How do we do it?
My disabled brother has inherited a brownstone; it carries no debt and taxes are fully paid each year. I discussed it with my other sibling with whom he lives with about renovating the second and third floors so it can bring an income to support them as they get old and eventually are not able to to work. Both are in mid/late 50s. Both worked all of their lives but only have tiny incomes. I’m looking for some advice as to how to move a project like this forward given the circumstances. Or is this impossible? Thanks.
tinny167
in Roofers 11 years and 1 month ago
11
Please log in, in order to post replies!
11 replies
dorkofwindsor | 11 years and 1 month ago
i would look into both a 203k and a heloc. but with helocs being floating and 30 year treasury rallying hard, this could be an opportune time to fix. getting credit for rent depends on various factors, but the loan to value should be low so you should find some community bank that will be willing to work with you somehow.
jockdeboeraia | 11 years and 1 month ago
Look into getting a 203k loan.
brokelin | 11 years and 1 month ago
A few additional comments. You don’t say whether your brother’s disability is mental or physical … how interested are he and your other sibling in managing a complicated renovation project, and being landlords? And how able? Are their incomes small because they don’t have the ability to handle complicated projects, or because they are smart and capable, but do things they love that pay little? These things matter most, because these projects (renovation into apartments, and being landlords) don’t just happen on their own. They need to be up for it – unless you are going to do it all, which I don’t recommend, as it is a huge job to manage such a renovation. Whether they want to do it and are able is what matters, as the money is there in the building in equity, as noted above, but the loan, and the renovation process, and the landlording need to be well managed. If they aren’t up for it, it would make sense to sell the building and purchase them a condo or coop (or two, if separate living units are wanted), in an accessible building if the disability requires it, where they could live, with their costs somewhat controlled from major increases, which would not happen in a rental, which is why I wouldn’t recommend a rental for aging, necessarily, if there would be money from the sale to allow purchase of condo or coop. Perhaps the building won’t support such a sale and purchase of apartment(s) now, but if you wait, prices will go up substantially if it is in an area that is still gentrifying over the next years. It doesn’t sound like there is any urgency to the question, so gather information and consider options carefully. An owned apartment in a elevator building can be best for aging, whether or not one is disabled, as many of us become disabled in various ways as we age, and brownstones, even lower duplexes, are not always the most accommodating homes at that point in life. Still, one can always renovate now and move later if necessary – it is just that it is hard to predict the future with any certainty when it comes to aging.
NeoGrec | 11 years and 1 month ago
Apartments in great condition attract top rents and good tenants. Apartments in poor condition require a lot of maintenance (that eventually becomes quite costly) and tend to create grumpy, complaining tenants. Not a good scenario for two owners without experience as landlords, one of whom is disabled. So if you don’t have the ready cash to fund a really decent renovation, consider selling and cashing out. You don’t say where your house is located but with every brownstone neighborhood of Brooklyn achieving incredibly high prices currently, you might be better off relocating your brothers to an apartment in an elevator building.
ventilated | 11 years and 1 month ago
Is it doable?–yes. Is there a learning curve to owning and managing a property?–absolutely. What is the current Certificate of Occupancy? (1, 2, 3-family, other?) Renovating a 1-family into a 3-family is a costly and involved process. It’s doable, but you need to be well-informed before plunging in. Have you spoken with a financial planner? Spoken with a trust and estate attorney? Spoken with a real estate attorney? There are many, many moving parts to your question, including not just property issues but tax ramifications. Explore some of these before moving forward. If you’re not already working with a good attorney (often hard to know just how good they are when everything is new), try starting with a free appointment at the Financial Literacy center at SIBL: http://www.nypl.org/help/getting-oriented/financial-literacy-central
bk1lnite | 11 years and 1 month ago
True, the accounting can be complicated so it’s worth getting good advice. As I understand it, your brother will have a “stepped up basis”, so for example if the house was purchased decades ago for 200k and it’s worth 1.5million when he inherits it his basis is 1.5m and if he sells tomorrow will owe no capital gains taxes. If half the building is rental property then you can deduct the rental portion of ongoing expenses (maintenance, insurance, heat & hot water) against rental income and you depreciate the (rental portion of) the building for ~28 years, so as slopefarm says he may have many years of income with minimal or zero tax. If he sells years from now capital gains tax would be due on the difference between the selling price and the basis (1.5m + the cost of capital improvements) less the 250k exclusion for the sale of a primary residence plus tax due on the recapture of depreciation. Of course if he lives in the house the rest of his life capital gains tax is not a concern.
slopefarm | 11 years and 1 month ago
2 comments to BK1 and r2’s advice. First, Figure out the rental market where the house is and the expected income. then, of course, net monthly payments for financing the work. You might not feel that the income generated this way is sufficient for two people. Compare it to the alternative — selling the house and figuring out how much income the principal from the sale will generate, less rent in a new place, of course. If you go the reno for income route, meet with an accountant, so you will know how best to account for reno and maintenance expenses to offset against rental income — which get amortized, which you take all at once, what losses carry over, etc. You may be able to keep the amount of income tax you pay on rental income minimal to zero for quite a few years.
bk1lnite | 11 years and 1 month ago
It certainly sounds doable. Shouldn’t be that difficult, esp. if it’s already a legal 3 family and you need to do a modest renovation (e.g. update kitchens and bathrooms, paint, etc.) as opposed to gut renovate. I would suggest looking to get a home equity line of credit. With no existing mortgage your family is likely sitting on a huge amount of equity, and banks may be willing to set up a line with the tiny incomes of the owners if the loan to value ratio is low. (For example, if the brownstone is worth $1.5 million a $300k is only 20% LTV which means very low risk for the lender). A HELOC lets you get the money you need when you need it – deal with the boiler soon while it’s not heating season; do the renovations to the 3rd and 4th floors and pay interest only until you get rental income. When the apartments are rented start paying principal in addition to interest payments.
resident2 | 11 years and 1 month ago
Nothing is impossible, it just takes money! If neither of your siblings have sufficient income to refinance the building to raise the money for the upgrades to rent out the upper apartments; perhaps you could co-sign? It sounds like they may need your help in managing the tenants and building anyway. But all of this depends on what is the current legal use of the building? If the renovations include a change of use in order to be able to legally rent out the upper floors, it may be better to look for an alternative….maybe selling the building in order to take care of their future? If it is just a matter of upgrading existing apartments, you will then need to weigh the costs of the renovations, with the costs of the refinance to gain how much income? There is no easy answer without knowing a lot more about the whole picture. This is the kind of financial planning/building management that I deal with on a regular basis. Feel free to contact me through this site if you would like some help.
tinny167 | 11 years and 1 month ago
Also, I meant we wanted to renovate the third and fourth floors not the second and third. I know, this is not the sign of a good project manager. 🙂
tinny167 | 11 years and 1 month ago
P.s. I forgot to add the boiler broke down some time ago so that has to be addressed as well.