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June 17, 2009
Seeking Advice on Multi-Family
I’m in my mid-20s, and looking to buy a house in Bed Stuy, East Flatbush, or PLG (particularly the latter because I want to be close to the park). My current income is approximately 60K, however there is a chance that I may not have this job for much longer. I’ve been lurking on this and other forums for the past few months, learning as much as I can about real estate, virtually from scratch (my family never owned, and I grew up in a rental).
I want to buy a 3-family with a finished basement, effectively giving me 4 units. I would live in the basement apartment, and rent out the other 3. I’m particularly considering new-construction houses.
I have a couple of quick questions for those of you caring to chime in, particularly if you have some knowledge or experience in this area:
1. When considering a 3-family house (or even a 4-unit, including a basement), what percent of your monthly expenses (mortgage payments, taxes, insurance, etc.) do you believe the rent roll should cover?
2. How would you gauge the rental market in the aforementioned neighborhoods? Given that it is softening considerably in prime neighborhoods, this will eventually trickle down to the fringe neighborhoods as well, wouldn’t you say? So overall, what would you say is the best way of safely estimating your income from rent? For example, the banks only consider 75% of the rental income to account for vacancies, etc. but do you really think it’s necessary to assume that the apartment will be vacant 3 months out of the year, assuming that the landlord is reasonably apt? Should I rely on rents today’s rents (for example, from Craigslist) and apply a certain discount for the future? These are just two examples, but the general idea is, How should I safely estimate my rent flow so that I make a financially sustainable decision, using best practices from the present and looking a bit into the future?
Any comments or personal experiences welcome!
Comments
My husband is a real estate agent who works primarily in the bed-stuy, bushwick area.
He has a firm grasp on the trends and issues in the area.
You can contact him at elixbrown@hotmail.com for more assistance
Posted by: mysideofstuy at June 16, 2009 8:53 PM
Before you live in an illegal apartment and rent out apartments in a building which is occuped in violation of its certificate of occupancy, you should speak to an attorney.
Posted by: Putnamdenizen at June 16, 2009 9:42 PM
You are about to lose your job so you want to buy a house? That thinking is so pre crash. What happens when you need major repairs or you can't get the rents you expect or can not get a tenant for a few months or you have to spend 6 months in court to evict a non payer? Unless you have huge savings you will need a lot of good luck.
Posted by: edifice rex at June 17, 2009 10:17 AM
I second edifice_rex. I also hope you have a lot of savings if you believe you may lose your job in a near future.
I assume that you are interested in new constructions because you think you're not going to have any major repairs the first years.
I know someone who may be able to provide you with some answers.
Do you have an email address where he can write to?
Thanks.
Posted by: lostintranslation at June 17, 2009 10:50 AM
In the small chance that this is not just a snarky OP, what do you expect to be able to afford on a $60,000 salary?
Posted by: daveinbedstuy at June 17, 2009 11:18 AM
you'd be surprised how much you can save on a 60k salary if you know how to save and grow your money over time. i'm in my mid-20s, have a smaller salary still, but more savings than most 40 year olds.
Of course I've been working since i was 13 and have saved/invested since.
Posted by: ftgreenepark at June 17, 2009 11:30 AM
PLG is mostly one family houses. Lefferts Manor is all one family houses. It is also way out of your likely price range on a $60k income (houses there currently asking $800k-$1.2mm).
Unless you have a lot of capital from another source, East Flatbush or the very eastern edge of BedStuy would be the only areas that you would get anything sizeable in your likely price range.
Posted by: etson at June 17, 2009 11:32 AM
I know of someone who was able to get a 3 family in South Slope in the low $800Ks. With a little work she is getting about $1600 - $1700 each for the 2 rentals. Fortunately she made money on a 1 BR she owned prior to put down 20%. So her monthly mortgage plus tax/insurance/expenses is under $4500, making her net effective outlay (including tax break, she makes in the $60K range) under $1000. She has a great apartment with a yard
and a basement. It is possible DIBS.
Posted by: NewYawker at June 17, 2009 11:33 AM
why would you risk buying a property would the potential of losing your income? dependent on renters to pay (with the economy doing well and all you know people are dying to pay their rent) and with an excess of apartments for rent in brooklyn (potential vacancies).
i dont mean to be a prick about it but come on think for a minute. Im in a similar situation as you. Im also in my mid 20s and looking for a place, but my job is pretty secure. im a bit hesitant due to the dependence on people paying their rent.
