2-4 Unit Multifamily Acquisition in New York City

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2-4 Unit Multifamily Acquisition in New York City

Account Closed
Realtor · Manhattan · Member since 2018 · 6 posts · 3 votes

Looking for anyone who's brain I can pick about their relevant experience investing in small multifamily in NYC  or other high-cost entry markets around the US-

I work in commercial and am interested in making an investment in one of the outer boroughs of NYC. I can model a deal no problem and tell when the numbers make sense, but I need some suggestions as to how people navigate financing in low cap rate environments where even crappy MF properties are going to run at least 350-400K per unit. I have around 100K cash and dont plan to invest until the next market correction, and will probably have about $150 by the time that rolls around. Still, a down payment on a modest 3-4 unit is going to be around 400K if I were to put down 30-40%. FHA regs are pretty confusing to me and I think that even if I were to occupy, the loan wouldn't be for nearly enough considering their maximums.

Does anyone have suggestions as to how to navigate debt in a situation like this? 

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Llewelyn A.
Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
8y

@Account Closed

Aidan: You can private Message me. I have been a Brooklyn Investor for 21 years and currently hold a portfolio of 8 multi-family properties, mostly 3 and 4 family buildings including several Brownstones.

David: It may not seem intuitive to you, but there is a LOT of money being made here in NYC.

I for one have made around $10 Million in unrealized profits for my Investors and myself.

Investing in big Metro Cities, you need a reason to trade High Cap Rates. That reason is huge appreciation.

An example of the kind of appreciation I get would typically be like a property I purchased in the year 2000.

The Purchase Price was $140k, $21k down, $8k in closing costs, and approx. $40k of renovations. Total invested, $21k plus $8k plus $40k = $69k.

Today, I can sell the building for at least $1.2 Million. If I were to sell it today, I would wind up with $1 Million, profitting $1 Million minus an investment of $69k = $931k. The ROI on the Sale would be $931k divided by $69k = 1,350% ROI over the 18 year holding period.

But there is no need to sell because this property also increased in cash flow and is doing excellent.

Where else can you get fantastic deals like this?

Either case, I'm not here to preach about investing using Future Value formulas such as Internal Rate of Return (IRR).

I am here to confirm Aidan's understanding of Investing in large Metro areas, and specifically, NYC.

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  • Daniel Harbuz
    Specialist · Europe · Member since 2018 · 44 posts · 30 votes
    8y

    Sorry for posting a question instead of an answer but why are you focused on a higher cost entry market? 

    Also regarding waiting for a crash im keeping some funds in reserve but still investing just to get experience and contacts so when it comes im in a solid position to capitalise.

    0Reply
  • Account Closed
    OP
    Realtor · Manhattan · Member since 2018 · 6 posts · 3 votes
    8y

    Daniel-

    I am predominantly limiting my scope to markets where I have more intimate knowledge of opportunities and contacts that could help me boost my bottom line. By staying in New York, I could handle closing without the need for an agent, and I could personally attend to a lot of the basic renovations that the property will inevitably need either alone or by overseeing labor on a freelance/contract basis. Essentially, the choice to stay in that market in which I am located is solely intended to reduce acquisition and renovation costs. 

    1Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    8y

    Proximity to the asset doesn't have much to do with the need to be represented during the acquisition. Yes, overseeing renovations will definitely be easier but I would focus on ROI. If I wasn't buying with the plan to live in one unit I would buy in a market with higher caps so you don't have to put 30-40% down.

    You could be waiting years for the next correction and who is to say it will be significant? Buy in a strong area where a correction will have a limited impact and make sure your loan term is long enough to ride it out if the market dips. Don't wait to get in the game. 

    3Reply
  • Randi Plevy
    Investor · New York City, NY · Member since 2014 · 141 posts · 65 votes
    8y

    @Account Closed: Which boroughs are you considering? I have closed scores of transactions in Queens and the Bronx of two family properties in the $600-$750,000 range. These buyers are all putting 3.5% down on FHA loans and using the imputed rent from one unit to qualify. Pointedly, the buyers have good, but not great, W2 jobs. If you are a commission based employee, you may find it harder to qualify, but speaking to a knowledgeable mortgage broker is a good start.

    5Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y

    @Account Closed

    Aidan: You can private Message me. I have been a Brooklyn Investor for 21 years and currently hold a portfolio of 8 multi-family properties, mostly 3 and 4 family buildings including several Brownstones.

