I inherited a property in NYC, but I'm confused about how real estate generates profit

Legal and Tax Aspects
1

I just received a $1 million rental property in Queens, NYC, which is fully paid off and held in a trust. Examining the historical cash flow, I’m left puzzled because it seems like I’m either missing something crucial about real estate or my property’s performance is far from ideal.

Here’s a breakdown:

  • Last year’s rental income: $36,000 (3.6% yield).
  • Annual expenses: $9,000 for taxes and insurance (0.91%), $12,600 for maintenance (1.26%), and $1,000 for management fees (0.1%).
  • If I hire a management company, it would cost about 10% of rental income, or $3,600 (0.36%).

This leaves me with a pre-tax net income of $9,800 annually, translating to a mere 0.98% return, which drops to about 0.64% after estimated 35% income tax, equating to only $530 monthly.

This seems unreasonably low, especially since there’s no mortgage. If there was one, I’d be in a worse position!

While I know property appreciation in NYC is significant, the thought of having a mortgage seems daunting. If I assumed a 5% interest on 80% of the property with a 20% down payment, I’d still face negative cash flow. It seems like investing in real estate just isn’t yielding the diversification I anticipated, as the stock market could provide better returns without the hassles and risks of property management.

Also, from what I’ve read, it appears scaling is crucial for real estate success. Should I keep this property or would my capital serve me better elsewhere? What essential principles of real estate am I possibly overlooking?

2

Your experience isn’t unusual, particularly in high-value markets like NYC where property appreciation often outpaces rental income. One key principle to remember is leveraging your property. While it might seem counterintuitive to take on a mortgage, the capital freed up could be used to diversify your investments, potentially increasing your overall returns. Additionally, explore ways to increase rental income, like short-term leasing or renovations that allow for higher rent. Remember, real estate success often involves a balance of appreciation and cash flow strategies.

3

Hey there, it sounds frustrating! One idea is consider increasing rent gradually if the market allows. Also look into possible tax deductions you might be missing out on. NYC has special property deductions. Sometimes rerunning the numbers after consulting a tax advisor can show diff results. Good luck!