Good Deal or Bad Deal??

Question

Good afternoon,

So I made an offer on a 2 family which also includes a store front in  Brooklyn, NY and my offer was accepted at 435k. after sellers concession  it brings the cost to $461,100. I will be getting a renovation loan and  estimated about 50k in repairs (total mortgage $511,100).

inspection will be taking place tomorrow and I will be bringing a contractor for an estimate.

The 2 units above the store are vacant and includes 3 bedrooms each. On  the low end I plan to rent each unit for about $1,700 a month each.The  store is occupied and being used as a driving school. Seller "says" the  tenant is paying $1,950 a month and the lease is up March 2015. (total  rent estimate = $5,350)

I will be making a down payment of 3.5% . mortgage payment which also  includes property taxes, home insurance, PMI will come up to about  $3,600.

I estimate $600 for utilities per month (Heat and electric).

Is this a good deal? I am starting to get the jitters since I have been  making offers since March 2013 and this is my first offer that was  accepted.

Dyrol Harding · Answer

Sorry for the late response but here is my take; "Douglas Elliman rep: 70% of Brooklyn home sales going to hedge funds, investors and international buyers" reference http://freewilliamsburg.com/douglas-elliman-rep-70-of-brooklyn-home-sales-going-to-hedge-funds-investors-and-international-buyers/.

NYC is a different market, Brooklyn is a very hot market. There is a hedge fund representing an Australian buyer who owns 71 buildings in Bushwick. These investors are not looking to flip they are holding. There is a lot of money being spent in Brooklyn now and if you can get a "reasonable deal" you can capitalize on this. The market is competitive but there are things you can do the maximize your income:

1) Since you are doing construction, consider separating the utilities and have the tenants pay their own heat (or other utilities if possible). Way the cost of the additional work to assess the ROI.

2) Look into shares for the 3 br apartments. Preferably rent to a group of friends who can share the space and rent rooms. A per room rental may increase the total rent for the apartment. Keep in mind that the apartment reno should facilitate this (storage, common spaces etc.). I have had friends (professionals: architects, artists) who lived in bushwick sharing an apartment for years. This also can reduce your vacancy rate by allowing individuals to leave independently while some rooms stay occupied.

3) Maximize your commercial space i.e. make sure your commercial tenant can bring value to the neighborhood in the future. This is purely a judgement call since the area is going in a certain direction. You don't want a ghetto fast food, they don't add value to your property but give the prospective tenant the impression that you have low standards as a landlord.

Obviously YOUR bottom line is the most important. I don't believe the subway is a major factor. You can try to change the windows on the street facade which is a very expensive endevour (approx. $800 - $2500 per unit). Another option could be to call a company like WindowFix to give you an estimate to re-gasket/weather seal all the windows (approx. $200/unit). There are hundred of residential buildings along the above ground tracks in Brooklyn. The great thing about this market is that there is no shortage of tenants.

SO, good luck. I live in Bedstuy and there have been a few dead bodies and drug raids on my block but the neighborhood is seeing much better days and even much better tenants. Hope this helps.

Brie Schmidt · Answer

@Kwesi S. - you know your market.  I am in an urban area where a MF costs between 300k - 800k in a decent area and ours all CF quite well.

In regards to Bill's comment about vacancy, repairs, and property management being 21% of rent... that varies.  I see that you live in Brooklyn, so if you are close to the properties you can self manage them and drop the PM costs.  Also if you are rehabbing the properties before tenants move in the repair percentage will be very low (at least it is with us we spend about 2-3% annually though keep a healthy reserve) and since everything will be new it will be easy to manage with very little maintenance requests.   About vacancy - while we plan for it, we have never had a vacancy being in the city.  The competition is so high here that we rent ours out in about a day usually with multiple applications and slightly higher market rents.  But again, we keep a reserve of 10% annual on hand at all times in case.

Chris Winterhalter · Answer

@Kwesi S.

You are in a completely different market than most people understand.  If you are in a good location, with potential for growth (which let's be honest it's Brooklyn), and you can push rents you could put yourself in a great position in 10 years.  If long term wealth and investing in long term rentals locally is your strategy then I would stick with it.  Especially if you can lock in long term low cost debt.  Investing out of state or out of area isn't for everyone.  I would really be curious of the failure rate of investing out of state or out of area especially fully leveraged.

Also if you are in a good location leasing will be very easy giving you a better durability of income than a low income rental.

Any NYC investors want to chime in?

Pete Nater · Answer

Hi @Kwesi S. , did you check what the market rent is in your area? Depending on where in Brooklyn, you might be able to get higher rent, especially if you fix up the place nicely. Sounds like @Troy Sheets  might be right, FHA loan? Generally, you could move after 1 year, get a tenant and repeat the process. Good luck. I'm in NYC too. Let me know if you need help finding the next one.

Kwesi S. · Answer

@Raymond B.

Thank you

Raymond B. · Answer

@Kwesi S.,

To make the @ work do this:

Hold down the shift key and the @?

Look below this box, and you will see a list of names.

Click on the person's name, and they will be notified via an email, that you made a reply to them.

Raymond

Kwesi S. · Answer

@Ryan it is in the Flatbush area. @Troy I will be living there for at least a year. The neighborhood is changing so I don't mind residing there for now until I am ready to purchase a one family home for my growing family.

Troy Sheets · Answer

3.5% down and PMI sounds like an owner-occupied FHA loan, which requires you to live in it. Just sayin'.

Ryan Ong · Answer

Kwesi,

Just out of curiously which area of Brooklyn is your property located at? It sounds really cheap that a 2 family with a commercial unit can go for under 500K in Brooklyn.

Wayne Brooks · Answer

Kwesi, to understand your numbers...you say price of $435, but with seller concessions $461.  What you mean is purchase price of $461, and the seller paying $26 k of your closing costs.

Problems:     Verify these with your mtg broker who has pre approved you

property may not appraise for the increased price.

Seller can Not pay for your tax/insurance pre paids

You will be out off pocket more than 3.5%

The numbers are too tight, or actually negative.

Good Deal or Bad Deal??

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