All Forum Posts by: Adam K.

@Chad Eatinger There's a lot to unpack in this thread, and I'd be happy to have a more in-depth conversation, but a few quick thoughts. I live and invest in Brooklyn, so what I say is only applicable to here though I imagine it probably applies in the more desirable areas of Queens (Astoria, LIC, Woodside, Sunnyside, Ridgewood, etc) as well.

Basically, at your budget, what you're looking for (living rent-free within 30-45 minutes of Manhattan) is not going to happen -- at least not in Brooklyn. Jersey might be a better bet, though I have no experience there.

If your budget is $1MM, I'm assuming you have around 250K in capital to work with? I'm also assuming you'll be living in 1 unit entirely with at least 2, if not 3 bedrooms. There's literally going to be nothing you can afford on that budget with 3-4 units that's within 30-45 minutes of NYU. Not going to happen.

Best case, you'd probably be able to pay a bit less monthly by buying than you would by renting a similar unit, but you'd have to decide whether that's worth the frictional costs and capital deployment for a place you're only going to live for 2 years (my guess --- it won't be). You'll also be more like 45 mins-1 hour away from NYU, if not more.

Anything on the West side of Prospect Park north of Sunset Park is going to be unaffordable.

There are 2 units in the low $1MM range in Flatbush or Bed Stuy or Bushwick (which are probably 45 mins-1 hr away from NYU on a good day) -- your monthly expense would be in the $5K range and you'd maybe get $2500 from the other unit. You can probably buy something cheaper -- 850K-900K but it would require 50-100K of work and probably be out of your budget. And ultimately you're paying more cash and still getting the same rents. It's just not really financially feasible to house-hack a duplex with a family and break even.

You can get a 3 (or maybe a 4) unit place for $1.2-$1.4MM, maybe cheaper if it's a fixer upper but again, doesn't seem to be in your price range. In those cases you can probably get to a point where you end up negatively cash flowing $1000-1500, which is not a bad "rent" for a 2 or 3 bedroom.

Other thoughts:

1. Assuming you're not an all-cash buyer, off-market, foreclosure/REO is a pipe dream, at least in Brooklyn. So forget about that. You're not going to find a way to "get in on the cheap", not here.

2. Looking for something that "needs quite a bit of work" to build sweat equity obviously requires more capital and will lower the purchase price you can get unless you're planning on going the hard money route which if you're inexperienced is a bad idea. For example, if you have 250K but you're going to need $100K to rehab the place, all of a sudden you can only really afford a $600K property.

3. L line shutdown isn't going to make properties along that line any more affordable. Owners aren't dumb, they aren't going to panic over a temporary shut down.

4. Some answers to questions --- anything 4 units and below won't be rent-stabilized unless the building has a tax abatement on it. Heat and hot water is often paid by the owner, especially in older buildings, but some newer construction will have separate boilers/water heaters. Water and common electric (hallways, etc) are paid by the owner.

Not trying to be a Debbie Downer, just trying to give you the realistic view.

@Daniel Greenblatt Depends on what exactly you're having the super do. But for trash, snow removal during winter, keeping the hallways clean, etc, we pay $250-300/month to a local guy.

@Charles S.

I'll try and keep this short but these numbers are not close to accurate. I'd need to know more about how old the building is, what neighborhood it's in, etc, to give you a precise picture, but here are some issues.

1) You don't include any cost for utilities. It's rare for tenants to pay their own heat in NYC (it does happen in newer buildings, though I'd be surprised if a brand new 2 unit in Queens would be going for 400K), but even assuming they do, you need to pay for electric in common areas and I've never heard of a tenant paying water in NYC. Gas, common electric and water for a 2-unit is going to run you between $200-400/month depending on the heating type, the size of the common areas, amenities (dishwasher, washer/dryer), etc.

2) 5% PM fee is not going to happen. What property manager is going to waste time for $190/month? Even 10% might be low, not including cost of placing tenants, lease renewals, etc -- but if you're self-managing I would just erase that cost entirely.

3) $35/month in repairs -- not even sure where that comes from -- Even in a brand new building that's way too low. I'd budget at least $100/unit/month depending on the age of the building. You're literally budgeting $420/year in repairs for 2 units. Basically anything that breaks is going to cost almost that much by itself. One tenant sees a mouse and your extermination cost is over your yearly budget for that unit. Your Cap-ex number is just a shot in the dark without knowing the age of the roof, mechanicals, etc, but $200/month is probably fine.

