Bed Stuy and Bushwick Property Analysis -- Appreciation Play?

Question

Hello BP.  I am considering purchasing property and would like some opinion.

The property is located in the Bed Stuy area of Brooklyn.  Brick construction - built around 2006.  Very recent apartment upgrades.  Newer appliances.  Newer mechanicals.  Newer roof.  Very good condition in and out.  Obviously all to be verified by an Inspector!

THE NUMBERS:

Purchase price:   $1.25m

Mortgage:   $4529.98  Based on 25% down.  30 year fixed at 4.1% APR (confirming rate with Lender)

Taxes:   $8500 confirmed

Repairs:   $1,500

Insurance:   $3300

CapEx:   $2400

Water/Sewer:   $3120

Vacancy:   $3000  Very in demand area.  Vacancy % tends to be a lot lower.  Figuring 1 per 18 months

Electricity:   $625  For light.  Tenants pay for other utilities

Misc:   $1200

Rental Income:   $79,200  Two apts currently have rents slightly lower than market rates for the area

I am basing the above expenses on:  The property is only 10 years old.  The overall condition of the apartments and building - very good.  I estimated the expenses at 12% more than the yearly expenses on my other existing property (which is 9 years old, also 3 units, same # of BRs, overall same physical condition, same neighborhood).

My other property cash flows pretty well..for NYC so I was considering this new property as an appreciation play.  I know pretty much all BPers would shun this deal as it has a very low cap rate; and almost non-existent cash flow.  Unfortunately, I have not the skills, the time, the team or desire to take on renovation. I am considering this only as Bed-Stuy and Bushwick are very in-demand neighborhoods that still have room for really nice increase.

Let me know what you think..especially Brooklyn Bed Stuy and Bushwick investors.  Thanks all.

Llewelyn A. · Answer

@Daniel C.

Depending on the Building that is over 4 Units, there will be at least two problems:

1) It's Commercial Qualifications. That means you will normally need more down (LTVs are generally in the 65% range which means 35% down), DSCR is at least 1.2 which means you have to have the Rents to justify the the loan payments and you will not get the Rate fixed for more than, say 7 years. You may pay a point or even two in origination fees and your Interest Rate will be higher. If you get a decent Commercial Residential Loan, let me know about it and I'll be happy to use that Mortgage Company!

2) Rent Stabilization - Most buildings over 4 Units in NYC may have some Rent Stabilized units. Make sure you don't get too involved in that unless you are willing to take on something like this. If you are limiting your Revenues, you are limiting your income. If that is the case, you are absolutely limiting your Appreciation while you are limiting your income! This is a pretty bad scenario! If I were to buy 4+ Units in NYC, the apts cannot be stabilized. But the price will be astronomical for these kinds of units.

3) Property Management - You'll need to self manage. Since the Cashflow generally will not be very positive if at all, with a PM, you will pay an additional 10% of rent roll. And that's just the beginning costs that does not include things that they will eventually charge for.

You should really follow the model you used with your 2008 Bed-Stuy purchase. Besides, you have the experience doing it that way and it was absolutely successful. I have been buying properties in a similar way, but with a lot more diligence in regards to Future type calculations and using conservative pro-forma numbers.

If you want to learn more about the calculations, use a book called "What Every Real Estate Investor needs to about Cashflow" by Frank Gallinelli Amazon Link Here

If you master these calculations, you will master NYC Real Estate.

Investor Llew

Llewelyn A. · Answer

@Daniel C.

In 2004, I bought a similar property like the one you are describing.

However, at the time, Clinton Hill was the similar to what Bed-Stuy was about 5 years ago.

In your case, the property is $1.25 Million now.

In my case, it was $890k and cashflow broke even.

Fast forward to today.

I cashflow $3k per month.

The property is worth around $3 Million.

I have been investing in Brooklyn for 20 years and now have 6 multi-Family including 2 in Bed-Stuy.

If the above example is too long for you, then I'll give you another example.

In 2014, I bought a 4 Story, 3 Family building on Hancock for $900k.

Put in $300k of renovations.

Today, it cashflows $1.5k and the building is worth $1.8 Million.

People tend to do Cashflow analysis as if the Cashflow that you get today will always be the cashflow you get for the rest of the Investment's life.

In NYC, that kind of logic will prevent you from buying Great Properties which will not only give you fantastic appreciation, but will give you a ton of cashflow in the future.

That being said, as @Richard Mui mentions, it's about block by block in Bed-Stuy. Obviously, stay away from problem housing complexes and various homeless shelters strewn out all over and try to get closer to the Subway, particularly the A-Train at Nostrand.

Unfortunately, most of those properties will be hitting the $2 Million mark for a 3 Family.

I also want to point out that no matter which year of my 2 decades of Investing here in Brooklyn, I have been told by MANY Investors that NYC is too EXPENSIVE. FOR EVERY SINGLE YEAR I INVESTED. I heard it all the time... "What are you crazy for paying that amount?!"

