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May 7, 2009
Becoming a landlord
I found a two unit Townhouses in Williamsburg near the L train priced under $1M. The house is in good shape.
My plan is to put 15%down at purchase and rent one of the two units to help me ease the monthly mortgage payments.
I am a first time homebuyer, but an architect, so remodeling is not an issue.
Could someone share their thoughts if this is a good longterm investment? and any issues that might come up in the near future?
Comments
Your plan sounds great but don't you think you are over-paying for the house? Home prices have just started coming down in New York City and probably will come down for the next few years. How much could renting help you pay a 850.000 dollar debt?
Posted by: hannible at May 7, 2009 5:45 AM
Don't pay any attention to hannible. Without any information he has determined that you are overpaying because he can't afford it. He'll never be able to afford anything anyway.
Not enough information on your property to tell whether its priced right or not. In the long run, home ownership makes more sense than renting and eventually this property will rise in value. Do the math on the economics of rebting vs. ownership and let us know what the numbers look like.
Posted by: daveinbedstuy at May 7, 2009 8:21 AM
Yeah, what Dave said.
A metric I used when making the same move - if you hypothetically rented both units, would the entire house rent for roughly what your monthly nut is? If it's close, then close to fair value.
Posted by: Johnny at May 7, 2009 9:15 AM
First congrats on making this big step! When buying any kind of property for investment purposes (well and also with this being ur primary home as well) running the numbers ahead of time is so important. You really make your money when you purchase so you have to make sure u do this well. Check out how much rents are in the area then compare that to what your mortgage is going to be plus taxes, insurance, utilities, maintence of the property and see if it is even worth it. If not, then offer less for the property. Things to consider:
-Is the brownstone set up so that each unit has it's own meter? if not heating/hot water is an extra cost you will have to consider. You will be able to charge more rent but is it worth it to u.
-Are the units 2 bedroom or above? this will affect the potential tenants u will attract. 2 bdrm or above will cater to more families.
-What schools systems if any are nearby.
-You should suggest that your tenants get renters insurance.
-Make sure u take pictures of not just the unit but also the electical and plumbing in the unit before u rent ..these might come in handy in the future.
Some other stuff i will leave out b/c u are an architect so i am sure u know already.
But in any case.. Good luck.. it can be a rewarding experience.
Posted by: scarter at May 7, 2009 9:27 AM
I think income producing properties are almost always a good investment. There will be highs and lows but over the long term multi-family properties are as good as gold, so to speak.
Like others have said you need to run the numbers; what rents you can get, heating expenses, real estate tax, cash on hand for emergency repairs, funds for upgrades like new roof and boiler, etc.
I just bought a 4 family property (and my family has owned multi-unit brownstones on Brooklyn for 96+ years) and I see it like this:
- my mortgage is locked and will never change.
- rents will rise and fall over the course of the loan, but 25 years from now the value of the property will be greater than it is now (my family paid $125k for a 10 unit brownstone in the 70s. ups and downs since, for sure, but it's worth a helluva lot more than $125k now).
- And most importantly, if you truly plan on living in it you can make all the improvements you want, maintain it, live in it and enjoy it, and know that all your expenses are going to something you, personally, value greatly.
Research the numbers. If they work for you, and you are comfortable with them, and most importantly you like the property then go for it. It wont be easy, but nothing beats owning your own home (especially when someone else is helping pay the bills ;) )
Posted by: christopher at May 7, 2009 9:41 AM
$1M is big $$$. So is the 15% down paymt. To be wrong could be super expensive. Not debating if ownership is better than renting, etc but rather timing to buy something. if the monthly cashflow is very close to renting something comparable, then it's worth considering. If cashflow is much higher than renting then waiting is not a bad idea cause price trend is still going down.
Posted by: more4less at May 7, 2009 10:17 AM
I am with more4less. I'd recommend real caution when tying yourself up with this much debt - unfortunately architecture isn't the most reliable field when it comes to a sustained and dependable income. Be super careful.
Posted by: Stonergut at May 7, 2009 11:31 AM
Egg,
I am in the same boat as you - I am/was looking to do the same thing and I'm an architect. My wife and I met with a mortgage broker to discuss which I recommend. We were looking at an FHA insured 203(k) renovation loan so we could do 3.5% - 5% down payment (come on, I'm an architect after all). Keep that in mind when determining what is relevant and what is not since we were talking about FHA.