4) Investments usually require 25% down.

5) Closing costs are waaay too low. You're looking at $10-12K minimum - mortgage tax, title insurance, mortgage insurance, attorney fees, inspection, appraisal, etc etc. Not to mention points on the mortgage if you're doing a private lender (though I don't know any private lender giving 7% at a 30 year term to someone with 0 experience, and I'm also not sure what the point of splitting the difference between FHA and private lender is...you're either doing one or the other....)

I'd put the cash on cash closer to 4-5% on this. That being said, for NYC that's not too bad and if you really can get a place that generates $3800/rent for $400K, that's a great deal. I'm dubious, though.

@Laura Moreno That's a good area to be targeting and it's not a terrible deal. The numbers aren't that far off, but they're not entirely accurate, particularly with the rents they claim you can get. I think @Eric A. is close with his estimate of $6000-6500.

First, it's a 1 bedroom and 2 two bedrooms (maybe you can call it a converted 3). And if you notice, not all the "bedrooms" have windows and 1 bedroom in each of the 2nd/3rd floor are kid-sized bedrooms (10*6).

In that area, 2 bedrooms rent for $2000/month, 3 bedrooms rent for at most $2500/month -- let's be generous and say you can get $2500/month even though the layout isn't great and the bedrooms are small. Most likely, it'll be less. I'd expect at most $1700/month for the 1st floor unless there's an amazing finished basement / backyard which there doesn't appear to be. Keep in mind there doesn't appear to be laundry in building, there's no dishwashers or central air or any amenities.

But let's say you live in the 1 bedroom and get $5000/month in rent from the other 2. So annual rentroll of $60K. The brochure has a 0% vacancy rate, which is unrealistic (let's call it 3%). The taxes look low, which is good. Insurance is about right. Their utilities estimate is pretty close, but it's a little low. I'd at least double the maintenance cost. I think the annual expenses (including vacancy, but no PM because I assume you'd be self-managing) would be around $20K.

With your mortgage payment, in a best case scenario, you'd be looking at losing around $20K a year if you occupied the 1st floor. That's not too bad, considering principal paydown and the mortgage tax deduction will help. The thing is, you'll be spending $250K in a down payment and closing costs and you can probably rent in that area for about what you'll be losing per month. So is there a better use of your $250K? It depends on how much appreciation you think there will be in the neighborhood. I think the neighborhood is definitely on the rise and there aren't a ton of multifamilies in that price range.

Keep in mind this has been on the market for 6 months and nearly 4 months after the huge price cut. There's a reason no one is jumping on it. Also, the brochure implies a cash payment so you should find out if you can even finance it.

Is it a great deal? No. Is the cap rate 7+%? No, not even close. Probably half that. But are you likely to find a better deal in that neighborhood on the MLS? That's the question. I'd personally keep looking or make a offer on this place for under the asking price.

@Daniel Greenblatt Short answer, not a chance in Manhattan under 96th or "prime" Brooklyn. Extremely unlikely anywhere else.

Condos are mostly being built in gentrified places like Bed Stuy and Crown Heights and AT BEST, you might be getting a rent payment that equals your mortgage (like @Eric A. said, unless you're putting down a big down payment) -- and that doesn't take into account common charges, taxes and maintenance costs.

For example, the cheapest 2 bedroom (which is actually a converted 1 bed) I see under 96th is 800K --- but that has common charges and taxes of $3K/month. You probably couldn't get much more than that in rent -- and that's before your mortgage payment. 2-beds can go for $900K-1MM in the cheaper areas, but you'll be paying at least $5K in expenses for a place that can rent for at most $4K. In Brooklyn it'd be like $650-800K with $4K in expenses for a place that can rent for at most $3K.

If you're fine with an appreciation play and taking the likely loss every month, you could certainly come out way ahead in the long run. But don't expect any cash flow.

@John Hickey is right, the 50% rule doesn't apply to NYC and besides, any simplistic rule of thumb will only get you so far. If you really want to analyze a deal you need to dig deeper and try and pin down specific expenses -- taxes really vary from building to building, as do the utility costs (particularly if your tenants pay heat or water) and maintenance completely depends on the condition of the building.

