Thought this would be a good place to post some general questions as a real estate novice and gather some perspectives from people in-the-know. Currently in IBD, and in the near term (~1 year), I’m looking to diversify my income stream by adding a multi-family income-generating investment property with 3-4 units total. I live in NYC in west Harlem where you can still find bargain properties with enough effort and I know the area will only continue to attract long-term tenants, short-term renters, tourists, and in general people who want to stay on the island but can’t afford Midtown. I may or may not choose to live in one of the units based on the difference in terms of the mortgage I’m able to secure and ideally would not want to be a live-in. Also, I’ve experimented with renting units out on AirBnB in the past and have been very successful; unclear if I would want to pursue that and I know this is currently a controversial, in-limbo subject in NYC, so there’s that. I’m going to do extensive research before proceeding because I’m clearly new to this. In general, the idea would be to buy as cheap as possible, use the property to generate income for 4-5 years, and then sell. That’s the background, and now for some questions if you would be so kind as to entertain them:
• I know there are some government-backed programs out there that support mortgages with a LTV of up to 97% - how feasible is this for someone in my position or is it just pie in the sky dreaming? • I’ve looked into properties in the foreclosure process or REO; what are some of the mechanics behind buying these? Are all of these total cash up-front deals, or can you still put a mortgage on in some cases? • Can I still engage in multi-family investing without a substantial liquid asset / net worth foundation? • In general: What are some of the biggest pitfalls of multi-family investing and first time real estate investing in general? Is there any advice you would give to someone like me, in terms of where to spend my time doing research, what to avoid, etc.?
I would counsel you to think long and hard about what your operating costs will be. This kind of play can be extremely profitable if you can buy at a low basis and do a lot of the management yourself; however, West Harlem has very little that is truly affordable (we do a lot there) and if you have to pay someone to do most of the management/repair work, you'll start losing money very very quickly. Too small to justify the kinds of bills your going to run up. Who takes out the trash, or does snow removal?
Also worth considering who are the tenants? This goes to the previous point; rent stabilized tenants are impossible to get out, which means no rent growth and less potential on sale. Flip side to that is that in a 3-4 unit building, a turnover might mean a relatively long vacancy; losing one of your units for 3 months can be a disaster to your cash flow in that case.
TL;DR - you're attitude in terms of what is most important (LTV, mortgage rates, net worth) are the last questions you should be asking in this scenario. They're far more important when analyzing larger purchases. In this case, you should 100% be more focused on the day-to-day operational difficulties and costs, and whether you have the time or money (or the property has the cash flow) to support that. If one pipe bursts in January and you have to hire a plumber to fix it and bring in an outside super to fix the resulting damage, that could be a huge portion of your NOI that gets eaten, right there.