I am evaluating an under market for a rent controlled unit currently occupied by a tenant in NYC. The property is a foreclosure so I can't get any information from the previous owner. The rents collected are about half cost of the HOA fee.
My situation is that I am actually looking for a primary residence and would be willing to live in this property for several years.
So, the risk is if I can’t do an owner use eviction, I’ll essentially be substidizing the tenants rent every month out of my own pocket.
Any advice how I can either gauge the likilihood of an owner use eviction being legal for this particular situation beforehand OR somehow legally raise rents to close the expense gap?
For legal advice, retain an attorney. NYC is an animal unto itself. The laws are very complex and favorable to tenants.
You mention an HOA... is this a condominium unit? Coop?
I'm not a legal expert but I am an NYC based real estate appraiser and I have to say...if you're looking for a primary residence and want to move in somewhere relatively soon don't be fooled by the low price tag. The price is low because the unit is not valuable to the market. Rent controlled tenants are nearly impossible to evict in any reasonable amount of time. My experience is that people who buy these units do so at a considerable discount and basically have to wait for the tenant to die or break some kind of law such as subletting/Air BNB.
Also rent controlled units generally have SIGNIFICANT deferred maintenance issues because there is no incentive to maintain them. So you have to have a repair budget factored in as well.
I wouldn't risk it personally but it's your call. If you are planning to owner occupy and want a bargain maybe search for HDFC coops? There are income restrictions but if you qualify you can buy an apartment for pennies on the dollar.
You can not evict a rent controlled tenant to use the apartment as your primary residence in a co-op or condo that was formed in a non-eviction conversion plan. If it were that easy, these types of apartments would not be trading under market. I would move on.
The only time this even remotely makes sense if you can buy the unit next to yours with the possibility of one day making a great combination, or you buy them in bulk and play the numbers game with a very long time horizon.
I looked at a great number of these, some 20 years ago, where apartment buildings under "rent control" or "rent stabilization" are sold, the entire building to be converted to COOPS and Condos. I looked at many of these, some occupied, some in foreclosure, but finally bought a vacant triplex and foreclosure since the prospects to ridding occupied properties under these regulation are either prolonged or impossible.
First, if you're talking "rent controlled" you're talking about the old law from WWII where the original tenants or decedents reside. Not to get into the weeds of regulations, it's almost impossible to evict, so recent news stories of huge sums paid these people are reported. If all you have to do is to live there, just pay a straw buyer to buy the place for you and have him live there a short while, and then sell to you. No need to payoff the tenant with several hundred thousand. But for both stabilized and controlled tenants, if they're over 62 years of age, they are protected for this reason alone. You just can't kick them out.
I recall the last rent controlled apartment I seen, it's in the 2nd floor of a building with several stores underneath. The rent controlled tenant is over 90 years old, and two landlords in a row bought the building, and planned to wait her out, and they waited for over 20 years, but she's still there. Yet, she's still alive and refused to even be paid to move. When market rent ran $800.00 at the time, her rent controlled rent was set to $98.00, and the last owner didn't even bother with the extensive paperwork to get rent increases, where he has to get approvals at 3 to 6 percent depending if it's a one year or two year lease. The owner said, I have better things to do to make $3.00 more a month in rent.
So, the question is, would I be the 3rd landlord to wait? What if she lives to 105.
Talking about living to 105, a women we know from church was looking for an apartment for her mom. When we finally got the full story, they been urging mom to sell her home, and to move to a smaller place. Problem was she lived there 50 years and refused to move. So they told her they'll rent a place in the neighborhood temporarily while looking for a smaller place. She finally agreed, rented our place, the mom turned out to be 103, don't want to live in a nursing home. I have the same problem now with my mom in law, she's 93, can't live by herself, but yet insists on keeping her coop, no nursing home for her, even though it cost $790/month in coop fees. She is mortgage free. The point I'm making is old folks just don't want to move, wants a place to call home, and you'll be in a hell of a fight if you start one.
Now, there are other sneaky ways to get them out, but I don't do it since I believe it's against my beliefs.