    David: It may not seem intuitive to you, but there is a LOT of money being made here in NYC.

    I for one have made around $10 Million in unrealized profits for my Investors and myself.

    Investing in big Metro Cities, you need a reason to trade High Cap Rates. That reason is huge appreciation.

    An example of the kind of appreciation I get would typically be like a property I purchased in the year 2000.

    The Purchase Price was $140k, $21k down, $8k in closing costs, and approx. $40k of renovations. Total invested, $21k plus $8k plus $40k = $69k.

    Today, I can sell the building for at least $1.2 Million. If I were to sell it today, I would wind up with $1 Million, profitting $1 Million minus an investment of $69k = $931k. The ROI on the Sale would be $931k divided by $69k = 1,350% ROI over the 18 year holding period.

    But there is no need to sell because this property also increased in cash flow and is doing excellent.

    Where else can you get fantastic deals like this?

    Either case, I'm not here to preach about investing using Future Value formulas such as Internal Rate of Return (IRR).

    I am here to confirm Aidan's understanding of Investing in large Metro areas, and specifically, NYC.

    7Reply
  • Account Closed
    OP
    Realtor · Manhattan · Member since 2018 · 6 posts · 3 votes
    8y

    David-

    Thanks for your input. Considering this is my first asset, I definitely want to stick with something in my area. Plus, in the high likelihood that I need to bring in a capital partner or some other creative form of financing, these established markets practically speak for themselves. I am looking at this first investment as a means of getting my feet wet and proving that I can add value to similar assets. However, I am very confident, given my line of work, that I can model the financial feasibility of any opportunities with a pretty high degree of accuracy. I think that your strategy of buying into a strong market without regard for timing can certainly work for someone with longer investment horizons, but my own are limited to acquisition during a downturn, a rapid value-add, and a couple of years demonstrating rent growth to exit at a lower cap and an appreciated property value. While the added value coming from renovations is essential to bring rents to market levels, the bulk of the return would likely be a result of plain appreciation in property value. I am curious if anything about this strategy still seems strange after giving a bit of background. Would love to hear your opinion. 

    0Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    8y

    @Llewelyn A. I always view appreciation as an added benefit; the deal must stand on it's own. That is a good return but a lot of investors don't want their money tied up 18 years. Example: if you were to make a 20% IRR every 3 years, cash out, and do that every 3 years for 18 years you would have doubled the return that you made in the same amount of time. Just something to think about.


    @Account Closed keep in mind cap rates are irrelevant with anything less than 5 units so forcing appreciation is out. You would be at the mercy of the market. But, buying and occupying a quad with an FHA loan like Randi mentioned gets your feet wet with a lot less out of pocket. This makes even more sense if you haven't bought a primary residence yet.

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y

    @David Lilley

    David, I do better than a 20% IRR over my 21 year history. I not only hold on to these very highly appreciating properties, but I then take out what ever I can of the Equity through loans to increase those returns.

    There really isn't much that can compare to the returns we make except a few very high performing stocks. Even then, we still do much in the aspect that we would rather risk a larger amount of money on Real Estate than on a stock.

    Anyway, this isn't that discussion. There are plenty of threads about cash flow and appreciation on BP.

    0Reply
  • Account Closed
    OP
    Realtor · Manhattan · Member since 2018 · 6 posts · 3 votes
    8y

    @David Lilley

    Thank you for commenting on the financing aspect of it. As far as I understand the process of obtaining FHA financing, there are two options. Option 1 being purchase with owner occupation of one unit as a primary residence, and option 2 being an FHA multifamily loan which requires a slew of other requirements to be met and would likely be impossible for a first time buyer such as myself.

    What downsides exist, if any, to option 1, besides having to occupy a unit in what realistically would be a pretty crappy part of town. Would you ever consider a HML if you were in my position?

    0Reply
  • Josane Cumandala
    Appraiser · Brooklyn, NY · Member since 2018 · 106 posts · 118 votes
    8y

    This is a fantastic thread and I'm following mostly for my own education but in my experience as residential appraiser in NYC I almost never see owner-occupants putting 20% on property in Manhattan or Brooklyn. It's almost always 10% down, 90% financed - which is still a lot of money because it's such expensive real estate.  However I'm not sure if this is because of the specific banks we work with or if 90% loans are just more common out here. We are very particular about what banks we work for and do not like dealing with AMCs. 

