Valuing a MF in New York City

20 Replies

All of you that have actually worked in NYC and have gone through any "works anywhere" training program know that NYC is a very specialized market and things are just done differently here.

I would like to know what you all consider the best way to come up with a current value and after repair value for a multifamily property IN NYC specifically.  Comps?  A cap rate?  If a cap rate, a cap rate based on what exactly?

Please indicate your experience in the NYC market in your answers.  THANK YOU.

I am also wondering what response you will receive for this question.  NYC is a complete beast of its own. They just announced that for one year leases no increase and for two year leases two percent increase for rent stabilized apartments.  As an investor event's like this make me stay away from investing within 5 miles.

I have decided to open up my search range within an hour out of the city such as Yonkers, Northern NJ, and even a little further.

Also as a primer on calculating ARV to compare two properties use this file http://www.biggerpockets.com/files/user/JasonScott/file/estimating-arv by @J Scott

Originally posted by @Angel Rosado :

They just announced that for one year leases no increase and for two year leases two percent increase for rent stabilized apartments.  As an investor event's like this make me stay away from investing within 5 miles.


Basically, that means that rent growth is likely to track inflation for the next couple years.  Which is how 90% of the US markets operate.  Not so unique after-all... (just a little bit of sarcasm there... ;-)

That says to me, if you evaluate your NY properties in a similar fashion to how you'd evaluate deals elsewhere (at least in the short-term), that should give you an idea of how to proceed.

@J Scott Sorry the valuation techniques are the same.  When I said that, I meant to say that NYC is a beast in terms of the cost to purchase a property is high or is my thinking flawed?

Just when I was thinking it was impossible to send sarcasm via forums someone has succeeded hahaha.

Originally posted by @Angel Rosado :

@J Scott Sorry the valuation techniques are the same.  When I said that, I meant to say that NYC is a beast in terms of the cost to purchase a property is high or is my thinking flawed?

Just when I was thinking it was impossible to send sarcasm via forums someone has succeeded hahaha.

Prices are certainly higher in NYC than in most cities, but that doesn't make the valuation methods any different.  Perhaps investors are willing to buy with lower cap rates, perhaps investors are willing to speculate more, perhaps there are rent control rules/laws that need to be factored into the analysis, etc.  But, the basic valuation techniques will hold true anywhere that real estate is participating in a free market.

If the OP thinks that NYC has it's own set of valuation rules, I'll need to be convinced...

Originally posted by @Angel Rosado :

I am also wondering what response you will receive for this question.  NYC is a complete beast of its own. They just announced that for one year leases no increase and for two year leases two percent increase for rent stabilized apartments.  As an investor event's like this make me stay away from investing within 5 miles.

I have decided to open up my search range within an hour out of the city such as Yonkers, Northern NJ, and even a little further.

Also as a primer on calculating ARV to compare two properties use this file http://www.biggerpockets.com/files/user/JasonScott... by @J Scott

However, that's only applicable to rent stabilized apartments.  Pretty simply response to that - don't invest in units that are under rent control or rent stabilization programs.

I've had a ton of success investing in MFH (3 and 4 family buildings) in very specific New York City neighborhoods - Bed Stuy, Bushwick, and Ridgewood in my case.

Investing in NYC is not really any different than in any other part of the country with the following exceptions:

-Cost of entry is very high.  My 3 and 4 family units all were between 600k and 1.3M to purchase

-The market is hyper-localized.  The different of a few blocks can mean the difference between fairly comparable rental units being able to command $2000/mo in rent vs. $3000/mo in rent, and if you don't know the areas well yourself, you run the risk of buying something one block too far over

-In return for high cost of entry and high rents, the returns are larger.  On my most recent purchase (1.2M at 25% down for a 3-family) I'm taking in gross rents of $8600/mo (which is below market rate due to signing initial leases mid-winter) but still have a monthly net profit (after all expenses including capital reserves) of roughly $2k, so an 8% return.  After re-leasing during peak rental months I expect gross rents of around $9400/mo, bumping annual return to 11.2% from that point forward.

I'm happy to answer any specific questions about NYC MFH based on my experience over the past 5 or so years.