First, the bank wants the building to be self sustaining based on 80% of comp rents - not craigslist listings or what you think you can get (you can use www.rentometer.com for an idea). So 80% of the rent you take in + whatever you would pay in rent if you were renting your unit needs to cover your PITI (Mortgage + Taxes + Homeowners Insurance + Mortgage Insurance if any). This basically wiped us out from 2 or 3 family but made 4 family feasible (we were looking in Clinton Hill). We did talk mostly 3 family so 2 family might be different with this requirement.
Another blow was the Debt to Income Ratio (DTI). The FHA limits are 31% and 43% (pretty standard) which we thought was fine since the incoming rent would pay down the mortgage - no problem. Wrong. The bank calls this a "PITI Wash" and used to allow it back in the day but no more. Incoming rent is counted as income and again only at 80% so with the DTI limit, really only 25-35% can go against your mortgage payment.
The other thing (for FHA renovation loan at least) was we would need a licensed contractor to do the work - no DIY. Since every place we're looking at needs substantial work, this is significant. If you're looking to scrape & paint, install some new tile, things like that, maybe it's not a problem.
Long story short - meet with a mortgage broker. Other than that, I think this is an awesome idea. For an architect at least - we tend to be handy, don't mind fixing thing and will be familiar with every square inch of that building. I've found one thing most rich people have in common is they got rich using other people's money.
Posted by: wilso26941 at May 7, 2009 12:15 PM
I think the rental income could make an otherwise unaffordable home doable, it allowed us to buy a house and the rent covers half the mortgage. Be aware, though, that you do need some sort of cushion, as there may be months where the unit is vacant (ie between tenants) or the tenant does not pay on time.
Posted by: mh at May 7, 2009 1:11 PM
Yes pay attention to daveinbedsty. He bought an overpricedhome in BedSty now he spends all day here talking wonderful things about BedSty as if it were the new Brooklyn Hieghts. He does this because he thinks if he can keep telling people prices in BedSty are going up he might find someone to dump his overpriced home to. Keep trying home prices are going down and you are paying a mortgage on a underwater home.
Posted by: hannible at May 7, 2009 7:58 PM
williamsburg is a strange neighborhood price-wise. It's severely overbuilt for condos and such.
In addition, its a very large neighborhood with a relatively small portion of truly desirable addresses. If it's a 15 min walk to the train, its not very appealing. If it's right by the bedford L, it might be a good plan.
Posted by: slick at May 8, 2009 3:54 AM
i'm with hannible that this seems to be a lot of money, although that depends where in williamsburg we're talking about. i've been researching plenty of properties in east williamsburg, the southside, and north bushwick over the past year, and unless this place is in prime williamsburg (bedford or lorimer L stops) it seems a bit overpriced. good luck with this big decision!
Posted by: sweetser at May 8, 2009 3:22 PM
re: wilso's comment - I agree, but not sure I'd recommend a 4-family for your first time. First, the law is more flexible for a two-family - you have more regulations you have to follow for a four-family. Second, that's a lot of relationships to manage, a lot of moving parts to make sure your mortgage gets paid every month. With four families, you're tripling the possibility that one of your tenants loses a job/goes on disability/has a death in the family or whatever calamity causes them not to be able to pay their rent on time. And you're on the hook for that.
