House hacking in Brooklyn seems impossible

[Jesse S.]

A little background..... I live in Brooklyn with my wife and 2 kids. We love real estate but find ourselves priced out of our local market. We own two out of state SFRs that we bought turnkey and they are performing well, but we're on the fence about investing more OOS or trying to do something locally. As we are quickly outgrowing our 2 BR and we're thinking about the future, the prospect of moving to the Long Island or Jersey burbs is really unappealing; we want to stay here and the only way I can think about doing that is with some sort of multi-family or Commercial/Residential house hack. I'm not even looking for some sort of CoC return; I just want the rents to offset my mortgage and allow me to afford more space than I normally would. Put another way, if I could rent out a multi-family and have my out of pocket costs be less than what I am paying in rent today, I would be interested. While I'm not banking on Brooklyn appreciation, I do think homes here are a good store of value.

So that bring us to prices... while there are obviously area in Brooklyn we could afford do this, I really value my 30 minute commute to work and don't want to move far out, double my commute to work just to afford a place. So my personal decisions aside, lets talk economics. 

I found this great building that had a 3 BR duplex over a commercial/office space. I absolutely loved it, but it was listed at $2.9M with a 5% cap rate. I'm waiting to hear back from the agent about if the cap rate is hypothetical (i.e. what renting the entire building would return) vs actual economics of the current rented office space. Based on an old advertisement I saw on LoopNet and some rental comps, I think the commercial space rents for $3,500-$5,000. You don't have to be good at math to know that the commercial rent doesn't do much to offset your total debt obligation. So for this one, I don't think the economics make sense.

However, how can a 5% cap rate be attractive to anyone? Possibly as an owner occupant where you aren't looking for a "cash return", but in my example above the numbers didn't makes sense. And if they don't make sense as an owner occupant, how could they ever for an investor??  

I haven't touched on the down payment yet, which I obviously don't have. I'm trying not to make the downpayment be a limiter as I know there are ways for creative financing, but I'm struggling to see how to make anything work (even assuming I can figure something out around the initial cash outlay).  

If you live locally and want to chat about this or have ideas, please post here or shoot me a DM. I'd love to talk. 

[Llewelyn A.]

@Jesse S.

I have a portfolio of 10 small multi-family properties here in Brooklyn where the center point is Prospect Park.

More specifically, I own properties in Ditmas Park, Windsor Terrace, Clinton Hill and Bed-Stuy.

Additionally, all 10 properties are between 2 to 4 Units, NONE are Rent Controlled or Rent Stabilized, and all have two or more Partners.

The first property we bought was in 1997 in Ditmas Park.

The last we bought we bought was in 2018 in Bed-Stuy right near the A-Train at Nostrand Ave stop.

Acquisitions are on hold mainly because of very uncertain, unfriendly to Landlord politics.

This past June, a suite of Renter Friendly laws were passed.

Most of the changes strengthened the laws that were already here in NYC for Rent Controlled and stablized apts.

However, other parts of the law affects every single rental, including non-regulated apts in the State of NY. Some of those are:
- Cannot charge more than $20 on a Rental Application
- Cannot use Prior Evictions as a criteria for qualifications of a potential tenant
- Judges can extend an eviction up to 1 year
- Cannot do No Cause Evictions
- etc.

What is worse is that there is a push by the radical Left to make these kinds of laws National.

Until the uncertainity period is over and we start to have a very certain set of laws soon, be it pro-tenant or pro-landlord, then I will NOT continue my acquisitions of new properties for my portfolio.

One outcome in the future could be that ALL Properties (including Small Residential properties like mine) will wind up becoming Rent Regulated as a safe bet.

If that's the case, then the value of every type of properties, including mine, will fall in value as the future rent appreciation is no longer controlled by the free Market.

If the future laws do not regulate small properties like mine, then the Value will appreciate tremendously. We have enough evidence that unregulated buildings and apts skyrocket in price due to the lack of supply of free market apts where you don't need to be on a 10 or 20 year waiting list for that those regulated apts.

I think that in the State of NY, and especially in the City of NYC, if you want to acquire a residential investment, you are doing so where the future regulations are uncertain for at least the next election cycle.

I also won't rule out Commercial RE to be untouched either. There's word that NY wants to regulate even Commercial property's rent.

I have a saying that I like to use: "If you can Predict it, you can profit from it."

When the future is uncertain, you cannot predict things like the future appreciation of both Rents and Value. Therefore, I am uncertain as to how much I can profit, and therefore, I am on hold.

I would say that if you already had Portfolio of buildings like mine which had properties acquired decades ago and had already captured a large amount of Appreciation where the Price may move down a bit, then it's worth keeping for the Gamble that the future politics may not touch 2 to 4 Family Buildings.

So for me personally, I am keeping the portfolio but am not expanding it.

What I will expand, however, is my Property Management business should the future regulate my buildings! There will be a TON of small property owners that will be completely miserable with dealing with the City and State to be in compliance of the Rent Regulation Laws.

There will be a vacuum left to be filled by someone with the knowledge of Managing Properties in a highly regulated City and State.

That's where I come in.

So I'm in a hedge situation.

If the laws become pro-regulated and does not affect 2 to 4 Family buildings, I win because my buildings will appreciation tremendously.

If the laws become pro-regulated and DOES affect 2 to 4 Family buildings, I lose a bit of Value in my Property Portfolio but I win because I expand my Property Management Business tremendously.

If the current laws do not change OR if it becomes more Landlord friendly, then I expand my current Portfolio.

I like to encourage Investors to think of their Investments as more of an Investment VEHICLE.

When you drive your Vehicle, if you stare at the Rare View Mirror (meaning past data) too long, you will crash your Vehicle.

If you stare out the side view (the current data such as today's cash flow) too long, you will crash your Investment Vehicle.

HOWEVER, if you look through the front windshield almost ALL the time, you will be able to see the signs that the BRIDGE IS OUT before you drive into the River. You will be able to avoid obstacles, take detours, etc. If you look out the front windshield mostly and only occasionally look at the side view and rear view mirror, you will be able to steer your Investment Vehicle away from Danger and on to safer roads.

BTW, what you are proposing which is to House Hack a multi-family or Commercial property is exactly what I did when I started out 21 years ago.

For 21 years, the only certainty was that property values would INCREASE in NYC and other Large Metros that didn't have problems like Detroit.

Why was it certain? Because the Capital Gains Exclusion was enacted for Home Owners just before I bought my first House Hack Investment Property.

When you add a National Law that exempts you from paying Capital Gains on profit of up to $500k after owning for 5 years, that is so ridiculously pro-real estate back in 1997 when property values was so much cheaper, that good Real Estate really had only one way to go, UP.

This Law was written 2 decades ago when the average home was probably not even $200k. Only the Rich could have taken advantage of this exclusion by the first year of the law. However, it would be just about one decade before this law would eventually work for the middle class.

Either case, what I'm saying is that I personally follow the politics and the possible outcome of the laws that may affect my Strategy.

If I can't predict the Law, I can't predict what will happen to Real Estate, and therefore, I won't acquire more until it's sorted out.

But in the meantime, I can set up a hedge so I can win in any direction.

Makes sense?