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January 5, 2009
Investing in Multifamily Props
Does anyone here own a small multi-family (4-8 units) as an investment property?
I'd be curious to know about the ins/outs of such an investment. I came across a 5 family for sale that seems attractive but I know very little about the whole topic. Any reading material or insight would be appreciated.
Comments
I really don't know much, but I have heard one-to-four-family houses are treated differently than five-and-up. The latter are "commercial" property, you will need a 25-percent down payment, and are governed by special laws, including rent control and stabilization. There may also be special tax issues, but I don't know.
Posted by: mopar at January 5, 2009 2:01 PM
6 family and above is usually the rent-stabilation category for NYC.
Most residential mortgages (those meeting FNMA guidelines) are 1-4 family. So getting mortgage will propbably be little harder/expensive than 4.
Posted by: Petebklyn at January 5, 2009 2:06 PM
I looked into a 4-family a while ago and decided against it. For the casual investor like me, it would seem that the rewards can be pretty high with the right buildings, but the risks are appropriately high too.
Down payments are higher as noted. Interest rates similarly (I think.) Taxes proportionally higher as well. Plus would be tough to manage on part time basis. Which hits the bottom line hard.
I own a 2-family. Won't get rich. But I like the dynamic. Have leverage thanks to rental income. Tax-man friendly. And manageable maintenance.
But based on what I've learned owning and managing my small building, I'd consider it now if I had the loot. Property values have taken a hit. Rates are low.
Posted by: Johnny at January 5, 2009 2:11 PM
I own a 6 family. What specificaly would you like to know?
Posted by: landlord at January 5, 2009 2:41 PM
Landlord, would you mind if i emailed you directly?
Posted by: paspar2 at January 5, 2009 3:25 PM
I mind. Inquiring minds want to know.
Posted by: slick at January 5, 2009 4:34 PM
I purchased a 4 family as a rental unit brownstone . It pays for it self. Of course not much equity at this time but haven't had a problem with tenants...However be prepared to constantly be there in the beginning as tenants call for things to be done boiler pipes lights cleaning the front of the house in the winter etc on the whole if u get a good deal go for it we're in the process of purchasing another one good luck.Not sorry about the long term investment at all.
PC
Posted by: PC at January 5, 2009 5:26 PM
It's a little known secret that half the retirees in Miami and Naples, FL. are living off of 4-6 family investment income properties located in NYC. The higher you go, the better the economy of scale pays off. Of course, you have to put up the 20% for the commercial loan, which translates into 200K cash for a million dollar property. 6 and above are usually rent stabilized and can be made profitable off the bat with a thorough knowledge of rent stabilization laws and rental increase guidelines, like the 1/40th rule and the 17% vacancy increase. You must do your homework first before purchase. Most importantly, looking at the state certified rent report. what the seller tells you he's collecting and what he is actually able to collect may be two entirely different things. New York City rental properties are not for the faint of heart, they require true grit to deal with tenants, myriad agencies, taxes and plumbing problems that are the bane of all landlords. (there's a reason why many landlords are professional plumbers).
that being said, these properties are often generational enterprises, passed down, paid in full, to lucky (usually profligate) children, who live off these working man's trust funds.
the six family makes sense for a small investor since it's manageable, not usually as expensive as a non-regulated,rare 4 or 5 family, and once paid off with a 15yr fixed rate loan, can fund your retirement in Costa Rica where you can sit back and laugh at all the suckers freezing their asses off in the rat race that is NYC.
Posted by: Legion at January 5, 2009 7:07 PM
Yes, we have a five family and a four family, both with store fronts. They were purchased many years ago by my grandparents, and have turned out to be good investments. The good thing is, since they are less than 6 families, you are not subject to rent stabilization rules. So you can increase the rents as you want. However, you are sort of a slave to the building, unless you have have a super. My dad takes care of everything, and he is getting up in years. There is a lot of responsibility. If you leave town on vacation, somebody has to have the keys to the basement, and be in charge in the event of an emergency. Get ready for calls from tenants about lack of heat, leaks, things breaking, appliances not working, etc. You really need a lot of time to take care of the building. And tenants are a headache if you get a bad one. We have one tenant who we have taken to housing court over and over for non-payment of rent. The courts rule in favor of the tenants, and always agree to some type of payment schedule.
Posted by: Bklyn born at January 5, 2009 7:46 PM
I have heard the following:
Financing
Over 4 units - commercial. This from more than one lender, and I take it as a standard. The impact in financing is that you have to have more down - on the order of 20 to 25%. This was in more favorable lending environment - last year. (Grimace).
Maintenance / Technical
I have spoken to many an owner. In a 100 year old brownstones - things break. Constantly. So be prepared for repairs (time, money, etc.) Another thing about this... brokers and sellers I've found grossly understate the maintenance issue and the fact that you will always be working on the place. Always.
Economics
This - in my opinion - is perhaps the toughest to get right. I think that the "boom" of the last few years (decades perhaps) seems to have made it look easy. But I get the feeling that prices are kinda high now (read probably over-valued). That said, the good stuff is the good stuff. Prices of those properties seem to me to be resistant to decline (stands to reason I think). But every seller thinks that they have the good stuff. Every seller wants to use the most aggressive comp on the block to price their property. This to me contributes to a generally over-valued market condition.