@Josane Cumandala @Jason Lee and @Frank Chin thank you so much for your insight and opinions. My grandmother is 98 years old, and still has another 10 years in her. I'm also not nearly cold enough to think about kicking someone like her on the street. I'd be interested in some kind of win-win. That said, I am having a difficult time moving on from this one (and similar opportunities for that matter) because the math seems to work even when I can't immediately move-in. And to clear a few things up, this is a Co-op not a condo (apologies for not making that more clear).
For example: buying into this co-op and paying HOA fees for 20 years yields an annual return of about 10% (and obviously more for less time, i.e. 10 year would be a 18% yearly return). That's not an amazing return, but it beats my stock portfolio.
Has anyone approached rent controlled, tenant occupied co-ops as a specialty (or have creative ideas on how to make it work)? I imagine there could be some notion of "underwriting" tenants before making an investment.
In this instance, with amount of information available online, I've been able to figure out who actually lives in the unit. It's definitely a grey area to do anything with this information, but what (if anything) would be ethical? Could I contact them asking about their willingness to relocate? Everyone has a price, unless you're my grandma...
If the current rent covers half the maintenance, then how are you coming up with a 10% return when there's negative cash flow? Or is this after you're able to evict or buy out the tenant?
The thing is, not everyone has a price. A lump sum buyout might sound great but where can a tenant on limited income find new housing, when most tenants are vetted by income? You can always try to buyout the tenant but in a situation like this I would always prepare for the worst. Not sure you could underwrite the tenant in any meaningful way. The current tenant could have a young relative or grandchild that moves in and takes over the lease.
There are investors that specialize in rent controlled apartments but they buy in bulk to try to mitigate many of the risks.
@Jason Lee the estimated return is averaged annual return based on purchase price and value after tenant has vacated, based on value of recently sold units in the building.
Vacant neighboring unit: $1 million
Tenant occupied unit: $250k
Would a buy-out under $750k be logical especially if it is to be owner occupied? I understand there is risk that someone would not take a buy-out, and the it's far easier to just buy the $1 million unit, but those who buy several of these types of investments have to start somewhere, right?
@Paul Jones if you're going to spend $1 million either way you might as well get the vacant unit and hopefully not have to do as much renovation. I don't see what "return" you're getting if you plan to live in the unit after the tenant leaves rather than rent it out. This all sounds highly speculative to me. If the tenant could be bought out the owner would most likely have done so themselves so that they can list their property for more money.
@Josane Cumandala in that scenario, it would be a max spend of $1 million with potential (though understandably very risky) to settle for far less. I'm interested in determining the amount of risk in this situation. It may be that the tenant is willing to relocate. It's also possible to further negotiate using that risk as leverage on the seller. I agree that it is speculative though, but with enough cash to explore options, it could be a diamond in the rough.
Does anyone have strategies for determining the risk of a specific tenant before making a purchase?
Now that you mentioned it is a COOP, there's a lot more digging you have to do, and correspondingly a higher risk. I have owned and rented out condos, but with COOP's, while you still pay a monthly fee, it's a totally different animal.
When owners of the original building decided to go COOP, and sell to buying investors, usually the first group are bulk buyers. Say the building has 100 units, some will pick up say 20 or more, at a discount, usually a mixture of rent controlled and non rent controlled tenants, and occupied vs vacant. He then either flip or resell to single buyers like yourself.
The risk I'm talking about besides the financial risk of your individual unit, is risk of the entire COOP where usually they obtain an underlying mortgage, and it may or may not be paid up to date. While rare, the bank can foreclose on the entire COOP and owners of shares, which is what you'll have, not real estate, can be lost. The bigger risk is some of these bulk buyers, if there are any, may fall behind making payments of their units, and put the entire COOP in jeopardy. While I attended COOP foreclosure auctions, at the end of the auction, bidders who did not win would be swarmed by these bulk owners, saying "we have units for sale too, can we talk?".
So while your looking at the one unit, the bigger picture is the state of finances of the COOP, are there major owners of multiple units, and if there's only a few that owns the majority, I'd be very nervous. In other words, there's too many moving parts to consider, particularly if you're new at this.
I mentioned my mother in law owns a COOP. It's an old established one with no underlying mortgage. If that wasn't the case, we would have her invest in a condo.