of the curve and invest in a top 20 U.S. urban market?” Martin Eiden, a real estate broker in Compass‘ sports and entertainment division, told Inman. “As mentioned above, all projected growth. Sure, the cap rates may be lower now, but the appreciation will far outweigh any short term gain.”
Eiden said there are two types of clients he recommends buy in urban areas: second/vacation home buyers and straight investors.
A lot of people already live in cities or suburbs that offers all the traditional benefits of a vacation home – like a ski lodge or a condo on the ocean – Eiden said. Empty nesters and millennials alike enjoy the benefits of a city, and if you visit a city three to four times a year, it may be more cost-effective to buy something rather than stay in a hotel.
“However, the best benefit is wealth accumulation with property appreciation,” Eiden said. “Trends for the top 20 U.S. cities project significant growth over the next decade as millennials enjoy urban environments.”
Martin Eidman | Photo credit: Compass
Rebecca Brooksher of Warburg Realty told Inman that investors need to look out for low carrying costs when choosing an investment property. But they should fully understand why those costs are low.
“If the building has an assessment, for example, you want to know when the assessment ends and how the monthlies will increase at that time,” Brooksher said. “If the building has low taxes because they have a deal with the city, it’s good to know the specifics of that deal and make sure it will remain in place for the near future.”
Rebecca Brooksher | Photo credit: Warburg Realty
Gerard Splendore, also with of Warburg Realty echoed Brooksher’s sentiments, noting that, like all investment properties, low operating expenses are the key to a high return on investment. He said that’s becoming more difficult in urban areas, due to, “increasing taxes, fuel costs, salaries, insurance and the ongoing, constantly increasing costs of maintenance and building repairs.”
Gerard Splendore | Photo credit: Warburg Realty
“In New York State, for example, with the new rent regulations — which have confused everyone — it will be increasingly difficult to stay in the black,” Splendore added.
Chris Totaro | Photo credit: Warburg Realty
Chris Totaro, also with Warburg Realty, said the property should be fairly liquid – meaning it should be a condo and not a co-op.
“The building should be well managed, near [public transportation] and be a desirable rental,” Totaro said.
Buyers should also do their due diligence on planned capital improvements that may occur in the building’s near future.
Steven Schwat | Photo credit: Urban Investment Partners
“New developments with a tax abatement are one way to minimize the risk of a big capital project and to reduce ‘initial’ costs,” Totaro said. “Those abatements don’t last forever.”
Steven Schwat, the principal of the Washington D.C.-based firm Urban Investment Partners, told Inman he prefers to look for undervalued properties.
“Depending on the type of investor and the size of the check you are investing, I am fond of finding undervalued properties,” Schwat said. “In every market, there is the top rent and the bottom rent. What’s the difference? Can you buy the latter and improve the rents?”
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