Multifamily Commercial Real Estate Sale for $35.3 Million

Not really true Sam - all you need is alot of capital and good management.

If you seriously renovate every vacancy (and thereby get much more rent); and put in significant buildingwide Major Capital Improvements (which raises existing tenants rent)

You don't have to be cruel or ruthless, all you really need to do is evict those tenants who do not pay and demand timely payment of rent from everyone else and you can quickly (3-5 yrs) turn a RS building into a very profitable investment.

Although I do acknowledge at 10.4x RR purchase price - such a senario is very very difficult

Posted by: fsrg at September 11, 2008 11:43 AM

Sam you are criticizing a number of things at once - NYC housing court determines the consequences (or lack there of) for failing to pay rent - and you are right - it is a joke. That being said - this has nothing to do with Rent Stabilization Laws.

And while I agree that the 'reward' for making tenants happy (i.e. providing good services and a nice building) is mitigated by the inability to raise rent, there is most definitely a benefit in keeping tenants happy - happy tenants pay quicker, treat your building better, and attract better (and higher paying) tenants for vacancies.

As for tenants not wanting improvements - so what - as long as you follow the law (albeit often time arbitrary and silly one) you can collect all the Capital Improvements from the existing tenancy whether they want it or not. You do not need tenants approval for buildingwide MCIs.

Look I am no fan of RC/RS - but it also provides certain opportunities - it aint easy - but there is plenty of money to be made in (some) RS/RC housing, while providing tenants a great place to live.

Posted by: fsrg at September 11, 2008 12:27 PM

Benson - I am not ignoring any costs (including time) - nor am I advocating FOR RS/RC (I do favor a vacancy decontrol however).

All I am saying is that you can make alot of money in RS/RC buildings if you buy right (i.e. low rents) and have the capital to take advantage of the law to get MCI increases.

Yes, problem tenants can make your life miserable, delay things, and cost real $ - but with persistence and good records (and $) you will eventually defeat these obstructions.

And yes the bureaucracy favors the tenant, so it makes everything that much harder.

And yes RC/RS is price controls and results in most of the problems of such (shortages etc...)

But as to the strict point of whether you can make $ owning such property without being a cruel slumlord - sorry but the answer is YES.

You buy the building as a multiple of the RR - so if the rents are low (compared to market) and you have the capital to invest, you can use the laws provisions to make tons of buildingwide (and vacancy) improvements and you will (eventually) collect the investment back in terms of higher rents. And that includes higher rents on "improvements" that you could never collect for from non-R/S tenants - like a new roof, boiler, pointing, etc.....

The other advantage of RS/RC buildings (one which is foolishly being threatened by our assinie politicians) is that unlike market-rate tenants - every year (or 2) the "Government" mandates a rent increase (usually between 2-5%) - while it isnt a mandatory increase, tenants view it as such - which makes cash flow increases much more 'bankable' then in a market-rate building.

Look - I am no fan of RS/RC - it is stupid in so many ways - but you can make money at it (without being an a$$hole) and if you don't believe me - good - just makes for more opportunity out there.

Posted by: fsrg at September 11, 2008 1:05 PM

Good Services to me = reliable heat and hot water; clean (and attractive) environment, quick and efficient repairs and maintenance and a general consideration for safety (ie. decent security, snow removal lighting, etc...)

Posted by: fsrg at September 11, 2008 1:09 PM

Sam - glad you feel that way - Alot of money has been made betting against that exact sentiment over the years. (without bribery, physical threats or intimidation or otherwise acting like a criminal).

But then again I dont generally know about the hardened tenancy of Brooklyn - I generally deal with the soft, push-overs that live in the Bronx.

Posted by: fsrg at September 11, 2008 1:38 PM

It is nearly impossible to make any $ for a long time if the multiple is over 10x (historically 7x or lower is what you really wanted) - but frankly that isnt the most important factor - the most important factor is current rents. If you find a decent building with room rents of less than $265 a room (assuming an ultimate market rate of around $350 a room), you can generally make money pretty quick (3-5yrs). Stay away from buildings with more than 15% Sec-8 or other welfare programs (they never move, dont work and will destroy your building fast).

Also you want buildings with lots of 3rm apartments (i.e. 1BR) - believe it or not, they will be the easiest to rent and command the highest room rents.

And as I said before you need tons of capital (it will cost $15-20G to renovate an apartment properly, plus you'll need hundreds of thousands more for things like pointing, new elevators, new intercoms etc... - all things you can collect MCIs for and J-51s)

Personally I wouldn't buy anything now (unless it is a real deal) because one thing Sam said is true - lots and lots of people have entered the market (including hedge funds in recent years) - who have no idea what they are doing (these things are labor intensive investments) and with the price of oil so high this winter (plus water and taxes also up) I predict there will be alot of selling coming over the next few years - which will bring cap rates and GRM to a more legitimate (non-speculative) place.

Posted by: fsrg at September 11, 2008 2:02 PM

I have seen turnover of 20% in the 1st 18mo of ownership in more than 1 building, simply through normal moves and demanding that people pay the rent (quick dispose notices, etc...). After that tends to be about 5-10% a year based on normal moves, deaths, evictions, etc...

Yes Sam you are right, there are professional deadbeats (again why I say stay away from programs like Sec-8) who will go to court every time, make stuff up and continue living rent-free; but far more will give up much sooner when they realize you will pursue the case, not sign dumb stips and make them come to court over and over.

But yes - it requires patience, a digital camera (to prove repairs are not needed or completed) and meticulous paperwork.

But you are wrong that the majority of tenants in RS/RC buildings are slimeballs out to get over on the LL - most are hard working people who want a decent place to live and are rightly happy to take advantage of a law that makes it difficult to raise rents - however if you follow the law and pick the right opportunities there is plenty of upside in RS/RC housing - and you can be a human being at the same time.

Posted by: fsrg at September 11, 2008 3:51 PM