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January 16, 2008
to buy or not?
I know this is a common question and a personal decision... but I am looking at a 2 family in windsor terrace near the fort hamilton f stop on the park side of the prospect expressway (about 2 blocks to the f and about the same distance to the park) with a 3 bed approximately 1300 sq foot apartment and a 2 bed which I would occupy. In addition there is a driveway and garage. The purchase price is around 850k. I plan to stay there long term (at least 5-7 years). My question is in order to afford the monthly mortgage cost I would be relying on the rental to bring in at least 2000/month. I know no one has a crystal ball but I am concerned with the mortgage crisis and the economy being in the crapper, is this a risky move? I know most people have to sacrifice to purchase in nyc but i dont want to be regretting this move in a few months. Any opinions are welcomed. Thanks
Comments
If your question is whether the 3 bed unit can be rented now and for the foreseeable future (I read an article just today that suggests that rents are starting to follow the downward trend of sales prices) for $2,000 or more in that neighborhood I would say, "Yes". If a parking space in the driveway could be offered to the tenant as well, it would be an emphatic "Yes" and if the space were in the garage it would be a "Hell, Yeah!"
Posted by: johnife at January 16, 2008 6:07 PM
what does the apartment currently rent for? my wife very wisely forced me to make a budget based on what our rental actually rents for, as opposed to my foolish plan to budget what i thought i could get for it.
Posted by: guest at January 16, 2008 6:50 PM
You kind of hit on something here which is that being a landlord suddenly forces you to be an economist too.
I would ask for the previous rental statements to get an idea from the owner what you can get for it at least. Bear in mind that a rule of thumb in the real estate industry is to assume one month of vacancy per year for your gross rental income estimate.
Posted by: Smokychimp at January 16, 2008 7:41 PM
guest @ 6:50 - the rent is currently around 1600 but the apartment needs substantial work ( new kitchen and bath) which I would like to do before renting out. And as far as I know the rent has not been increased in over 4 years.
Posted by: katiem633 at January 16, 2008 7:43 PM
If you do a decent (fancy not necessary) reno on the kitchen and bath, I think you can easily charge $2k. 1300 sf is a really good-sized apartment.
Look at Craigslist and see what similar apartments are getting--and be discerning. Many of the listings are crap renovations, and/or not really in the neighborhood that's advertised.
Posted by: tinarina at January 16, 2008 8:58 PM
To answer your question more explicitly, I bet you can get at least $2200-$2400/month for your place if it's clean and inviting. Even if the economy takes a major nosedive, there will always be a housing shortage in NYC and rental prices aren't going to tank.
We also have a house with a rental unit and we've been fortunate enough to have tenants who've always stayed two years or more.
Smokychimp (love that name!) is right about the vacancy rate, and that will be part of the formula that your mortgage company factors in, but that's not been my real-life experience.
Good luck and definitely go for your piece of the real estate pie!
Posted by: tinarina at January 16, 2008 9:06 PM
sounds VERY overpriced.
you can get a similar apartment in park slope for the same price.
wt is not worth 850k.
period.
Posted by: guest at January 16, 2008 9:28 PM
9:28 you dimwit. he is buying a house, not an apartment. and park slope is soft. and stop writing "period" at the end of all your posts because it makes you sound like a dimwit even if all your posts weren't filled with mistakes.
Posted by: guest at January 16, 2008 10:29 PM
Absolutely you can get 2k per month. But, can you NET 2k, if that's what you need. I'd say it would be a close call, since as someone pointed out you have to budget 1 mo. vacant, plus you'll be paying for heat and water. You've also got maintenance, which can be expensive since a lot of it will be on an emergency basis.
Hopefully you won't have many problems since you plan to renovate, but pipes can burst, roofs leak etc.
As for the area, I've posted before that it's one of my favorites in bklyn. PS 154 (right next to the Ft. Ham. stop) is a good school, and I could see a family moving into your apt.
Posted by: guest at January 16, 2008 10:38 PM
Don't forget the taxes you pay on rental income! So if $2000 is your break even, that means that the gross rent needs to be 33% (or whatever your tax bracket it) higher. NOt sure if that calc. already went into the $2k figure. It probably did but just an fyi in case it didn't...
