How to make money in real estate
What do Gowanus, Crown Heights, Dumbo, the Brooklyn Navy Yard and Long Island City have in common? These neighborhoods all have experienced rapid growth and revitalization, making them desirable investment targets. They're also designated opportunity zones—census tracts that are eligible for tax-advantaged investment.
Opportunity zones were introduced as part of the sprawling federal tax reform bill passed in 2017. The idea was to spur long-term, private investment in low-income, economically distressed areas that might otherwise not be attractive. The investments can be in real estate or business ventures headquartered within the zones.
Investors have 180 days to roll over capital gains from the sale of property, stock or other assets into a Qualified Opportunity Fund. Those profits can be deferred and reduced if the investment is held for five or more years. Hold for 10 years and any gains on the opportunity zone investment itself are tax-free.
In New York City, 306 areas have been designated across all five boroughs, including large swaths of the Bronx. The neighborhoods, which based on 2010 Census data have a poverty rate of at least 20% and income levels below the area's median, were identified by state officials and approved by the Treasury Department. Though the program was intended to encourage investors to put money into risky areas, some of New York's zones hardly could be described as distressed. The Brooklyn Navy Yard, for example, has attracted more than $1 billion in investment in the past decade.
Some of New York City's opportunity zones have seen an influx of affluent households since 2000, according to an analysis of all 8,700 zones nationwide by consulting firm Webster Pacific.
"New York City is by far the best area in the U.S. to find opportunity zone investments with a high likelihood of seeing increasing prices in the next five years," said Steve Bazant, a consultant with Webster Pacific and co-author of the study.
With a new round of clarifications released by the Treasury Department in April, the race is on to roll over capital gains into qualifying investments. But hurry: To maximize the potential, you need to invest in an opportunity fund by the end of the year.
— Amy Cortese
BEAT THE TRAINS
Metro-North won't arrive in the East Bronx for at least four years. But it's bringing real estate investment opportunities to the area right now.
Four new Metro-North stations in Hunts Point, Parkchester, Morris Park and Co-op City will take East Bronx residents directly to Penn Station in as little as 20 minutes and provide transit to Westchester County. The project is part of Penn Station Access, a plan to route Metro-North trains to Penn Station once the East Side Access project at Grand Central wraps up by 2023.
Improved railway transit is one of several improvements coming to the area in the next several years —making it a smart place to buy property. East Bronx home prices are still relatively affordable. But expect them to spike during the next five to 10 years, said Richard Lopes, a real estate agent who lives in Co-op City and works in the area. His neighborhood, and others nearby, have a community feel because some families have lived there for generations. He added that more retail is coming to the area ahead of the trains.
"Anyone who's looking to buy in Morris Park, Parkchester—those areas are still very appealing and attractive to a lot of people," Lopes said. "It's a good melting pot right now."
The average sale price for a home in the East Bronx, according to Redfin Corp., is below $500,000, as opposed to $1.2 million in Manhattan and $700,000 in Brooklyn. Trulia rates the East Bronx as one of the safest areas of the borough.
The Bronx has seen a flurry of development recently. A September report from localize.city, a data firm that analyzes New York housing, found that since 2016, some 12,000 new units were approved in the Bronx, roughly the same number as in Manhattan, and about a quarter of the city's total.
The city is investing too. Beyond the new Metro-North stations, the Soundview ferry is set to be extended to Throgs Neck in 2021. The city is also working on two development projects in Hunts Point, where another Metro-North station is on the way. One project will repurpose the former Spofford Juvenile Detention Center into a residential–commercial campus called The Peninsula. Another will strengthen the buffer between the neighborhood's industrial and residential areas. The South Bronx Greenway, a recreational space that begins in Hunts Point, also was recently expanded.
"You're not only getting new units, but you're getting new retail and commercial spots," said Joshua Weissman, founder of JCAL Development Group, which builds Bronx residential properties. "The borough is safe and getting safer."
— Ben Sales
RIDE THE WAKE
Ferry service is expanding across the city and raising home values near the docks. Next year will see a ferry service launch from St. George on Staten Island to Midtown West. In 2021 boats will expand to Coney Island, Sunset Park and Throgs Neck.
