Cooperative Apt investing for cash flow ?

Question

Hello everyone. First time poster here, eager beaver newbie.

Has anyone on here bought foreclosed coop units for cash flow ? I don’t have any cash but I foresee that it could be profitable at the right price. I am raising capital for my first rental house, but I’m aiming for my first property/properties to be in a market that I can get the capital together to buy  into quicker- ie 3+ hours out of NYC. I manage multi family Coop and Condo buildings in Westchester NY for the past 13 years , so I have seen that it’s doable in a perfect circumstance. I would likely consider Coop rentals once I have enough money from a refinance to buy it up. I’d like to think at least someone on BP has done this before ? I can’t seem to find anyone mention this but I haven’t searched too hard to be honest.

Charles Xia · Answer

@Billy Archer

Nice! Seems like you know a lot about it already. From what I remember I think some coops try to keep a ratio of investors vs non-investors or they don't let investors buy up a certain percentage of the coop or something?

Seems like you know the whole process and the risks with it. I actually didn't know this was a niche so thanks for your response! I personally didn't like coops and some agents I worked with didn't want to help me get a coop at all because of all the work they have to do digging through the coop board... Some coops have some sneaky boards...

I have brought some people to look at coops and it just seems like you have to do your homework on the coop board before you buy the foreclosure? I also tend to stay away from the coops because of the very high fees... I wanted something to cash flow right off the bat without the paying so many fees all the time.

Do you think you think coop investing is worthwhile in your opinion? Isn't is harder to sell the coops in general? Do you think coops are a long term buy and hold play?

Best,

Charles

Charles Xia · Answer

Hi Billy,

Seems like you already have great experience in real estate already. Coop/Condo investing is certainly doable. Here are some roadblocks on coops that I know of.

1. When buying a coop you have to get the coop board's approval . This just means you might not be able to buy any coop you want.

2. Coops in NY generally have very high fees. You should look at the cash flow numbers. If a coop rents out for $2000 a month but the monthly maintenance fees are $1000 a month you only have $1000 left to cover your mortgage. You might have to pay for some utilities and that all just depends on property so make make sure it fits your investment needs.

3. Foreclosed units also generally require all cash... You don't get to see the property before buying it and there's inherently a lot of risk in that.

Are you refinancing because the rates are low now? Are you doing a cash out refinance? Cash out refinances might not be the best at the time but it all depends on your situation which I don't know.

If you have any other questions feel free to message me.

I hope this helps,

Happy Investing,

Charles

Billy Archer · Answer

@Charles Xia Thanks for your reply!  Cooperatives generally do not allow for investors, and a lot of Coops do not allow renting (subletting).  I saw a very savvy investor buy up foreclosed Coop units during the 08 mortgage crisis at multiple buildings we manage.  When you buy from the bank at auction, you gain a unit with unsold shares.  Provided the owner of the unsold shares doesn't move in, you are afforded certain rights that a Sponsor is afforded, ie you can rent without the Board's scrutiny of each tenant etc.  It's a back door that made one of my Boards livid, but I was impressed, frankly.  And importantly, I saw it can be replicated with a good team when there's suddenly a bunch of foreclosures on the market.

The downside is you need to buy the foreclosure with cash, and you are correct that you cannot see the unit first.  The goal would be to find a junk unit for cheap, put the money into renovation, and rent it until you decide to sell it.  Since there's no mortgage, you would count on repaying your investment with the cashflow it makes above monthly maintenance costs. With any luck you pay off your investment in 2-3 years, and the rest is pure cash flow.

The upside is that the Coop is responsible for pipes inside the walls, exterior maintenance, snow, tax payments, snaking drains, etc.  And there's a full time Superintendent that generally lives on site to handle maintenance requests.  In essence you can piggyback on the management of the property since you're still a Shareholder.  Only certain repairs would need to be done and you can kick him $20-$40 per visit if your tenant has a problem, instead of hiring a handyman.  Since Coop buildings are meant for owner-occupied residences, not investor properties, you can see how there is a draw.  A lot of this rides, however, on the proper screening for a great tenant.

What I was saying about refinancing is that I intend to BRRRR my first rental.   I'm researching markets but I don't have the funds at this time to put 20% down.  Therefore I'm doing research and getting myself ready, but I don't have any equity since I don't have any property currently.  As soon as I am cash heavy, I was considering the Coop foreclosure route in a non-BRRRR strategy to help add to my portfolio.  It essentially would be my niche, once I build myself up to it.  Was hoping to hear from others that may have done this, since it is a niche and not quite spoken about, as far as I've seen.

Billy Archer · Answer

Coops that allow subletting only allow a certain percentage (usually less than 10%) of units to be sublet.  Some Coops don't allow subletting at all.  Others allow it only with a proven hardship.  I believe the lenders refuse to lend to Coops with greater than 10% of sublets in occupancy.

From a traditional standpoint, I hate the idea of Coops as an investment.  Maintenance fees suck, and I absolutely hate the idea of a group of people meeting every month to rule their land.  Unlike a fortune 500 company that is run by a Board of experts, all you need in a Coop is a buy-in.  So, you can have people with no sense of business on a Board just because they like to be in everyone's personal business.

If, however, you can find a way to bypass a Board where their rules are limited on your actions, you stack the odds a little more in your favor.  If you can legally rent without them approving the renter or the idea of renting, you are doing so around an environment set forth with services like live-in Superintendent, exterior and common area maintenance, heat, water, sewer and taxes covered in your maintenance payments. Sure you're going to pay $600-$1000+ a month in upkeep, but it's like keeping money aside for capex, repairs and taxes.

I lived in my parents' Coop from 8 to 22 years old growing up, and when I turned 22 I began managing Coop buildings full time.  Having been involved with them my whole life, I am fully dissuaded from ever LIVING in one again, but as I work out my own business plan, I see potential if you can find a way to invest them legally.

I can't say how hard it is to sell a Coop since I haven't really focused on it.  Since Westchester property taxes were the highest in the US last year, Coops in this area are a more attractive option for first time home buyers or retired or those that don't want to maintain their exterior etc etc.  Therefore I'd like to think they're relatively liquid. According to one of my building's comps in White Plains, what used to sell for $100K-$130K in 1998 now sells for $300K-$325K.  That's nearly a $10K increase in value per year over 22 years.  And at least 1 unit of that size has sold on an average of 1 per year or more.