Is Rent to Own the way to go in NYC?

Question

Hi BP,

Would love your feedback on my situation so that I can get started investing in Real Estate:

I want a rent to own or For Sale by owner deal because I want to stop paying rent myself and am constantly behind the NY market when trying to raise a down payment. I was born & bred in Chelsea which I am totally priced out of now and moved to Inwood 3 years ago. I have a good corporate job and make a nice income but I have a wife & kid so I am only able to bank about 15k a year. At that rate to come up with the down payment on, say a moderate 2 bedroom in Inwood/Riverdale - 350k minimum in today's market, I will need another 4 years - at best. I would like to take that money, use it as a preliminary payment and set up a rent to own situation over those next 4-5 years to own my own home. Have you encountered similar situations and do you think my reasoning is sound?  Or am I better off continuing to rent myself and plow the $ into Turnkey properties where I can begin investing next year on 100k properties?

Thanks!

Charles Worth · Answer

@William Hochstedler

@Bruce Faulk

Sorry for late response the tag didn't work but happy I to be thought of and yes I am looking into this but its really tough in NYC for the following reasons (just my opinion)

1) As was already mentioned money is a huge one. Even if you got a line of credit for $1MM that wouldn't even buy you one property in NYC whereas elsewhere you can buy a lot of properties.

2) Competition - There are a ton of people buying for themselves in things that most people would not do in the burbs such as buying a multi or living with other people. This decreases opportunities. Also, a lot of people use their FHA but you can only do this once. There is also a lot more competition on the multi level in NYC than other parts of the country at least in my opinion. Many firms have kids out there scouting properties all the time in NY.

3) Property Values - Its very tough to find what many people like when doing a refi type deal which is enough room to buy it, account for transaction cost on the initial buy and finance than the costs of the refi while still having enough room to make money. Due to the competition and the fact that many people buy hoping the market will rise during their hold period its tough to find properties that meet conservative metrics.

4) Sourcing: NYC I think is a much more relationship focused system than maybe some other places. It is almost all going to be off-market properties or you will definitely pay.

5) Comps - Comps can be very tough in NYC. can you compare a brownstone apartment for rent or buy to an apartment in a converted store front, how about in a nice new build glass tower on a P/sq basis. how do you take into account HOA fees and taxes as the variations are extreme.

6) Tenant laws are definitely tough in NYC and because much of the city is renters, rental protection is a big focus and courts are crowded. Also, rent control and stabilization can be hard to deal with.

William Hochstedler · Answer

Thanks for the insight @Charles Worth

In the nineties, my friend and I would spend weekends bicycling through fringe neighborhoods of Brooklyn and write down addresses of boarded up buildings and call every sign that we saw.  We were finding FSBO's (usually 10-20K sf commercial buildings) in the Atlantic Yards, Ft Greene and Gowanus for well under $50/sf.

As twenty-somethings and no experience in real estate, we didn't know what to do with the information we found and $300K price tags (even for 10,000 sf) were out of our league.

I don't know the Bronx that well, but have to imagine that there are still great opportunities there.

In terms of the regulatory environment, I'd be interested in resources for what the lay of the land is like to convert SFR's into Multi's (legally or otherwise).

Interested to hear developments.

Bruce Faulk · Answer

Excellent summary of the difficulties of New York @Charles Worth!

I am speaking to agents, owners and realtors here and have heard much of what you say above.  So, should I take my little stash and start out of state with a turnkey company or a BRRR in the Bronx? I will message you as well to see if I can buy you lunch sometime soon.

Thanks again for the fantastic knowledge!

Bruce

William Hochstedler · Answer

Also, at price points like $250K, you should be able to do a straight purchase with your $15K (95% LTV).  What's keeping you from pursuing this approach?

William Hochstedler · Answer

@Bruce Faulk

Do a search for Hard Money here.  High LTV's that include rehab $$ are tough without a track record.

There are some excellent blogs and posts on how to build a network of private money, but it takes time to establish.

Also talk to individual banks about their programs.  Mortgage lenders tend to broker mostly conforming loans, but banks have in-house products that can be very interesting.  Out here, for example, we have a regional bank that does construction loans on existing construction with 5% down with a built in 6-12 month refi based on appraisal.  They pre-qualify you for the refi based on the improved value.  If the construction loan amount for purchase and improvements is less than 80% of the projected improved value, you're good to go.  You don't even have to put up the 5%, just show you have it.  Sweet loan.

Good luck.

Bruce Faulk · Answer

Excellent question @William Hochstedler and i bet the answer is: yes others are doing it.  I actually just spoke to an agent who is working with investors to do exactly this in the Bronx; the Bronx is close to me and the $ involved is doable: 180-250k for an apartment or SFH in a B- neighborhood.  Probably better for me to be near my first project rather than turnkey in Memphis or Philly.  The numbers you quote for brownsotne in a developed neighborhood are possibly correct- tell me, where does a person go for that financing of 400k?  Probably a newbie question, but I look forward to your answer.  How did you do it in UT?  Thanks!

William Hochstedler · Answer

Maybe @Charles Worth can chime in here.

I don't understand why the New Yorkers aren't playing the same game the rest of us are.  Folks on BP call it BRRR (Buy, Remodel, Rent, Refi).  We approach all of our holds this way by creating forced equity.  It's just that in NYC, the dollar amounts are higher.

I bet there are opportunities in that area to pick up a battered brownstone for under $1M, put $300-400K into it to make it a 3-4 plex, Have it appraise for $1.8M and pull your (borrowed) cash out on a refi.  Fully rented, this could get $8-10K/month which should cash flow modestly.  Of course, you would have $10K+ month debt service during the holding period until it's stabilized.

Is there no financing for projects like this?  Are the holding costs too high?  Is the bureaucracy too monstrous?  Or are people using this strategy and I'm just not hearing about it?

Conway Churaman · Answer

Watching this thread closely.  I'm hoping locals in NYC area will provide you feedback.

Is Rent to Own the way to go in NYC?

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