Abbas Hashmi is an international Family Office and Sovereign Wealth Fund focused expert. Managing Director at Crito Capital.
getty
Investing in income-producing rental property can provide you with a solid return, depending on your specific goals and market. It is an especially attractive investment at a time like this — when the stock market is volatile, interest rates are low and housing prices are increasing. If you are looking to invest outside of your native country because of the uncertainty triggered by Covid-19, then rental properties in New York and New Jersey may be an ideal avenue to explore.
In my experience, many investors do not realize that choosing to purchase an out-of-country income property is one of the smartest ways to spread risk, earn higher returns, and invest more efficiently and soundly from a tax perspective.
The Appeal Of New Jersey And New York Rental Properties
There are many reasons international investors will find rental properties in these regions attractive. For one, in terms of location, New Jersey has easily been one of the best choices for investing in lucrative rental properties. This is because the strategic location of New Jersey next to New York City to its northeast and Philadelphia to its southwest makes it an ideal place to purchase a rental property. This is especially true if you are looking for high rental demand.
The relatively low property prices in New Jersey are also what makes the state a location worth considering, particularly for investors with a tight budget. You can find income-generating homes for sale for an average of about $350,000 in many locations and neighborhoods in New Jersey.
Similarly, purchasing investment property in New York to rent out is another investment diversification strategy for international real estate investors. Many tenants in Manhattan, in particular, are very high credit quality. So, the income stream can help you pay the mortgage while your property appreciates over time. In most cases, as an international investor in New York, you should focus on purchasing townhouses, condos or single-family homes.
• Property Appreciation
One of the most unique aspects of rental real estate investing in New York and New Jersey is that you can often use a modest amount of your own money and borrow the rest, often four to 20 times more, usually from a lender such as a bank. This is known as leverage.
Well-located rentals in New York are a limited commodity and have an ever-increasing demand. This results in price appreciation that is usually well above the inflation rate, with growing rents as well as values. There’s also a trend toward lower homeownership rates. This is why rentals in New Jersey continue to benefit considerably from an ever-bigger pool of demand for New York City rentals, and you can make the most of it.
• Monthly Cash Flow
The potential monthly income is another reason to invest in international rental property. Keep in mind that location, vacancy rates and amenities all play key roles in the amount of rent you can charge, and hence, how much income you will be able to generate. In most cases, if you are up for the challenge, the right rental property in New York or New Jersey can start generating positive cash flow for you.
Even in an economic recession, when tenants might receive a rent cut in order to maintain occupancies at higher levels, overall, the income levels tend to remain consistent and relatively resilient over the full cycle.
• Tax Advantages
There is no doubt that investing in rental properties comes with many tax benefits, including depreciation — probably one of the best advantages of all. As an owner of rental property, you may be able to write off:
• Mortgage interest.
• Interest on credit cards used for making purchases for the rental property.
• Insurance expenses.
• Maintenance and repairs.
• Legal and professional fees.
• Travel expenses.
• Property taxes.
• Long-Term Upsides
Investing in rental property internationally can result in a big capital gains advantage down the line. Note that leveraging your current assets can also help — the more you leverage, the lower your capital outlay will be. This may afford you a more substantial rental property. That this will also free up more of your cash that you can use to pay off nondeductible debt.
Rentals also often serve as a valuable hedge against the prevalent risk of increasing inflation. Because leases are usually no longer than one year, frequent rent increases when warranted can help you keep up with the inflation rate.
Downsides To Consider Before You Invest
For any investor and with any investment property, it’s important to understand both sides of an opportunity before you engage. Here are a few downsides associated with investing in rental property in New York or New Jersey.
• Lack Of Liquidity
In the stock market, you can sell shares at a moment’s notice, but property can take longer to sell. This is because real estate isn’t a liquid asset. So even in the hottest markets, it will likely take several months to successfully complete a sale. This lack of liquidity may be a problem for investors who want to be able to access their funds quickly.
• Tenant Risk
There is no guarantee that the tenants of your investment properties will pay their rent in full and on time. Even with the best of tenants in the best of times, the revenue stream isn’t guaranteed.
• Upkeep
You probably know that major and minor repairs arise in maintaining a rental property. Some property owners tend to save money by doing the work on their own. However, many lack the tools, time or skills for property repairs and will have to shell out regular contractor fees.
Final Thoughts
In many situations, looking outside your country can potentially help you locate properties that fit your overall investment strategy. Now is the time to ask if purchasing an income-producing rental property with high cash flow in an appealing area with rental demand is the right way to diversify your investment portfolio.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?