-matthew

Originally posted by @J Scott:
Originally posted by @Angel Rosado:

@J Scott Sorry the valuation techniques are the same.  When I said that, I meant to say that NYC is a beast in terms of the cost to purchase a property is high or is my thinking flawed?

Just when I was thinking it was impossible to send sarcasm via forums someone has succeeded hahaha.

Prices are certainly higher in NYC than in most cities, but that doesn't make the valuation methods any different.  Perhaps investors are willing to buy with lower cap rates, perhaps investors are willing to speculate more, perhaps there are rent control rules/laws that need to be factored into the analysis, etc.  But, the basic valuation techniques will hold true anywhere that real estate is participating in a free market.

If the OP thinks that NYC has it's own set of valuation rules, I'll need to be convinced...

 Spot on.  There's nothing different about valuation in NYC than anywhere else.

In fact, depending on the neighborhood, due to a fairly homogenous housing stock (eg; stick construction 3 or 4 family row-houses), I'd argue it's easier to value some properties because they're all "the same".  In 5 years and multiple gut-renovated 3 and 4 family properties in the same neighborhoods I can tell you that the various costs associated are basically identical property-to-property. 

As with anything, it's about knowing the vagaries of the market.  No lawn maintenance to worry about in NYC, but make sure you get snow shoveled immediately or the city will fine you.  Same with making sure garbage or recycling are properly sorted, otherwise, you get a fine!  Property taxes are shockingly low in most areas of NYC (despite common belief), vacancy rates are also extremely low (I've averaged 100% occupancy across multiple properties in 5 years without even trying hard).  Depending on the neighborhood, brokers fees/commission for finding tenants can be high (1 month rent to 15% of annual rent, landlord pays) unless you're in an area that's "hot enough" to command tenant paid brokers fees.  And the list goes on...

@Matthew Saskin Great points on both responses.  I look forward to achieving the results that you have been able to attain.  

The biggest hurdle that I am dealing with is the cost to enter the market, which is a matter of time, saving as much as I can.  I can clearly see the vacancy rates being low compared to other market especially considering the concentration of people within the 5 boroughs.

Just in these two post I was able to get a lot of information, didn't know that in NY the landlord pays the broker's fee.

Originally posted by @Angel Rosado :

@Matthew Saskin Great points on both responses.  I look forward to achieving the results that you have been able to attain.  

The biggest hurdle that I am dealing with is the cost to enter the market, which is a matter of time, saving as much as I can.  I can clearly see the vacancy rates being low compared to other market especially considering the concentration of people within the 5 boroughs.

Just in these two post I was able to get a lot of information, didn't know that in NY the landlord pays the broker's fee.

 Brokers fees are a highly variable area, driven mostly by how "hot" a neighborhood is.  In prime neighborhoods (eg; all of Manhattan, Park Slope/Williamsburg/etc. in Brooklyn, and others) the standard is for tenants to pay without question.  In other up and coming/gentrifying areas, it's pretty variable as to whether the norm is tenant-pays or landlord-pays.  In the areas we invest in, I'd say we're just at the cusp of switching from landlord to tenant pays for the brokers fees - give it another 1-2 years and the areas will be solidly tenant pays.

Moral of the story, understand the dynamics of your specific target neighborhood so you can evaluate appropriately.

@J Scott

I am not nearly as experienced as you are so I assume this exists in another market but so far I have not seen it to such a great extent:

1) Because vacancy is almost non-existent and costs are so high I have seen people do things in NYC that are probably not as prevalent elsewhere. From fake walls to turn a unit into two to conversions of the tiniest spaces into units. Normally these are not approved for such use and in some cases it was the tenants that did not the landlord. If it was the landlord normally it factors into income.

2) Due to the factors above even people who pay a lot of money live with "slumlord" landlords. I know people who pay a ton of money for their unit and can't get anything fixed.  Problem is rents are up and their location is great so they stay anyway.

3) Since the market has been so hot for so long many landlords I have run across have almost non-existent records and can get away with this

4) Comps are harder because the structures and uses are so different not just block by block but within the same block and its not like most of that stuff is listed anywhere

5) Because of the cost making a mistake in NYC on your first property or second property can be fatal (financially).