I've looked at the economics of renovating old properties. Generally, this seemed tough - having to put hundreds of thousands into a property after spending $900k to $1.4M in decent - non-prime neighborhoods. I wouldn't say it was undoable (to do with favorable economic outcome). In fact, cutting and condo-ing seemed at times to show some "room". But still - I echo the statement a previous writer made about risk. I feel it's quite high - in particular to renovate in a manner that's cost effective... But perhaps market flux will improve this situation. Then again, that also affects your opportunity to sell or rent at the number you want in the short term...
Posted by: keithan at January 5, 2009 9:57 PM
By the way, last post wasn't meant to discourage. I think that the moral of story is: do your homework. I've found it quite tough to find deals that I thought proved to be economically sensible. Also, the market's in flux - I'd be eyeing historic prices quite closely in this environment... I mean pre- massive years long run-up...
Posted by: keithan at January 5, 2009 10:02 PM
We bought a 3-family brownstone (owner's duplex + 2 one-brs) about 5 yrs ago and it has been great. We're first time homeowners and were really hesitant about the responsibilities-- in terms of maintenance, economics, plus who-knows-what that goes with having tenants as neighbors. But it's been fantastic for us.
We have had some rocky patches, especially at the beginning, when we had a couple of big maintenance problems and a tenant who didn't leave when he said he was going to. Those were really stressful times, but since then, we have little to complain about. Owning the rental apartments has enabled us to live in a much nicer apartment than we could afford otherwise, and our tenants have been great neighbors & even friends.
For what it's worth, I think that the competitiveness of NYC's rental market for the past few years has helped us a lot. Whenever we have an apartment available, we advertise on craigslist & get dozens of applications for it, and many of those people have good credit and all of that, so we just pick the people with whom we have the most comfortable rapport. I worried at first that that was unfair because it's so subjective, but now I think it's smart-- because, after all, you have to trust your tenants and they have to trust you, too.
Posted by: Isty at January 6, 2009 5:50 AM
paspar2 - whats your email address?
Posted by: landlord at January 6, 2009 9:30 AM
We have a 5 family and I must tell you it was an absolute bitchto get financing as Lenders evaluate solely on rental income (even if you plan on making it your residence). In addition, there is a significant and painful difference between commercial and residetial loan rates and tax rates. We used Benjamin Levin as our motgage broker and he really helped us navigate.
Posted by: HomeSweetstuy at January 6, 2009 9:37 AM
Im approaching this as a pure long term investment. I will not live in the property - which is an important distinction....
Im trying to read up on this and figure out how to value a property right. There are a lot of conflicting guidelines online so I figured its best to talk to actual landlords.
Those of you who went though the exercise (especially in the last 5or so years): what were your valuation guidelines (multiple of RR, certain CAP etc)? did you expect to have a monthly return early on or were you willing to be flat monthly with the expectation of the property appreciating and growth of your equity?
here is an example property I looked at:
pros: it was in an area Im very familiar with. rents were under market slightly. the building was recently renovated with new kitchens/baths/furnace/roof. Tenants were there a while..
cons NOI was 1% above the debt service (25% down and 6% 30yr fixed) with a decent maintenance cushion. price is 12.5 times RR. The cash return on this one was basically nil and the return would be increased equity and appreciation.
feel free to email me at paspar22 at gmail
also, Im looking for online forums where discussions such as this are welcome but have yet to find any. Suggestions?
thanks
Posted by: paspar2 at January 6, 2009 10:41 AM
HomeSweetstuy, whats Benjamin Levin contact info? thanks
Posted by: paspar2 at January 6, 2009 10:42 AM
I lived for over 20 years in a 16 unit pre-war in Bklyn Hgts. My ex and I were asked to be the on-site superintendents and I did that until i moved. It may pay for you to see if one of the tenants is able to do that. Otherwise you'll be spending a huge amount of time at your investment property. because i lived there, I got calls all hours of the night, but the majority of tenants were good eggs and you can defuse a lot of anger by having a presence there. (Of course we did have a resident nutjob- who was also a lawyer. she made up for all the rest.)
Posted by: bxgrl at January 6, 2009 12:18 PM
Well, I don't know if this will help...But remember the equity in the homes right now are not good. The next thing is that 26yrs ago the home I live in now a 2 family when making the payemnts we had to put at least $200 towards the morgage etc.. Morgage was $600... Well u know the house value has more than quadrupled. Now with the 4 family rental the profit is at a plus.Personally I think u need to make a propfit before u purchase a rental. Remember maintenance gas light unforseeable problems etc. Your rentals should be able to cover the unit and try not to take out from yr pocket. We also underestimated the rent that we thought we could get when we first purchased the 4 family. If the apartments are upscale and in the right location near subway close to manhattan you should get a good price for the rental... I don't know if this helps but good luck...
Posted by: PC at January 6, 2009 6:39 PM
If you are going into the market now for money forget it. If you are going to buy it and live in it and manage it then you will do fine. Alot of people had too much money bought and then did not want to deal with the day to day problems so they hired managers to do it for them. Now that the water is drying up in the pond they are cutting back on maintance and other need work. Remember being a hom owner requires love and hard work and it is not all about the almighty dollar and being able to tell people I own a building but can't even change a 50 cent light bulb
Posted by: hannible at January 7, 2009 9:12 PM
when you invest in a building... its is about the dollar. nothing else.
Posted by: paspar2 at January 8, 2009 2:09 PM
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