NYC Rent Stabilized Multifamily - Is it worth it?

Question

Hi everyone!

Question for my NYC investors out there -

Is buying a multifamily building that is currently rent stabilized (not rent controlled) worth it as a long term buy&hold?

I'm working a lead right now that would be 10% down, 5 year seller finance with balloon after year 5, $3k per month principal only payments during the 5 years to the seller. - During the 5 year period if absolutely nothing changes with the rents, the monthly cash flow would be around $1800 conservatively.

But is it worth it?

And what happens after the 5 year when the balloon is due?

All opinions needed on this one! :)

Thank you,

Fred S Romero · Answer

Im not a real estate agent but I’m a real estate investor, landlord and developer in New York City. I am very familiar with the neighborhoods, fair market values (rental and sales comps), and how NYC regulations on rental units. First, seller financing is typically offered for two main reasons 1) no bank will underwrite the loan. This can be for various reasons including appraised value, debt service coverage (income to expense ratio), tax liens and violations or illegal improvements just to name a few. The bank determines the loan to be too risky. 2) the owner is highly motived to sell. There can be many reasons for this. The most likely scenario is that the owner themselves have a balloon payment due within 5 years and with interest rates sky high or because of concerns the 6 or more family unit housing market will crash with the recent changes in rent stabilization laws that make it almost impossible to ever deregulate rent stabilized apartments along with rising interest rates. The fact that the seller is offering a low down payment, principal only payments for five years means and assuming interest rates are based on current rates for investment properties and the rates are fixed, we can safely assume you have a highly motived seller and the seller is not confident prospective buyers will be able to secure a loan. Remember motived sellers want out fast so they will provide concessions including assisting with closing costs. They don’t typically want to hold a note. This means the property has issues too. The market is usually spot on. If you see 6 family houses in desirable neighborhoods for sale at a fraction of the price of a one or two family house and they aren’t moving it’s for very good reason. Higher interest rates, overleveraged current owners, stronger rent stabilization laws and fewer landlords with the financial means to let apartments go empty for years to renovate/combine units to deregulate the units makes buying an investment property with rent stabilized units a bad short and long term investment decision. I would not personally invest in a rent stabilized rental property and I can afford to lose the money keeping apartments vacant for years to get to 80% vacancy to begin renovations and I won’t do it. There is a negative return on investment if you calculate the annual expenses, inflation rate and opportunity costs. I am only calculating the money costs. I’m not even accounting for the headaches. Sounds like the owner is trying to dump his/her problem on the next guy. Real estate market is spot on. Multi-family units or 6 or more units are listed for a fraction of 1-3 family homes for all the reasons associated with rent stabilization. Just walk away.

Alexander Szikla · Answer

Need more details on the rent roll and expenses.

Mohammed Rahman · Answer

hey @Grace Lerner - I'm an investor and broker, and have worked on transactions involving stabilized and controlled units. Asking whether or not a deal is worth it is too subjective in my opinion. For example, one person's target might be $500/month cashflow, in that case this deal is awesome for the first 5 years. Another person's target might be $2k/month, etc. etc. Good deals vs. Bad deals are all subjective. What are your goals? If you're looking to put money into an appreciating asset then it could be worth it, however most of the investors I work with try and stay away from rent stabilized buildings. There are ways to deregulate the units, but it takes a long time as well as having a cooperating tenant. For the 5 years you're holding the hot potato it might be worth it - but the balloon payment is structured in a way to incentivize the buyer to secure a commercial note against the property and pay off the current owner. In 5 years if rates are 2% or hovering around there, maybe it's worth it since it'll be pretty easy for you to come by a lender that's willing to lend on a stabilized asset - but what happens if rates don't come down by that point. The reason the seller is happy to provide such a generous owner financed note is because of the exact reasons I mentioned above - stabilized properties are trading for a steep discount in NYC these days. Lenders won't touch them.