All this is not to say the valuation principals are different they are not, more that I feel its just tougher to operate here. 

Originally posted by @Charles Worth :

@J Scott

I am not nearly as experienced as you are so I assume this exists in another market but so far I have not seen it to such a great extent:

....

Every market is going to have its quirks, and that's part of the reason why I'm a huge proponent of investing in your own backyard.  The points you mention above don't impact the method of valuation of properties, though they very well may impact the valuations themselves.

-In return for high cost of entry and high rents, the returns are larger.  On my most recent purchase (1.2M at 25% down for a 3-family) I'm taking in gross rents of $8600/mo (which is below market rate due to signing initial leases mid-winter) but still have a monthly net profit (after all expenses including capital reserves) of roughly $2k, so an 8% return.  After re-leasing during peak rental months I expect gross rents of around $9400/mo, bumping annual return to 11.2% from that point forward.

I'm happy to answer any specific questions about NYC MFH based on my experience over the past 5 or so years.

-matthew

 I'm actually looking into obtaining either a 3 family or a mixed property (2 fam + storefront) in the next 4-5 months in the Brooklyn area (bay ridge, benson, dyker, but I'm heavily interested in looking into the same neighborhoods you invested in).

Were these just phenomenal deals to get you a rent roll of $8600 per month (And you said this is low end) for a 1.2mil place? I haven't done too much digging, but from what I've gathered, it seems like 1-1.2mil will get you around 6k in rent roll which would be a cap ex of 5ish% a year (much lower than your returns). Could you give me pointers as to how to get myself into a similar situation in a relatively "safe" but up and coming area? I'd be putting far more than 25% down - think double or triple that.

If it's better for us to speak via messaging, let's use that channel.

Thanks Matthew.

NYC in terms of valuation is no different than any other area in the world... when you're talking about the MATH that goes into those valuations. You still calculate a CAP rate, and cost per door, and NOI in the same formulas as any other place.

BUT? There is a difference. There is a big difference. In NYC there are factors that come into play that do not come into play in most other areas, things that you need to figure out and plan for, but have no spot in any of the "RE Analyzer" programs and excel sheets you will find readily available. As soon as I say this, there are going to be people chiming in that they have encountered similar situations, and I'm sure that's true! It is the COMBINATION of all of these additional factors that create the perfect storm that is NYC real estate. Navigate it well, and it can be a lot of fun!

I will preface the list below by saying that I have never even been involved in 2/3/4 unit properties in the city - so perhaps they are more akin to other places. My experience is in repositioning over a dozen properties in 4 of the boroughs (Manhattan, Bronx, Brooklyn, and Queens - sorry SI!) with 16 units minimum to over 100 units, both 100% res and mix use. So the following is a list from my experience, that you need to a) plan for and b) understand how to deal with if you're going to get into RE in the city.

Tenants (non rent controlled / stabilized): there is a massive shortage of affordable housing in the city, and a shortage in homeless beds as well. So when you visit the housing court to evict a tenant, there is a bench reserved for representatives from affordable housing agencies from across the city right in the court room. There will usually be at least 3 sitting there all day, and often more. These representatives are there for one reason - to keep people from being evicted. They have funding, but simply no place to actually place the evicted tenant. So as the case winds through the court, and just before the judge grants the eviction, one of these lovely representatives will stand up and offer to pay the past due balance - usually paying up to $5-6k per person, if the judge will dismiss the eviction case. And just in the blink of an eye, the judge slams the gavel and you have your non-paying tenant back. You can start the process again, but its going to end the same way. The only people that make any money in this madhouse are the lawyers. For this reason, if you want to legally evict in the city, you need to let their balance get to $10k or higher before beginning the process.