    Anyway, my point is this you may want to search for the best mortgage broker you can find who can find the right lender for you. Lenders that will be keeping the loan on their balance sheet rather than selling it to Fannie and Freddie may be able to give you better terms or some kind of downpayment assistance. Credit unions also almost always have better services and rates. You'll probably have to talk to a lot of people and kiss a lot of frogs before you find a prince. 

    4Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    8y

    Given your cash flows will be tight I think the high interest of a HML would not make sense but you will just have to run the numbers to see. You would also pay at least 1-2 points with HML most of the time.

    I think the only downside would be living in a bad part of town but you would only have to suck it up for one year and then you do not have to occupy at that point. However, a wise man once said never invest in the hood.

    If you want to keep acquisitions costs low, a mortgage broker will add 1 point to your costs. In my opinion a broker wouldn't be necessary for this type of deal. Josane is right though, credit unions will typically offer the best terms. You are going to have to get on the phone and talk to a lot of banks. Target FHA lenders and find out what their criteria is. Do this before you have a deal under contract. There is also free down payment assistance out there for FHA loans where they will give you down payment money. Not sure if it applies to multis but would be worth looking into.

    Give this article a read: 

    https://www.biggerpockets.com/renewsblog/fha-guidelines/

    1Reply
  • Joel S.
    Rental Property Investor · Brooklyn, NY & Jersey City NJ · Member since 2016 · 39 posts · 7 votes
    8y
    @Llewelyn A. You have a solid point for furure value investing and where patient money and or a capital call is possible. However, couple the Fact Of low cap rates with rent stabilization where increase in rental income is slow its not for your average investor.
    1Reply
  • Ceasar Rosas
    Real Estate Broker · Bronx, NY · Member since 2011 · 597 posts · 341 votes
    8y

    @David Lilley

    If you can put down 25% on a multifamily investment, in this market, I would say that's the way to go if you're not going to live in it, or don't want to. If you were going to live in it, FHA is a great option and not that hard to navigate at all. If you have 100k you're looking at about a 400k type of house which will be difficult in any borough. You may want to look at areas in Westchester like Yonkers or Mount Vernon. Possibly look over the Hudson at New Jersey. Absolute 1st step is to sit down with a great Mortgage Banker to know how qualified you are and how much you can afford. Have you done that yet?

    0Reply
  • Account Closed
    OP
    Realtor · Manhattan · Member since 2018 · 6 posts · 3 votes
    8y

    @David Lilley 

    Seems like FHA loan or bringing in a partner would be the only way to stretch the capital that I do have far enough to get my target area out of the crappy neighborhoods. Even the worst neighborhoods in Brooklyn (my target area) have average pricing of about 200K per unit, and even that number is skewed because of larger trades with 20+ units being so greatly discounted to reflect impact of rent control and stabilization. Otherwise, the cash I do have certainly wont get me anything in a desirable area.

    Does anyone here have any experience navigating the debt market early in their careers as investors? (Specifically, FHA financing for MF properties). If there are any mortgage people following this thread, is a bank likely to take a chance on someone like myself (23 years old, 750+ credit, stable income, relevant experience in other areas of commercial real estate) or is it going to really depend more upon the property that I bring them with financials and a solid value add plan to back it up?

    0Reply
  • David Lilley
    Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    8y

    @Account Closed as long as you meet the lender requirements below you shouldn't have an issue. They might also want to see 6-9 months debt service liquidity.

    • FICO® score at least 580 = 3.5% down payment.
    • FICO® score between 500 and 579 = 10% down payment.
    • MIP (Mortgage Insurance Premium ) is required.
    • Debt-to-Income Ratio < 43%.
    • The home must be the borrower's primary residence.
    • Borrower must have steady income and proof of employment.
    1Reply
  • Nima S.
    Real Estate Professional · New York, NY · Member since 2017 · 33 posts · 11 votes
    8y

    @Account Closed The thing to be wary of FHA is it comes with MIP (Mortgage Insurance Premium) and I believe it stays for the life of the loan. Only way to get rid of MIP is to refinance the FHA loan with another loan. Conventional loan options (Fannie, Freddie) also have lower down payment options (I believe) but the PMI on those go away when you can have 20% equity in your home which will have to proven out by an appraisal.

    In regards to talking to bankers, you can search for them on Zillow. You can sort out by their star ratings (which I highly recommend as it shows prior clients had great experience). Also I have few other bankers, brokers I connected with myself. If interested inbox me and I can provide you their info. Thanks - Nima

    1Reply
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