It’s no secret that New York — and especially Manhattan — is one of the most competitive and expensive residential markets in the world. Finding an undervalued property to maximize your real estate investment can be a challenge.
However, there are still some great hidden gems to be found in the city. It’s key to understand the difference between price and value. You want to find a real estate asset with a bigger potential value than the listing price.
So how do you know the actual value of a property? Some people consider the hypothetical cost of rebuilding the property from scratch. This can be complicated by renovations and upgrades, as well as the fact that older homes were built under completely different conditions. However, there are some more nuanced strategies that can help you spot your next purchase.
The Market Approach
This common way of looking at property relies on recent sales data for comparable properties. It requires some experience to know what the numbers and market fluctuations may mean, but it is highly effective at spotting a great short-term return on your investment.
I recently encountered a three-bedroom overlooking the park on Central Park South on the market for $4.5 million. But over the past six months, similar properties sold for between $6 million and $6.5 million. Assuming there isn’t some hidden issue, this anomaly signals that the buyer is in a rush to sell or wants to start a bidding war — a great opportunity for investment.
The Income Capitalization Approach
This method values the income that can be expected from a particular property. You determine the value by estimating the rental income it will generate, then divide this by your capitalization rate, which is determined generally by looking at how much the property is costing you against how much it’s bringing in. Consider factors including the mortgage, taxes, repairs and fees. It is a straightforward and useful tool that will give you a sense of whether that property might be undervalued.
The value per gross rent multiplier (GRM) approach also involves income generation. It is useful for measuring potential property value. You divide the price of the property by its gross income potential. This simple metric identifies properties with a low price relative to their market-based revenue generation. Income and GRM are extremely helpful in comparing properties.
In 2016, I was working with a family office, and we spotted two properties they liked: one at One57 and the other on Park Avenue and 71st Street. Both were in beautiful locations. The potential rent for both was the same at $45,000 to $47,000 per month. However, the price tag on Park was $14.5 million and the price of One57 was around $18 million. Using value per GRM, One57 was overpriced, and it was likely that the rents were going to decline. When this happened later on, my client was incredibly pleased with their choice.
Sometimes the saying is true: location, location, location. Your realtor will have a great sense of what neighborhoods are undervalued. Right now, that area is the Upper East Side, which has apartments with strong value and high rent capabilities, though similar units are selling for more in currently trendier areas. The low vacancy rate of the Upper East makes jumping on a luxury unit here a smart investment.
Ultimately, when looking at a property investment, it pays to consider a range of factors. It also pays to know how to look at the numbers and see where you can carve out an advantage by looking past the marketing and latest trends to see the true value of a property. That’s how you find a hidden gem.