BiggerPockets

Ok so I recently moved into an awesome 4 bedroom 3 bath duplex in an up and coming area of Manhattan (near Columbia University). The rent is much cheaper than what I was paying and the space I get is amazing- about 3,000 square feet. Since I plan on living here for a while, I took it upon myself to invest several thousand dollars into the place in addition to hundreds of hours of my own sweat equity. The place wasnt in terrible shape but I have completely redone the painting (yes Im allowed to), got on my hands and knees and cleaned every square inch practically with a toothbrush, dismantled chandeliers by each crystal and hand washed them, ect. The place looks phenomenal my friends tell me and I have recently thought about buying the whole townhouse which would include our 4 bedroom duplex, a 2 bedroom apt below us and another 2 bed in the basement with a backyard. The owners paid $700G back in 2007- Im not sure of the details but Im guessing it was some sort of shortsale deal. The townhouse was built in 1899 and is a very solid classical NYC townhouse with crown molding and all and was renovated withing the last year with all new fictures including recessed lighting and jacuzzi tubs... As I said the area is very up and coming as you can see new condos being built all around us. I want to jump on this by doing a lease to buy deal. Please advise me on the best way to get something done where it is a proposal the owners might be willing to accept. I dont know how accurate zillow.com is (probably way off in this case) but the most recent valuation for this home is 2.8 million. Im guessing the place after all improvements made is around 1.7M. I would like to live in this house while collecting rent from my roomates and the other tenants to pay off my mortgage and have a place that will be worth a ton more 5-10 years down the road. How does a typical lease to buy work? Can I write something up where I offer them a certain sales price, put say 15-20% down and then continue to pay rent whereas the rent would be paying down the actual purchase price? They probably wont do owner financing and Im looking to have a mortgage lined up within the next 24months. thanks for any advice

$1.7M properties make really, really bad rentals. So, this is pure speculation. 20% down on $1.7M is $340K. Do you have that? The loan amount would be $1.36M. Monthly payment of $9048, which would require an income around $387K a year, before considering the taxes and insurance. Do you make at least $450K?

If you're asking what terms (down, rent credit) the seller might accept, then you will have to ask the seller. There is no real standard. As a buyer, getting half the rent credited against the purchase would be great. Certainly you could propose to them a purchase price of $1.1M, 10% as option money, and half the rent as a credit. Whether or not they would consider any of that is totally to them.

Have you even spoken with them? This sort of a deal assumes a motivated seller. Are these guys motivated or even interested in selling? They may well know what they have on their hands and may be looking for a price in line with the retail value. They may intend to hold on for the long term.

Rental property evaluation is independent of the location. Whether its a NY multi or a house in the boondocks that could be bought for $10K, the math is exactly the same. A $1.1M property that generates $11,500 in rent is a loser rental just like the $110,000 property that generates $11500 in rent is a loser rental. Speculation on future appreciation is a completely different matter, and either could be good or bad for appreciation.

To be honest, when I saw your original post and you were talking about how nice the place was, I knew emotion had came into the discussion. When evaluating a rental property, you need to care about numbers. Property location, features, and condition matter only to the extent they affect the numbers.

If you sign a lease option agreement, your 10% down payment is gone if you don't follow through. Be sure you're going to actually close before you put that money on the line.

Wendy Patton talks about getting half, or even more, of the rent as credit. As a seller, I'd never agree to that. As a buyer, that's absolutely what I want. For that matter, why not all of the rent as a credit?

Make them an offer and see what they say. You have nothing to lose, right?

What you doing is really a "master lease". You lease the entire property from them with agreed terms, then sublet it to the other tenants. Similar to a lease option, but for a multi-family.

I wouldn't LO upper end properties because finding renters who will pay that much for rent especially in this market is going to be very very difficult.

I would wholesale it to someone instead.

You're basing a 5-10 year appreciation on what exactly?

Playing the speculation game is too risky this market might not reset for a while now.

I know the area very well. Have you taken into consideration the taxes? Plus the fact that people are fleeing real estate in NYC in droves based on the proposed new tax hikes. The taxes, ins, and maintenance on the building alone scare me. If you have that much disposible income, there are many more lucrative options for you without as much risk.
You have to ask yourself what is your goal. Is it that you really want to own in NYC? Or are you looking at this deal for making a profit?
In my opinion, I would hold off buying in NYC until you are loaded and lease options are not in your vocabulary.
You are however right about the rents. People pay through the nose for a tiny bit of space. However, the tenants rights in NYC are very tricky. Once you get a tenant in its almost impossible to get someone out. What happens if just two of your tenants lose their jobs and can't pay the rent. And you can't get them out for over a year or more. This happens all the time.

Just something to think about. Good luck no matter what you decide:-)

Jordan,

I've done business all over NY and have lots of friends that are investors in Brooklyn, Queens, NYC, and Manhattan . I understand what your saying about the price of rent and the cost of living, your correct and your numbers are accurate as far as that goes. Don't take offense on the comments on here, people are just sharing their experience with you so that you don't waste your hard earned cash.

That being said, you may have a great deal on your hands but be smart about it and run the numbers just like Jon said. Another piece of advice is to NEVER rely on the economy or speculate that the housing bubble will blow up again, it may but it also may not come back for a very long time. The point is, if you have a deal that has positive cashflow the economy for the most part is irrelevent. Be smart and don't let your emotions make the call, the numbers either work or they don't.

Good luck.

Jeff