Risk too high for a first time buyer? 2-4 Unit in Brooklyn

[Gianni M.]

I've been looking for deals in brooklyn(bushwick, bedstuy) and queens(ridgewood) to use an FHA loan and house hack to get started as a first property. I am feeling intimidated by the housing laws in NYC and the fact that a wrong move or bad tenant could put me in a bad position considering the fact I'm just starting out. Anyone have experience buying small multifamilies in NYC that could share any tips or words of warning?

I want to make the most of my savings (hence the FHA), plus I live in NYC and would like to for a while so I'd prefer to invest locally. My intention would be to hold the property for a very long time. That said, these areas are expensive right now so it seems unlikely I'd be making profit at least the first couple years as I pay mortgage insurance.

[Alexander Szikla]

Personally, I would not be too concerned about tenant risks. Since you will be living at the property and it will be a 2-4 family, you do not need to worry about Rent Control, Rent Stabilization, etc. 

True, New York is more tenant friendly than other states but pretty much everywhere is due to COVID-19. I would just caution you regarding tenant selection criteria and your process which is key. 

Every reward has an inherent degree of risk. But you want to make sure the risk/reward profile is asymmetric. Tenant issues will arise, but you can mitigate them by being selective.  

As far as mitigating risk and juicing reward, you also want to limit your equity exposed (FHA) and buy at the "bottom" (NYC currently). So I certainly think a house hack via FHA in NYC right now is the move. If you can get a 4 unit and share the basement , that would be ideal and create major cash flow and equity creation. 

Personally, I am very bullish on New York and NYC itself. Sure it suffered due to COVID, but you want to buy when there is distress. I think all the folks who moved away are already getting bored and already coming back. Plus, the vaccine is getting rolled out which will curb the spread tremendously. Now is the time to buy.

Cap rates came all the way down to 3% (or below!) during the "boom" times but COVID has loosened everything up and now 5% can be had in Manhattan, 6%-7% in Brooklyn and even 8% in the Bronx. The kicker here is that rates are much lower than the 7%. Today nationwide rates hit a low of 2.7% - so there has really never been a better time "spread" wise.

Long term, I think NYC will come back as it always has time and time again. I am also a great believer in investing when there is distress and deploying capital when you can.

If you are looking for yield in the short run, Manhattan may not be for you. However, it is certainly the most attractive it has been in years from a cash flow perspective. If you are seeking out asset accumulation and equity appreciation over the long term then there are certainly fortunes to be made. And there is still plenty of cash flow opportunities in the outer boroughs if you buy right!