Posted by: guikazoid at June 17, 2009 11:46 AM
I think you can swing this *if* you get to the point where you're not in fear of losing your job. You definitely need a job to make this work. No question.
But if you can keep it, you might do well to take the naysayers here with a grain of salt. People who're used to living really cheaply and saving money when they're not making a lot can manage to live a whole lot differently than people who eat out at The General Greene, for example (which is a great restaurant but so pricey for a plate of vegetables and some meat). And if it's worth it to you to be house-poor for 5 years or whatever, a multi-family could be a great investment for you.
I guess I'm also saying that you're super smart to try to own a way that will secure your future.
So a big question is: how much do you have saved to put down in the first place? A big down payment would mean a lot under these circumstances.
And, in answer to your question, I don't think it's likely at all that you'd have an apartment empty for 3 months. But it is likely that you'll have unexpected expenses-- an electrical repair, a leaky basement, whatever-- so you'll need a pot of cash on hand for those.
Posted by: Isty at June 17, 2009 12:00 PM
Certainly possible with a huge downpayment. The OP doesn't mention any of that though.
Posted by: daveinbedstuy at June 17, 2009 12:01 PM
I agree with quikazoid. I'm in my late 20s and have been lurking around B'stoner for years. My parents have owned their Brooklyn home free and clear for decades and have been encouraging me to buy a home of my own. "Just get a multi-family and rent it out" they keep saying. I looked around Brooklyn for a while and realized that even with a stable, decent salary and extremely disciplined savings practices, the only way I could afford to buy would be to rely on rental income....in the fringe of the fringe neighborhoods. Having seen housing court in action though, it's hard to provide optimistic advice for OP's situation. Now doesn't seem like the right time for someone in OP's position to jump into the NY market. Just my $.02
Posted by: BrookLynn at June 17, 2009 12:01 PM
Applaud your initiative OP. Key for me is to talk to a mortgage broker and get a sense for what you'd qualify for. Tricky these days.
Units impacts mortgage. I believe 4 triggers commercial and more expense/headaches, but aren't sure. Three units more manageable, and depending on setup, my give you the small space you need and rent out larger.
New construction - be careful. Not always fewer headaches and judging by some of the condo stories I've heard, often more hassles.
And then, regardless of how the numbers come out, make sure you're left with a few bucks in your pocket. I've had good luck with tenants over the years and have reliable income streams, but repairs can be costly and tough to quantify upfront regardless of inspections and such.
Over the long run, a great idea. In the short term, can be pricey so make sure you're solvent. Good news is prices aint going up any time soon so if a bit more savings helps, you have time.
Best of luck . . and ignore the occasional rudeness on this forum.
Posted by: Johnny at June 17, 2009 12:05 PM
Etson, I'm not so sure about your statement that PLG is mainly one family houses. That's true about Lefferts Manor, for sure. But the rest of PLG? Not so much. As a longtime PLG resident, I assure you that there are blocks upon blocks within PLG and beyond the Manor which have very attractive and very affordable multi-family housing opportunities.
As for your financial ability to swing such a deal, I'm going to assume there are pieces of your financial picture you haven't shared which make this whole picture more sensible than the bare facts you have offered. If that assumption is correct, then I ditto the spirit of the more encouraging comments.
Posted by: Brooklynista at June 17, 2009 12:22 PM
Yes the downpayment you're going to put and available cash reserves after closing are going to be the key.
We were able to buy a 3-family two years ago with a mortgage under my wife's name only. She was making around $60-$65K. She went to a large bank directly, no mortgage broker. Her job has been stable.
She refinanced last Friday. New monthly principal + interest + insurance + tax is about $3,000. The monthly rental income from the other two apts is $3,400.
So yes, it is doable.
Posted by: lostintranslation at June 17, 2009 12:23 PM
ugh there are so many more fun things to be doing in your mid 20s than being a house poor landlord in bed stuy. personally i think u should use your money and rent a swank one bedroom (in bed stuy cuz on that income it's all u can afford anyway) and get laid.
*rob*
Posted by: PitbullNYC at June 17, 2009 12:59 PM
and i dont mean to be offensive. im a house poor RENTER in park slope. it's no fun. unless u just like watching reality tv and eating tv dinners on sale.