Rent Stabilized / Rent Controlled: the rules of converting one of these apartments to market rate are ridiculous, and take decades. This is because these units have two rents: legal rent and actual rent. Every year the legal rent can increase by a tiny percentage (plus there are tax incentives that MAY allow you increase in larger increments), but that is something that you as a landlord have to stay on top of. If the previous owner failed to properly increase the legal rent every year, you do not get to show up and claim all of those lost years of increases - you start with the LAST legal rent (could be from 20 years ago) and you get to increase it 1-3% if you can convince the tenant to sign a new lease. Good luck with that. How did we deal with these tenants? Simple. We paid them. Forget everything you have ever heard about cash for keys. If the buy-out amount had 4 zeros, my company was happy. Yes, 4 zeros, not 4 figures. And these were paid in cash. Actual cash. We regularly went into 5 zero territory -  but then we would use certified bank checks. I'd rather not specify amounts here, but it makes great bar stories talking about walking around the bronx at 2 in the afternoon with 60k in my messenger bag.

City Agencies: Like getting your buildings inspected? Bring cash. Lots of it. I have had inspectors count steps on their way up a building, only to stop a few steps from the top and say "union regs say I am not required to go past X number of steps if I don't want to". I asked - "then how do I get the top floor inspected?" to which he said that I could request another inspection (wait another month) and perhaps that inspector won't mind the walk. And 311? If you're tenant thinks its too cold in their apartment, they call 311. A DOB/HPD inspector will happily arrive within a day and write the building a violation. These violations add up quickly, specifically as you are in the process of turning the property. You can expect to pay thousands each month to the city in violations, plus the additional time/expense of remedying each one and getting it inspected (see above).

AEP: NYC rolled out a program implemented by HPD targeting the 200 worst buildings in the city, based on violations. My group purchased 6 of those properties. But the list is updated every year - so there are always 200 on the list. If you are lucky enough to make it into this "exclusive club", expect to be earning $30,000 a month in penalties until you are able to get enough violations removed to come off the list. This means removing 100% of C violations (mold, fire safety, mechanical), 80% of B violations (vermin, loose fixtures, broken tiles, smaller stuff), and 80% of A violations (really stupid items like a light bulb out).

There are more - so many more. I love working in NYC and would do it again in a heartbeat, but it takes a lot out of you. Vacating a building in washington heights until 4 in the morning? Ya, been there. Guns / knives held at me? Absolutely. But it is quite a rush.

Enough about me - tell me of other cities that have SO many things that you need to account for during your repositioning? I'm sure they are out there, as I said. I just think NYC has a particular blend of ridiculous things to keep it special.

Originally posted by @Jerome Zhang :
Were these just phenomenal deals to get you a rent roll of $8600 per month (And you said this is low end) for a 1.2mil place? I haven't done too much digging, but from what I've gathered, it seems like 1-1.2mil will get you around 6k in rent roll which would be a cap ex of 5ish% a year (much lower than your returns). Could you give me pointers as to how to get myself into a similar situation in a relatively "safe" but up and coming area? I'd be putting far more than 25% down - think double or triple that.

If it's better for us to speak via messaging, let's use that channel.

Thanks Matthew.

 I'm happy to share in public or via direct message, ask any questions you've got.

Don't know where you're looking, but 1.2-1.5M in the right neighborhoods can easily get a solid rent roll.  Speaking generally, but I only look at 3/4 unit buildings (duplexes don't make sense), and in the grand scheme of things total number of legal bedrooms is the most important metric as that's ultimately what drives rent roll given that the majority of renters, at least in the gentrifying areas that I target, tend to be recent grads who are sharing an apartment and want to live in the "hot" part of town but can't afford Manhattan proper.  In the case of our last purchase, we paid 1.2M (on a property listed at 1.35M) since they only built it as 7 bedrooms total - during first walkthrough we identified the ability to easily, and legally, add 3 bedrooms to the mix.  End result, we negotiated the seller down, we put 20K in post-closing to add some walls and voila, we turned the apartment from something that would generate 6500-7500/month into something that will generate 9000-10000/month at peak market rents.

@Jerome Zhang

Jerome, I think a 5% cap rate is pretty standard for the listings I see, but as Matthew has shown, if you can pay below listing that helps your return, and if you get creative it helps your return. Also keep in mind that rents are rising pretty quickly in the right neighborhoods so that 5% cap will be higher in the future.