I would not have become so wealthy had I listened to them.

There is a difference in buying in NYC as opposed to buying in Reading, PA or Buffalo.

You just have to understand those differences.

I also believe that you cannot use ordinary rules like the 1% or 2% rules. They won't work in NYC.

You have to look for Future type calculations like Internal Rate of Return (IRR), Future Value, Discounted Cashflows, Rental and Expense Growth, etc.

All of my investments have done incredibly well and all in Brooklyn.

I know what you are saying.... past results is not indicative of future results. And that's very true.

I should add that I'm in contract to buy another 3 Family. This one in Ditmas Park. But I will by the next one in Bed-Stuy again. My rents have been moving up incredibly well there so I see better potential.

So yeah, I'm buying more at these prices despite all the people here and everywhere else telling me "How crazy you are to buy a 3 Family for $2 Million."

That $2 Million property will be $3 Million in less than 10 years, and I'm betting my money on it.

So yes, I'm putting my money where my mouth is.

Investor Llew

Adam K. · Answer

It's a 3 unit?

The numbers aren't bad for Brooklyn, but I've seen better. I'd probably offer in the $1.1mm range based on those numbers. But if you think there's room to grow the rents and the micro-neighborhood is promising, I'd go for it - assuming you can afford to tie up that capital and plan to hold for 5-10 years (and get some return with the principal paydown).

Richard M. · Answer

Daniel -

I've started looking into this neighborhood as well, I think your location matters a lot! Not just the neighborhood, but your specific block so be sure you've thought about that.

For example, there's a completely renovated 2 family brownstone in that neighborhood now listed for $1m (original listing was $1.2m months ago) and it's been sitting on the market... Why? I'm going to guess because it is across the street from a housing complex.

The fundamental question in my mind is: What is going to drive migration to this area? Schools? Safety? Commute time? Cheaper rents? Culture/cool factor?

This neighborhood has been so bought up by financial players looking to get a piece of the hyped up Brooklyn brand. Is that going to continue? Maybe, maybe not. At least you recognize this is an appreciation play and are going in eyes wide open. Some people might call that speculation, but living in NYC... that's the life we chose.

Also, I think you left out turnover costs in the above. When you get new tenants, how much does it cost to get the place rent ready? I'm going to guess it's more than 0.

Good luck buddy. Please keep us posted.

Godspeed.

Daniel C. · Answer

Llewelyn A. - Yes, 4+ units are out of my reach at this time.  The low LTV and higher rates are a serious deterrent for me.  I've recently started asking if any tenanted apartments are rent stabilized or Section 8.  Some people would prefer Sec8 tenants for the much lower vacancy rates and almost "guaranteed" prompt monthly deposits; but I would like to avoid because of certain guidelines coupled with the overly tenant-friendly (almost seems like FWB - but with the Landlord getting $crewed) NYC laws.

Truth be told - I think I just got really lucky on 1st property.  At the time, I hadn't done much research, number crunching, etc..  It did it because it felt right and was overly eager to just buy an investment property.  Now, I am try to analyze every detail - location, comps, nearby rents, NOIs, cash flow, property age, ppsf, tenant "vibe", etc...  I often come back to BP to see what else I may be missing from my assessments like the legal / eviction costs you mentioned in another post that are necessities for NYC.

Thank you for the book recommendation.  I'll definitely pick it up.

Daniel C. · Answer

Thank you for the feedback:

@Daniel Montes and @Adam K. - Yes, this would be a long-term buy and hold. They area continues to improve and the rents continue to rise.

@Anthony Perez - Bed Stuy does still have room for growth.  But I agree Cypress Hills, East New York and Bronsville have much more room for appreciation.  I have widened my search area to include those areas as well.

@Richard Mui - Yes, I try to avoid properties immediately close to housing complexes for reasons similar to what you mentioned. It's become more evident that Bed Stuy may be overpriced - at least for the small investor.  Thanks for bringing up the turnover costs.  I will add / factor that in the vacancy numbers.

Llewelyn A. - All the points you mentioned are very valid; and I agree.  I was hesitant when buying my first investment property in Bed Stuy in 2008.  Fast forward just 8 years later and the same property I got for $700K is worth double that.  The 1 or 2% rules do not work in most areas of NYC; and finding 10% caps are almost impossible unless it's maybe a 8+ units.  Yes, I will use IRR and Future Value as they are much better indicators for evaluating properties in these areas for long term.  Really great insight.

Anthony Perez · Answer

Walk away from this its not a deal bedstuy has already been gentrified. Go for Easy New York, Cypress Hills, Brownsville those areas are appreciating exponentially at the moment. ENY especially.

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Bed Stuy and Bushwick Property Analysis -- Appreciation Play?