Manhattan Condos as an Income Bet? Might as Well Buy Treasuries

(Bloomberg) -- Manhattan condo buyers who rent out their apartments are getting little more yield than they would with government debt.

Newly purchased condos that were listed for lease in the second quarter brought their owners a median return of 2.5 percent, according to an analysis released Monday by property-listings website StreetEasy. It's been stuck at that level since the end of last year, the lowest in data going back to 2010. The median yield on relatively risk-free 10-year Treasury notes was 2.25 percent in the second quarter.

“This is the lowest point we've seen in history,” Grant Long, a senior economist at StreetEasy, said in an interview. “It's a steady downward trend.”

A construction boom and the perceived strength of New York real estate has been luring investors looking for a safe place to park their cash and generate income. Between January 2010 and June of this year, more than 8,000 condo units were sold and then listed for rent within 180 days of the closing, StreetEasy said.

The investment thesis had promise in 2011, when rental yields peaked at 3.9 percent in the third quarter. But as developers added ever-pricier units to the skyline and the supply of rentals swelled, income prospects for those who buy and lease out condos have been diminishing fast.

Buying a condo “certainly appears to be a less-attractive investment than it was in the wake of the financial crisis,” Long said. “Sales prices have gone up enormously since then, and they've gone up more than rents have.”

In 2011, the median purchase price of condo units that became rentals during the third quarter was $899,000, StreetEasy said. In the second quarter of this year, investors who bought condos to lease out paid almost double that amount -- a median of $1.7 million.

Investors could still reap big gains from price appreciation and the eventual sales of their units, but they're going to come harder for those who purchase on the high end, Long said.

“With a glut of supply at the top of the market, the outlook for price appreciation on a Manhattan luxury condo these days is dim, particularly for investors interested in a quick profit,” he said. “Less-expensive units are a more-attractive bet.”

Added Costs

StreetEasy's analysis looks at a condo's sale price, and the subsequent asking rent the owner sought for it -- minus monthly property taxes and common charges, Long said. It also assumes the 1 percent “mansion” tax levied on properties that sold for $1 million or higher.

The study doesn't account for closing costs, mortgage expenses or any charges associated with hiring a property manager, all of which could further dent the monthly income that an owner pockets from the investment.

Among the properties surveyed was a studio apartment on East 88th Street that was purchased for $690,000 on May 2, and listed for rent later that month. The asking rent -- after a price reduction -- was $2,550. Assuming a tenant took that price, the condo owner stands to collect $1,414 a month after paying common charges of $501 and property taxes of $635. The result: a net annual income of $16,968, or about 2.5 percent of the total purchase price.

“It appears to be a much more crowded market than it was,” Long said.

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Kara Wetzel, Christine Maurus