I've only got limited experience and got very lucky with my first MF purchase thus far (800K for a 4 unit in a very hot neighborhood with a current rentroll of ~$7K that is still about 10% below market) but I think the same advice applies here that would to most places - keep digging and get creative.

Is there any reason you're going to put 50 - 75% down? Interest rates are still low, there's no reason not to take advantage of that and leave yourself with enough capital for 2 buildings. Putting all your money into one building is a pretty big risk.

@Matthew Saskin

Are you still based out of NC? Do you have partners in NYC? Just curious how you've gotten involved here and gotten familiar with the neighborhoods. I'm starting the search for my next purchase -- do you operate mostly off-MLS or do you find listings there, as well?

Originally posted by @Adam K. :

@Jerome Zhang

Jerome, I think a 5% cap rate is pretty standard for the listings I see, but as Matthew has shown, if you can pay below listing that helps your return, and if you get creative it helps your return. Also keep in mind that rents are rising pretty quickly in the right neighborhoods so that 5% cap will be higher in the future.

I've only got limited experience and got very lucky with my first MF purchase thus far (800K for a 4 unit in a very hot neighborhood with a current rentroll of ~$7K that is still about 10% below market) but I think the same advice applies here that would to most places - keep digging and get creative.

Is there any reason you're going to put 50 - 75% down? Interest rates are still low, there's no reason not to take advantage of that and leave yourself with enough capital for 2 buildings. Putting all your money into one building is a pretty big risk.

@Matthew Saskin

Are you still based out of NC? Do you have partners in NYC? Just curious how you've gotten involved here and gotten familiar with the neighborhoods. I'm starting the search for my next purchase -- do you operate mostly off-MLS or do you find listings there, as well?

 Adam - originally started investing in NYC about 5 years ago while living there.  Moved to North Carolina 3 years ago but continue to invest in NYC (as well as NC now).  I'm up in NYC every 4-6 weeks for my "day job", to visit family, etc.  I definitely would not consider investing in NYC without feet on the street to identify properties, understand the ins and outs of specific neighborhoods, etc.  There are too many vagaries in the NYC market to be entirely remote in my opinion.

As for identification of properties - mostly driving around my target neighorhoods and seeing what's being renovated. We only purchase renovated properties (from investors/flippers) - there's a bunch of reasons behind that, but that's what we do. MLS listings are pretty useless given the complete lack of a consolidated MLS in the NYC area and the fact that many properties (100% of the ones I've purchased) are never actually listed by any brokers.

-matthew

Originally posted by :

I've only got limited experience and got very lucky with my first MF purchase thus far (800K for a 4 unit in a very hot neighborhood with a current rentroll of ~$7K that is still about 10% below market) but I think the same advice applies here that would to most places - keep digging and get creative.

Is there any reason you're going to put 50 - 75% down? Interest rates are still low, there's no reason not to take advantage of that and leave yourself with enough capital for 2 buildings. Putting all your money into one building is a pretty big risk.

That's a great deal! May I ask which neighborhood that is? If you don't want to say publicly, I'd love a direct message (Haven't figured out how to send one yet...).

The big reason I'm going with 50-75% down and not taking much more advantage of leverage is due to this being part of a 1031 transaction and I have to utilize the sale of the current house in its entirety to shield myself from taxes. I also do plan on going into 2 or maybe even 3 properties with this one transaction, but I also don't want to stretch myself to thin. I'm still relatively new to the industry and it'd be dangerous for me to significantly leverage.

The other big reason is that this will be done on my parents behalf; the current property we own is providing awful return and the capital is better utilized in assets with much higher return and greater potential, hence the 1031. I don't want to overleverage them due to their age and I want to shield them from incurring too much liability, hence the 50-75% down.

If my plan works out and the returns come along, I'll leverage myself since I'm young and have a higher tolerance and propensity for risk.

@Jerome Zhang

It's in Prospect Lefferts Gardens.

I'm sure you've looked into this, but if the house you're selling is owner-occupied then you can write off 250K (or 500K assuming your parents are married) of the capital gain.

http://www.nolo.com/legal-encyclopedia/the-2500005...