*rob*
Posted by: PitbullNYC at June 17, 2009 1:02 PM
nuts
doesn't mean it's a bad idea
but it is nuts
Posted by: iz at June 17, 2009 1:04 PM
it's not just nuts, it's COCONUTS! - buckwyld fro, charm school
*rob*
Posted by: PitbullNYC at June 17, 2009 1:07 PM
Rob, it's easier to get laid if you own property.
Posted by: denton at June 17, 2009 1:57 PM
u know denton, i think u might be right hahahahah
grrr
*rob*
Posted by: PitbullNYC at June 17, 2009 2:00 PM
keep doing your research and go look at what is for sale.
Make a spreadsheet of all expenses involved. taxes, insurance, fuel, supplies...project a few years into future for income and expense. Talk to mortgage lenders.
Yes, can be done with enough savings. Be sure you have some cushion or family to lend a few bucks in an emergency.
Possible to roommates if need to use one of the apts yourself instead of basement.
Be very careful about tenants - make sure they are financially sound and responsible too.
Learn all you can about simple repairs and plumbing and mechanicals of houses.
I did same thing - alone - (but was early 30's not 20's) -
now own with no mortgage.
p.s. - Also do sample tax return - including depreciation schedule. That writeoff of depreciation is what saved me.
Posted by: Petebklyn at June 17, 2009 2:08 PM
I think the OP was mainly asking about new construction their are some new (IMO rather ugly) houses in PLG on Parkside Ave. and Bedford and on some Nostrand--New York Avenue blocks. They're less expensive than many older houses but AFAIK they're three, not four family.
Posted by: Bob Marvin at June 17, 2009 2:14 PM
Yes it is, denton. But then they want to marry you too.
Posted by: daveinbedstuy at June 17, 2009 2:20 PM
True that, Bob! But, I was responding more to Etson's statement about PLG being mainly one family houses. Not saying s/he was confused about the LM/PLG distinction but many who post here tend to think of LM and PLG as being the same. As one who lives in PLG -- but not in LM -- I admit to being sensitive, at times, to certain broad claims about the neighborhood. :-)
Posted by: Brooklynista at June 17, 2009 2:22 PM
Thanks for the correction, and sorry for the error, Brooklynista. I do not live in the neighborhood but I have looked at some places there, all of which had been one family.
(I am a he, btw)
Posted by: etson at June 17, 2009 2:25 PM
To answer your questions:
1. It's up to you, but your monthly costs (after figuring in rent roll, maintenence, heat, etc.) shouldn't exceed what you can easily afford. Certainly no more than 30 percent of your income after taxes, and hopefully a lot less.
2. The softening rental market has already trickled down in some areas. I would check current listings on Craigslist. In general in Bushwick and Bed Stuy (I am not familiar with PLG) a two-bedroom railroad rents for about $1200.
Other points:
*You are asking for trouble if you rent out more than the legally allowed number of apartments. For example, your tenants can stop paying rent. Two, sometimes the bank will not give you a mortgage if there are more than the legal number of tenants, baths, kitchens, etc., at close. Three, the lowest floors in true three-families in Bushwick and Bed Stuy are usually well below grade and have the boiler at this level. They are really not fit to live in. OTOH, true two families in Bushwick frequently have an English basement with a boiler that you really could live in (and many do).
*I was going to say you won't be able to borrow much with an income of $60,000, but amazingly the Manhattan Mortgage calculator says you can borrow up to $396,985. (This is assuming two rentals at $1200 each.)
*If you have to include the rentals to qualify for the mortgage, the bank will demand the units be rented out (or you have signed leases) for the units at that amount at closing.
Posted by: mopar at June 17, 2009 2:37 PM
yeah dibs. But watch out, your turn is coming soon :-)
Posted by: denton at June 17, 2009 2:39 PM
Wow, so many hostile and so many friendly folk all in one place! Didn’t mean to offend anyone, and I’m not sure why one would interpret my post as “snarky” But I’m not here to make enemies, just get some advice, so if you can contribute something to my two questions above – well, I would greatly appreciate it.
Let me address some of the posters above. Mysideofstuy, I appreciate your contact. I have a few houses that I am currently seriously considering, so I’m not sure I need a buyer’s broker, but I will certainly keep that email on hand. Thank you.