Posted by: U510545 at January 17, 2008 12:16 AM
You can shelter the rental income by depreciating the part of the house that's rneted out.
Posted by: Boerum Hill at January 17, 2008 9:51 AM
Yes, one of the major advantages of owning a house with a rental is that the rental income is sheltered.
Posted by: guest at January 17, 2008 10:10 AM
OP:
Can you rent it at that price? I'd say yes -- to me! My husband and I (along with our very well mannered 2-year-old) are great, highly qualified tenants (financially stable with perfect credit, will treat your home like our own, have an excellent 10-year history with our previous landlord, and we don't own or really want a car so you could rent the driveway/garage separately for additional income) and would be interested in renting that apartment if you in fact buy the house. We are willing to make a long term commitment, as we are actively looking to move into District 15 for the schools. If you'd like to discuss further, please feel to e-mail me off-line at persephone2669@yahoo.com.
Thanks very much, and good luck to you in your search for a home!
copy_gal
Posted by: guest at January 17, 2008 10:55 AM
You're unlikely to be able to shelter 100% of the rental income through depreciation. If the house is $850k and one assumes that the land (you can't depreciate the land value) is $250k (a reasonable guess at, say, $80 per buildable SF, assuming 3,000 SF allowable for the lot) then the cost basis of the house itself is just $600k. Assume 50% of the house is rented. That means you're depreciating $300k over a period of 27 1/2 years (the period dictated by the IRS). That works out to $900 per month, leaving about half of your rental income (less any utility and maintenance costs specific to the apartment) still subject to tax.
Posted by: johnife at January 17, 2008 11:06 AM
It's not accurate to say rental prices will go down because sales are slowing. That defies the common logic, and is the exact opposite of what every business and economic journal or newspaper is saying right now. The projection in Forbes for NYC stated rents will increase nearly 7% in 2008. Because of the slowing sales, which creates greater demand especially for family-sized rentals in decent shape. A tenant like that would have bought a coop, a year or two ago and now they are waiting so they need to rent.
I don't know WT rents, and I don't know that you'd get $2,000 net, after deducting all your expenses and taxes. But rents are going up not down.
Posted by: guest at January 17, 2008 11:27 AM
I was in a similar situation. In order to get the mortgage, the bank took a look at the apartment in my building and provided a (low-ball) appraisal of the potential rent. The bank used 75% of the appraised yearly rental as part of my income.
That being said, you have to remember that there are lots of other expected and unexpected costs associated with being a landlord. Emergencies -- and there are always emergencies -- that can wait in a one-family house have to be taken care of more quickly in a rental property. Also, you have to take into account potential vacancies and salt that money away. And don't forget, that while you may be able to handle 65 degrees in your place, you are required by law to keep the rental apartments at 68 degrees during the day, so you can't play with your heating bill as much as you would otherwise.
My advice is to be very circumspect with your budget. When in doubt, overestimate the potential costs so that you have a cushion in case something big goes really wrong.
I did wind up buying my place and am very glad that I did, but this first year is tough!
Good luck!
Posted by: guest at January 17, 2008 11:48 AM
Why no one has brought this up is beyond me. But my rule of thumb is, if you can't afford the house WITHOUT the rental income, you probably shouldn't be buying the house. The rent roll is a good way to subsisidize the mortgage, but it shouldn't be relied on!
Posted by: guest at January 17, 2008 12:30 PM
3 bedrooms are great for post college, room mate situations. (Just screen everyone very carefully, credit checks and guarantors...) If I were you, I'd save the money on renovations for that unit and just stick three "kids" in there. They can each pay $700 and there you have your $2100. Do minimal renovations, assuming everything works.
You're going to spend 15-30k on renovations, plus have NO income for 2-6 months, permits, finding the right people to do the work etc. For what? an extra $150 a month in rent? Not worth it in NYC. Plus, whoever said rents are trending downward is probably wrong. The mortgage crisis makes rent go UP because people who would be buying now have to rent. Supply and demand...
