I am in the process of looking at a deal on a multifamily in NYC outside Manhattan. It is a three family home my question is should I bypass this home if the tenants do not pay their own seprate utilities.
The home is worth about 560,000 in the nieghborhood it is in, but he is willing to give it to me for 530,000 for an all cash deal. It has a 3 bedroom over a three bedroom over a one bedromm each having a full bathroom. And it has a basement with two rooms and a bathroom that you could rent out and also they made a garage into a studio apartment. Before he put it on the market he was making 5,050 per month in rent roll. 1,500 for the third floor 3 bedroom, 1, 500 for the second floor three bedroom with bathroom, and 1, 250 for one bedroom with bathroom, and 800.00 for the studio efficiency with bathroom (used to be garage.)
The garage studio was made illegally without permits. That concerns me if I later have to turn it back into a garage. Also what concerns me that the tenants do not pay heat or water they just pay for electricity in their apartments and the gas for stove. Every other utility expense would be paid by me from the rent proceeds.
I did the numbers its seems like a good deal based on what the rent rolls were but as we speak the garage studio is vacant and the first floor is vacant as well. The only rents coming in is the 1,500.00 for the third and second floor. The real estate guy says he can get tenants no problem. and that I could raise rents eventually on the people paying 1,500.00 and raise it eventually to 1,700.00. However, taking into consideration I have to pay the water and heat for the tenants it doesnt seem like a good deal.
The area I am looking at is called Clason Point in the Bronx, NY. I thought it was a good deal because it was close to the one percent rule in terms of rent which is hard to get in NYC. Also, the average cap rate in NYC in this area is 5.0 if the rent comes in at 5,050 then it would be at 7 percent cap rate. The GRM is 8 which is good if the property does go back to making 5,050 a month and I can get it at the price I want at 523,000. However, these are assumptions. Bottom line the fact the apartments do not have separate utilities and the garage studio is illegal has me thinking of not even giving a counter offer. Need some advice from people who have invested in the NYC area, on if I should overlook all these red flags especially about the tenants not paying all of their own utilities within their apartment.
HI @George Ortiz , Welcome to BP.
I'm no expert and I will defer to more seasoned investors, however what sticks out to me is we need more information as it pertains to the core numbers. What are the figures for financing, taxes, major expenses(capex), management, rehab, ect? You mentioned several concerns about red flags such as the misappropriated garage structure and having to take care of partial utilities. Have you consulted a General Contractor? It may be wise to also speak with other local investors, realtors, and perhaps even a real estate attorney about any ordinances/laws, as it pertains to landlord laws in the area. Even with my best "assumed" numbers, I calculated that you mayâ¦perhapsâ¦possibly have some decent cash flow, however you may have some low cash-on-cash ROI. Again, it all depends on the true numbers. Just thoughts. Hope all works outâ¦keep us posted.
Hello Jay thanks for your insight and taking time to write. The taxes are 3,000 a year, the insurance is 1,700 per year. good idea on General contractor will look into that. I will be paying cash since I want to do a 1031 exchange and avoid capital gains taxes. I divided the insurance and taxes and utilities on a monthly basis it came out to 1490.85 monthly expenses. So after deducting that number with 5,050.00 rent roll a month the cash flow was 3,559.15. the pro forma cap rate is 7.91 % which is good for the Bronx hard to find 10 % or higher in a market like NYC. NOI is about 42, 709. 80. The rent rolls bring in 60,600 a year. Cash on Cash is 8.06 %, and the purchase cap rate is 8.14 %. The GRM is 8.66. and this house does not meet the 2 percent rule but I heard in NYC its hard to get the 2 percent rule. This house is .95 right below 1 percent. I am new at this so I see the numbers but dont know if they are good thats why I said I wanted feedback on what are good numbers for a high market like NYC. Thanks Jay once again!
Sounds like it can be a pretty solid deal here in the Bronx. The utilities not being separate shouldn't kill the deal as long as you properly factor in the expenses for it. Better yet have a few contractors give you estimates on separating them and what it would cost.
My concern would be the garage conversion. It seems like he has a 3 family he is using as a 4 family. That 4th unit would be an illegal rental and yes the rent on that can go away if the buildings department shuts it down. There can also be violations on the conversion. Have you ran title on the property and checked out the DOB website?
As for the 2% rule, yes this is NYC, getting that is near impossible these days and you're absolutely correct about cap rates. With that being said i wouldn't count on the illegal garage conversion's income because that may go away. Depending on exact location in Clason Point and size you can get 1700 - 1900 for the 3 bedrooms and 1000 - 1300 for the 1 bedroom.
Hope this helps!
Ceasar thanks alot for your advice. I just spoke to my attorney he said that the illegal garage could be a deal breaker if I want to later refinance the house to use OPM. My attorney said if I do the 1031 exchange that I should refi for 30 years and get my cash back to buy other properties. He told me that I would be cash poor if I just parked the capital gains in that property and did nothing else. what are your thoughts Ceasar on that? I thought it would be nice to be mortgage free and having that cashflow. You think its a good idea to refi and use OPM. Attorney said it would be a better tax advantage. Also he said I should look for nieghborhoods where there is construction going on because if its just uniform housing stock like Clason Point that the appreciation would be minimal.
and yes my attorney is going to look into seeing if there are any violations as to this property.
Update- decided to back out deal before I even started to deep in negotiations, my attorney found so many violations. Will continue to look.
Hi @George Ortiz - When you find another multifamily and you're looking for funding, message me. 30 year term 75LTV with rates between traditional banks and hard money lenders. No tax returns, no W2s, no income verification. As long as you have a 650+ credit score, the loan is based on the property and not you. Because of the simple underwriting, funding is fast. Let me know if that's something that would be of interest to you moving forward.
@Salvatore Lentini I'm interested in your MF funding. Can you PM me more information. I'm interested in buying a MF out of state.
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