Putnamdenizen, I really don’t appreciate your derogatory and baseless allegations because it just sets a negative tone for others to follow, and it really doesn’t help anyone in any way. And I think it’s a little presumptuous of you to assume the basement apartment to be an illegal. Please refer to the NYC codes of occupancy which clearly lay out the difference between a cellar and a basement.
Edifice Rex, and others who are wondering why I would want to buy a house if I am about to “lose” my job: All I’m saying is that there is a chance that I will not have this job (or have a lower-paying job) – maybe in a year, maybe in two, maybe less. Why that is such a sacrilegious thing to contemplate during these economic times, I don’t know. In fact, it is precisely because my job-prospects are uncertain that I am turning to this forum to try to realistically figure out to what extent the house will pay for itself.
Lostintranslation, thank you for your offer to help. If you have any helpful suggestions that you would like to make off the air, you can definitely email orangebrownstone at gmail.
Dave and others had valid questions about what kind of house I would be able to qualify for with my salary. The answer is, first, for the purpose of the mortgage, I would have a cosigner (so assume I could qualify for 700K with cosigner; both of our credit histories are excellent.) However I would be “wholly responsible” for the entire operation. I have about 10-15% down in cash (you’re absolutely right Isty, those of us with a frugal lifestyle can save a hefty penny in just a few years). Aforementioned cosigner can help with the rest to get to 20%, and any remaining closing. But Dave, it wouldn’t be more than 20% down. Isty, I can also borrow money from him in an emergency
A few people mentioned nonpaying tenants. Can anyone point to any good threads that discuss nonpaying tenants, and the subsequent course of action? How often does this happen? How should I plan for this when I’m doing my calculations?
Johnny – can you elaborate a little on what you mean by “new constructions – be careful?”
(Also, a bit off-topic, but it is my understanding that a 4-family would still fall under a residential loan, not a commercial one. The difference between 3-family and 4-family is how they are treated under the tax code, with the latter being a Class-2 property taxed, taxed in the same way as large APT buildings. Anyone else feel free to chime in.)
Lostintraslation – did you buy a new-construction? If I may ask, what is the layout of the house? Is it a 3-3-2, and are you living in the 2-bedroom and renting out the 2 3-bedrooms? What kind of rent are you charging (again, I apologize in advance for asking if you can’t reveal it), and what neighborhood are you in? $3000/month in total expenses sounds quite low for a 3-family; congratulations on making it work so well for you.
Bob Marvin – which “ugly” apts were you referring to on Parkside and Bedford? Do you have an address? How much are they going for? Also, regarding the aesthetics of the house, don’t you think this takes a backseat to the financial sustainability of the whole project?
Thanks for anyone who has contributed, and I greatly welcome any more comments, particularly regarding my original two questions. I would be happy to respond to any more questions and carry on this conversation for as long as people are willing to give me some useful tips and advice.
Posted by: OrangeBrownstone at June 17, 2009 5:47 PM
You said, "I want to buy a 3-family with a finished basement, effectively giving me 4 units. I would live in the basement apartment, and rent out the other 3."
I think this is why PutnamDenizen et al. assumed your basement apartment would be illegal. The basement vs. cellar issue is beside the point. Anything in violation of the C of O - like 4 families living in a 3-family building - is illegal. And I believe (although you should check with someone more knowledgeable to verify this) that if you are using any portion of the building illegally, a savvy tenant can use that as a legal excuse to stop paying rent. So be careful.
Posted by: StuyMom at June 17, 2009 7:51 PM
Thanks for that insight, StuyMom. You mean even if I lived in the basement, it would still be a problem because the whole building would be in violation. Interesting. Never considered that aspect of it. I wonder how realistic of an issue this is, and if it has ever really happened to anyone.
Posted by: OrangeBrownstone at June 17, 2009 9:41 PM
OB, you've got email!
Posted by: lostintranslation at June 17, 2009 10:46 PM
as far as PLG rents go they have actually been increasing according to what i see on the legit ads on craigslist - i'm always looking (even when i'm not looking). 1br's that went for $900 2 years ago are going for $1100 now. 2 and 3 br apts haven't increased as much in price though.
there is new construction on fenimore listed on CL that is 3 family with basement - 749k. two of them are 3br/2ba and the 3rd is 2br/2ba. also, the parkside/bedford new construction is for rent now since they couldn't find buyers.
and yes, there are plenty of multi-family houses in PLG.
Posted by: winthropst at June 18, 2009 12:35 AM
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