Posted by: UnprotectedWrecks at May 8, 2009 11:06 PM
Definitely be careful and think this through is this declining market. All these houses here in the Burg went from the $100K-200K range just a few years ago to these $1M+ prices now. 1M is so much more than it would cost to rebuild the bricks/wood and mortar its truly scary to plop that much down for one of these old woodies. Don't get me wrong, I love my old house and living here, however contrary to what Christopher says, you are not guaranteed that 30 years from now prices will ever be close to these again. This has been a totally unsustainable bubble and like Dot-com stocks, most never did and never will recover to those bubble prices ever again. And if house prices fall to where they should be - ie about 75% or more off current prices - your renters will vaporize and become buyers instead. Then when you can only get $500/month for your rental unit, how will you pay that astronomical mortgage? Delusion abounds on this board. People keep thinking that somehow the easy money that caused this mess will return and that somehow NYC is the only 300 square miles in the entire USA that will not fall back to normal prices like every other inflated US city has already or is in the process of doing. FYI - a few short years ago a million dollars would buy you a house in Beverly Hills. If that easy money never returns, people cannot get loans except those that meet DTI requirements, which means fewer people can pay BLOATED prices for these old houses that would cost 100-200K to rebuild if they went up in smoke tomorrow. Banks, appraisers, and regulators are correctly killing this "mutant bubble" as the what calls it. There is NO valid reason my house went from 200K to 1.5M in the past 7 years. If anything it's more worn out now than 7 years ago. However I now get the privilege of higher property taxes thanks to greedy banks and liar loans giving people free money to buy these old houses at inflated prices. Even if prices fall back to 200K for my house, that's still very expensive compared to the same house in other cities in this country. Houses in Detroit are less than 10K right now. Vegas, Phoenix, tons of formerly hot places in Florida, etc. have all fallen 60-80%. It can and will happen here. So think 20 years from now when your house is worth 300K and rent brings in $700/month will you be happy paying $6000/month PITI? Good luck. Hopefully we won't be seeing you in the foreclosure news in a couple years. I wouldn't buy in the city right now for anything.
Posted by: williamsburgguy at May 8, 2009 11:30 PM
Interesting question. Your post probably requires more questions than answers. However, being a first time home-buyer, getting into a rental+owner oc. may not be the best move. There are lots of positives, but also lots of negatives to renting. Not the least of being that while you may be comfortable with a certain standard of living, which you may justify being lower than normal because your the owner, may not fly with tenants. Another thing to consider is, given that you've never be responsible for your own place, the little things that you've never thought of may prove to be way more of a headache than you could have ever imagined. Add to that someone else harassing you about things, and it can/could get very stressful. My suggestion would be to think long and hard, AND consider the worst case scenario BEFORE getting in over your head, financial and physically. While owning a house and not a condo/apartment has significant benefits, getting into something a little less risky, like a condo/apt, and then using that to segway into a rental+owner oc. may be a better approach. Another thing to consider is the amount of rental properties that are most likely to come on-line in W-burg soon that may suppress your rental income.
I'm not a real estate agent, so take what I say with a grain of salt:) Good luck.
Posted by: goodoleboy at May 8, 2009 11:45 PM
williamsburgguy is presenting you with one possible negative scenario which i intend to rip apart blow by blow tomorrow when i'm not hungover. I say buy, I did, i love it over here, have two 2 families. Do you want to live in a crappy rental for the rest of your life? I'll take a risk and say everything will be fine 30 years from now. The condos will eventually fill up. Where is everyone going to go to find a better job? Detroit? There will always be renters here who need a reasonably priced apartment with a quick commute.
Posted by: bqe1970 at May 10, 2009 6:26 PM
By all means, rip away bqe1970. While you're at it think about how you might make those 2 families into 6 families by putting up partitions in every room and renting them out SRO style when rent has to drop to affordability when more people are out of work and cannot afford/or simply refuse to pay $1800 for their apartment in your 2 family house because those other 2000 now vacant apartments here in the Burg are renting for $500. Yes, buy away OP. Maybe you can let 4 other families and their kids move in with you to afford one of these old townhouses when you are stuck with a million dollar mortgage on a 300K house. What fun it will be with all of you sharing those 2 bathrooms and 2 kitchens. Ever read Jacob Riis How the Other Half Lives? He has some good pictures of how to maximize occupancy. Seriously, those of us who paid less than 100K for our houses in the 90's don't really have to worry about such nonsense and we can live one family to what was built as a one family house; however people who overpaid always try to rationalize why they didn't make a mistake and why 600 square feet is enough for any growing family. 30 years from now rents will be 20K per month and our houses will be worth a billion, and oddly enough wages will only be up 15% from where they are now. I'm guessing bqe is either a Realtor, mortgage broker, or maybe a former financial derivitives manager.
Posted by: williamsburgguy at May 11, 2009 8:04 PM
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