Research by Grant Long, StreetEasy's senior economist, found that in 2017 rents near the ferry stops in Astoria, on Atlantic Avenue and in Greenpoint grew 1.5% faster than rents in the broader surrounding area. Long told Crain's that he expects real estate value to rise in areas that are relatively isolated from transit, such as Red Hook.
MAKE IT RETROFIT
Given today's tightening margins, saving money may be just as lucrative as making more of it. Under the city's version of a Green New Deal, landlords who invest in cutting carbon emissions are poised to profit in the long run. Paying extra for more efficient equipment today will avoid fines down the road—and reduce power costs in the short term. That means if a boiler dies, wise property owners should "spend a little more money on a new one that improves efficiency," advised Jeffrey Perlman, president of Bright Power, which specializes in green retrofits.
Another cost-cutting option, especially for the roughly 80% of city buildings that are steam-heated, is to install temperature-controlled radiator covers. The galvanized- steel insulators designed by Radiator Labs, for instance, trap heat until a thermostat activates a fan, which then blows the hot air into the room. Residents can set each radiator at a different temperature, giving them less reason to cool off by opening windows. Buildings typically cut their heating costs by 25%, said Radiator Labs founder Marshall Cox, and its sensors can help figure out where else in the building money is flying out the window.
But for the biggest savings, builders can turn to so-called passive house design, which reduces energy use by 75% compared to conventional construction, while adding from zero to 10% to building costs, according to the experts at 475 High Performance Building Supply. The relatively modest increase comes partly from more builders using the sort of materials, such as triple-pane glass, that go into passive house design and make the buildings virtually airtight. But it's also because it doesn't take a lot to heat or cool a passive house building.
"You size your mechanical systems based on how much heating and cooling your building needs," said Asok Thirunavukarasu, a passive-house designer at Manhattan architectural firm Paul A. Castrucci. He thinks the added cost could be held to 5%: With airtight buildings reducing energy demand, "mechanical systems become much smaller."
— Matthew Flamm
A NEW OPPORTUNITY IN MIXED-INCOME HOUSING
Donald Trump made his name in luxury condos, but his moves as president have changed how developers make money building low-rent apartments.
Low-income tax credits and segregated developments are out. Opportunity zones and mixed-income projects are in.
The context for the change dates back to 1986, a time when the future commander-in-chief and ghostwriter Tony Schwartz were busy composing The Art of the Deal. That year President Ronald Reagan signed a landmark fiscal-reform bill that created low-income-housing tax credits—and a new model for bankrolling the construction of below-market units in inner-city America. The program enabled nonprofits to generate the credits and sell them to wealthy interests, who could use them to defray their tax burden.
With city-seized property now scarce and government programs increasingly favoring mixed-income projects, this approach was already on the wane when Trump moved into the White House 21 years later. But the president accelerated the trend by signing the Tax Cuts and Jobs Act in December 2017, said Andy Cohen, director of development for affordable-housing builder BRP Cos.
By slashing corporate tax rates, the legislation made low-income-housing tax credits less valuable. Although demand for them remains strong, Cohen said, they now produce less capital for affordable-housing builders.
Meanwhile, the same law established an opportunity zone program aimed at encouraging investment—including in affordable housing—in underprivileged neighborhoods. "It's bringing into real estate development, on more difficult-to-develop real estate, investors who would not otherwise be investing in these kinds of areas," Cohen said.
But because these financiers are sinking cash into a development, rather than purchasing credits, they expect a return on their money. That’s where constructing dwellings for a variety of households rather than exclusively for the poor comes in.
"In these mixed-income deals, there's a real cash equity," Cohen said.
Mayor Bill de Blasio's pivot toward market-rate development on New York City Housing Authority land promises even more opportunity for such projects.
There's one caveat, according to the New York State Association for Affordable Housing: Gov. Andrew Cuomo has backed bills in the state Legislature that would obligate any development receiving public subsidy to pay construction workers a prevailing wage. With three weeks remaining in this year’s legislative session, the fate of the bills is uncertain.