Posted by: hoffster at January 17, 2008 1:09 PM
hoffster,
While possibly not applicable to the NYC market (yet) the following article suggests that, nationally, rents are starting to reflect the change in the property purchasing market.
http://money.cnn.com/2008/01/16/real_estate/rents_flat/index.htm
Posted by: johnife at January 17, 2008 1:26 PM
Johnife, but you're ignoring the mortgage interest paid. If 50% of the house is rented, then 50% of the mortgage interest is going towards that investment. Assuming mortgaging $650K of the cost at just 6% (optimistic, I know), the mortgage interest on the unit is definitely going to run $1600 or more. Also, half of the expenses will also offset the income.
It's rare that a new owner is going to actually have any net income on the property that will be taxable, unless they put a lot of money down, or got a wonderful deal.
Posted by: Heatherie at January 17, 2008 2:13 PM
I agree with 12:30. If you cannot afford the mortgage without the rent, do not buy the house. You should be able to pay the mortgage without the rental income. Renters stop paying rent, they don't pay on time, and they move out. Could you afford to pay the mortgage plus all of your other expenses for a few months if a tenant stops paying the rent? It could take months to evict a non-paying tenant. Don't forget to add in your expenses for real estate taxes, insurance, water and sewer, plus heat! That's a lot of money to lay out each month for an 850K house.
Posted by: guest at January 17, 2008 6:34 PM
On the other hand, everybody has to get his foot on the first rung and if you have some cushion - your family can help you in an emergency - go for it.
Posted by: guest at January 17, 2008 7:01 PM
Thanks for all the comments.... glad to hear most you of think that this type of apartment could be rented for that price, and for those of you that think you shouldn't buy w/o being able to pay all expenses ... i tend to agree but also know that you have to make the plunge into real estate some time.....hopefully we will make the right move - with my luck we will close and then the market will go down - but i think in the long run we will be ok.....oh boy looks like i'm still up in the air - thanks again for all the comments!
Posted by: katiem633 at January 17, 2008 7:17 PM
johnife, that article you linked to says that rents in New York went up 12.8% in 2007 which is the highest rent increase in the country. it says that new york competes in a global market and by world standards New York is still pretty cheap.
That rents have gone down in other areas of the country is really very little indication that rents will be going down in New York.
Posted by: guest at January 18, 2008 12:01 PM
This isn't about buying real estate or an investment. Your question is about whether you should start a business. Being a landlord is being a business owner. You make a capital investment and run a business. Not being able to pay all expenses without the rent is really about how long you can run your business without customers. You need to be able to continue at a loss for some period. Asking about reasonable rents in the are IS the appropriate research about the market. The issue, I think, is whether you are really up to all the other aspects of running a business. Can you do the math, figure out the regulations, taxes, etc.
Posted by: guest at January 18, 2008 12:27 PM
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Posted by: ej1024 at January 18, 2008 1:28 PM
Uh, I can do math.
Posted by: guest at January 18, 2008 3:04 PM
Windsor Terrace 2 bedrooms start at $1800 and they're usually about 700-800 square feet. A 1200 square foot 3 bedroom apartment on Seeley Street (nice reno, w/d, d/w, outdoor space) near the park went for about $2800 in December. Last summer some tiny two bedrooms (650 or less sq ft) on Reeve & Sherman rented for 2K apiece (ridiculous!).
If you time it so that the apartment is available by June/July, you'll be able to charge more than you'd be able to in the winter. You could try for $3000. WT by the Fort Hamilton stop has easy on-street parking, so certainly rent out the garage.
Also, 850K with Garage sounds like an amazing deal in WT. Go for it!
Posted by: guest at January 20, 2008 5:12 PM
You'll be fine, take the plunge-I agree with hofster about the renovations in the rental unit not being a good idea-you can always renovate down the line if you want. However he uses the term "kids"-be careful about renting to people who have a wilder lifestyle, they could make you miserable even if they pay rent on time and aren't bad people.
Posted by: guest at February 19, 2008 12:12 AM
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