If you have to use all the capital, though, in a 1031 exchange, why not aim bigger and just put 25-30% down on a higher value building? The risk isn't all that different.

interesting discussion among you NYC investors. One thing I'm curious about- I never hear from any Manhattan investors here on BP. I'm assuming it's because you need deep pockets to do much in Manhattan?  If you want to buy 3-4 units in Manhattan, what are the price ranges?  I'm assuming $2-3 million minimum, and so you probably need to put down 30-40% to get any return?  Hence only deep pocket investors, or those who already have appreciated properties can play in that market?  I'd be interested in your perspectives on the Manhattan market. Thx. 

As for me I invest in San Francisco proper, which is quite close to what I envision the Manhattan RE market to be. And to respond to @Travis Lloyd I think San Francisco offers equally colorful and highly counter intuitive market dynamics :)

For instance, we also have those pesky non profit guys hanging around the courthouse and stepping in the last minute to pay a tenants rent just so they don't get evicted!  Happens to my contractor recently. 

Successfully navigating the SF building and planning departments here would make Stalin proud. I hire a "permit expediter" who knows people...otherwise get ready for a mind boggling run around, ensconced in incompetency, contradictory ordinances, and sheer arbitrariness. 

Rent control laws are pervasive, and our Board of Stupidvisors is tripping over themselves trying to pass more restrictions, many of which get overturned in state supreme court as being unconstitutional or violating takings laws. 

NIMBYism is pervasive. We have an acute housing shortage that just gets worse. Now our local supervisor is going ape sh*t that the "character" of the neighborhood is changing (i.e. It's gentrifying) and he's introduced a building moratorium to stop market rate new construction condos from further gentrifying the hood!

All these things sound horrendous to the untrained eye, but 20 years experience in SF has taught me that the harder they make it to build and rent out units, the higher the prices are. With that building moratorium, I say bring it! It's a neighborhood I'm already heavily invested in, so it will just increase property values and ensure that current rents stay maxed out- about $4500 average for a 2BR. I just rented out a nice, but tiny 700 sq ft flat for $3700 in 3 days! And rent control? The more oppressive you make it for landlords, the more people find ways to avoid it. SF is know to have 20-40,000 vacant units by wealthy LL's who don't want to deal. Others airbnb short term, corporate rentals, sell units off as TIC's. My salvation has been to navigate the Byzantine condo conversions laws here (condos are not under RC), plus I managed to recently snag a non rent controlled building, which is basically like printing money :)

So yeah, San Francisco is a brutal and colorful market, and you really need to know what you are doing, plus have a bit of chutzpah to succeed here. Not for the faint of heart :)

I'm assuming Manhattan is similar, so please, fill me in. 

Originally posted by @Amit M. :

interesting discussion among you NYC investors. One thing I'm curious about- I never hear from any Manhattan investors here on BP. I'm assuming it's because you need deep pockets to do much in Manhattan?  If you want to buy 3-4 units in Manhattan, what are the price ranges?  I'm assuming $2-3 million minimum, and so you probably need to put down 30-40% to get any return?  Hence only deep pocket investors, or those who already have appreciated properties can play in that market?  I'd be interested in your perspectives on the Manhattan market. Thx. 

 

Well, the big challenges (rent control/stabilization, tenant friendly housing courts, tough renovations/need for expeditors, etc.) is NYC-wide, no differences between the boroughs there.

As for Manhattan proper, my take is it comes down to two distinct reasons.  First - housing stock.  The bulk of manhattan doesn't have 2-4 family rowhouses/brownstones that exist in the outer boroughs.  The areas of Manhattan that do have smaller row houses are either in midtown near the park or in the east/west village (read: 3-4M+ for a property) or up in Harlem where it's marginally less expensive, but you can't command the rent to justify it.  Second, for those that can afford the rents there is just a high volume of available luxury/high-rise apartment buildings in Manhattan to choose from.  From friends and colleagues that live/rent in NYC, the bulk of owners/landlords of smaller properties in Manhattan tend to be long-term owners (eg; have owned the property for 20, 30+ years).

From an investment perspective, the price in the outer boroughs coupled with the still extremely high demand for rentals makes it a no-brainer if you can afford the entry ticket.

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