I've found that expenses have been between 25-30% of my rentroll (and we pay heat and water, if tenants do, I'd say 20-25%) -- I also pay a super, if you want to do that stuff yourself that's another 3% or so you can save. In my experience, rent increases have outpaced expense increases, as well, so I'd expect that to decrease as time goes on.

@Laura Moreno Based on the rents and that it's 6+ units, it sounds like it's a rent stabilized building and you'll have a tough time raising the rents.

You're also going to find it probably pretty difficult to finance because it will be a commercial loan and A) Those can't usually be owner-occupied B) A big bank will want to see a track record of landlording, and they underwrite based on the building's financials, which don't sound too good.

So unless you're paying in cash and you're prepared to wait for tenants to move out to get fair market rents, I'd look elsewhere.

Also, the mortgage on that alone (at a 75 LTV) is like $50000 a year, so not sure where you are getting the expenses. And I'd budget at least $100/unit/month for maintenance and around the same for utilities (so, around 17K total) and also budget more for Capex.

@Remo F. I assume you're going after an owner/occupant. In that case, most places I see put the rental in the garden/basement level and sometimes the upper duplex has a private roof deck. If the owner/occupant is looking for private garden access then the rental is on the top floor, but that's rarer.

Honestly I don't think it makes a big difference but being able to offer private outdoor space to the owner is a good way to stand out either way you do it.

@Justin S.

Congrats on the Bed-Stuy property. You certainly got in at the right time. With regards to your next step and the questions in your post, there are a few factors about your specific situation to consider. For example -- how much rent are you currently generating at your property? If your rents are maxed out, selling it becomes a more realistic option (I probably wouldn't, but I do believe some parts of Bed-Stuy are starting to level out - really depends on the specific location).

Are you looking to quit your job (making cash flow more important)? If not, I believe you're better off continuing to invest in NYC and also it allows you to take on more risk. And as @Llewelyn A. points out, if you have a job that supports you, trading appreciation for cash flow results in a bigger tax burden now. Also, keeping a W-2 job makes you a much more attractive borrower, but you're a mortgage banker so you probably have connections the rest of us don't.

Are you married / do you have kids? Again, this informs your risk profile. If you are single and steadily employed, I'd say you can afford to take out a lot more than 25% of the equity.

So here are my general thoughts:

1) Unless you have a reason to believe your home's value will decrease, it's a safe play. I believe that any equity that is just sitting in a property and is not delivering a return on its own is being wasted. I am always trying to pull equity out of properties to reinvest if possible. Perhaps that's too aggressive but I have a day job to fall back on and also live in a place I own so my expenses are low.

2) To put in succinctly, I'd buy the most units possible in a neighborhood with potential. I don't know your debt/equity ratio and again, you may have access to loan products we don't, but if there's no max to your loan size, I'd try to take out 500K of your equity --- that can buy $2MM worth of properties which could be 2 3-units in east Crown Heights or Flatbush or a 8 unit in Sunset Park or something comparable. Flatbush is a huge neighborhood and some areas are prime (near subways, close to nicer neighborhoods) and some areas are not (no subway access, nowhere close to parks, etc).

3/4/5) Out of state limits your appreciation potential and puts you at the mercy of PMs and you're never going to know the market as well as you know your home market.

I also see what you're saying about scaling, but with properties, quality beats quantity. If you're worried about cash flow, think about this -- do you think that had you bought SFRs in Maryland 3 years ago you'd be sitting on $1MM in equity right now?

@Laura Moreno Brownsville has a long time horizon. It'll probably develop eventually but it's a ways off, unless we're taking about the area that immediately borders Crown Heights/Bed Stuy. But the further SE you go, the worse it gets.

@Laura Moreno

It all depends on your budget. The cashflow may not be great in NYC, but the overall returns (including appreciation) are oftentimes much higher than you can get anywhere else if you buy in the right neighborhoods. And if you are planning to self-manage that improves your cashflow in comparison with an out-of-market property where you'd pay 8-10% in property management fees plus I believe that maintenance/capex costs are lower when you manage as opposed to a 3rd party.