Multi Family Investing - New York City

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.?

Comments (13)

Most Helpful
Jul 9, 2018

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.

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Jul 9, 2018

Thanks for the response, very helpful. Would be interested in hearing if your thoughts change if I were to have someone relatively close to me like a live-in in law or other person who is able to assist with ad hoc management. In terms of managing day to day and the risk associated with that, I have enough flexibility and have some support that could potentially help out. I'm more curious about a) sourcing and b) execution on the investment.

To your point on unexpected operating costs and things going haywire, wouldn't the IRR shield me from that, to a certain extent, if I found a well-valued property that I could exit from in ~5 years? I'm looking at upside from both a 1) monthly cash flow perspective and 2) property value appreciation perspective. Please let me know if I'm not looking at this the right way.

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Jul 9, 2018

You are, but you're looking at it like the cash flow on your spreadsheet is indicative of anything meaningful.

Yes, you underwrite 10,000/mo of revenue and 5,000/mo of expenses (or whatever it is). What happens when your roof leaks? What happens when your tenants are 2 months behind on their rent? Or you have to do repointing? Or the boiler breaks down in the middle of February? It's all well and good to say "my IRR shields me", and if everything goes well, it does. But you cannot treat a small property, especially a self-managed one, the same as you would a 100 unit multifamily building; trust me, I speak from personal experience on this. Fixing a small leak in your roof costs just as much as it would in a 300 unit tower, but you don't get to spread that cost. The IRR you are modeling means nothing; how are you underwriting your expense data? Where does the money come from for even minor capex work? If you capitalize some work, how are you going to compete on purchase price? Your IRR numbers ARE going to go haywire, nothing ever works the way it's supposed to in the underwriting. How do you protect yourself against that?

I genuinely do not mean the following to be offensive or rude, but it's pretty clear you're interested in the sourcing & underwriting, and not the ownership. Sourcing buildings is easy; walk down the street and knock on doors, or cold call owners. Go do some brokering in your spare time if that'll scratch the itch. But if you think you can work a full-time job and also do an adequate job managing a small property, you are mental. All the money these small owners and flippers make is by either holding long term, buying at an extremely low basis to amass volume, or adding their own sweat to the property. None of those apply to you or the area you're looking in.

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Jul 9, 2018
Ozymandia:

West Harlem has very little that is truly affordable (we do a lot there) [...] 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.

[...] 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.

Not from NYC and not in development/management yet, but still interested in how you would go about insulating your investments from such risks.

Jul 9, 2018
CadMonkey117:

Not from NYC and not in development/management yet, but still interested in how you would go about insulating your investments from such risks.

Specifically in NYC? If I'm dead set on buying Class 1 properties here, I'd try and joint venture with an existing player who has a management company and at least some kind of balance sheet. Go source the deals and raise the money, all the things the OP really wants to do, and give up XX% of the upside in return for the partner managing the property. I would only self-manage if I was actually handy enough and had enough time to do most of the non-technical work myself.

You insulate yourself from the risks I'm describing through scale, healthy reserves, a general knowledge of the maintenance your building will need, and relationships with subcontractors who will give you sweetheart deals. If you want to buy 4 family homes in Cleveland, you can probably do it, because bricks are cheaper. You can buy 6 units there (and many other places, presumably) for 45,000/unit. You'll pay 10x that for a similar sized property in Harlem. If the OP wanted to execute this strategy in a market where he was getting 40 units instead of 4, I'd say it's not a bad idea. But NYC is very expensive, both from a pricing standpoint and on the opex side. And of all the ways to insulate yourself, the OP has none of them. S/he is unlikely to be well capitalized enough to be able to underwrite a ton of hard cost into his/her budget, probably can't afford to be putting all their cash flow into reserves, and by their own admission hasn't been in this business long enough to truly understand the relationships needed to carry this off, or the potential operating complications and how to identify them.

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Jul 9, 2018

The NYC multi family industry may be the most corrupt and the most headache area in all of real estate.

Jul 10, 2018

I have the exact model for this, it includes per unit MCI and even has sensitivity analyses for different investment metrics.

Why do you need this? also 18%max increase do you even know what you are talking about? I've been in this space for so long I know the DHCR rules backwards and forwards. What rule says you can jump a rent 18%?

Jul 9, 2018

Bump - anyone else?

Jul 9, 2018

@Ozymandia has some great insights here and I'll defer on the NYC specific questions, but to speak on the 'non-regional' aspects of your questions/buying and owning small unit MF properties:

  • If your primary goal is a combo of capital preservation and cash flow generation, you can take advantage of the low LTV, but PMI is a PITA if you intend to pay down the mortgage down the road, especially with rising rates since you have to re-fi to get rid of it. If you're not looking to sell anytime soon (due to potential cyclical risk i near/mid term) I'd recommend putting the traditional % down so you don't have PMI and don't piss away that extra money every month.

-You can do REO/short sales, but beware that it will take you a long time to close the deal. The banks take forever to actually close these deals for one thing, and for another they are constantly shopping your offer if you don't have cash, so be prepared to get swooped by a random foreign dude with an all cash offer that he writes on a napkin. Has happened to me several times before.

-I'm not sure if you are meaning liquid assets/net worth foundation like a down payment/personal net worth base, or if you mean you want to locate a securitized way to invest. If the former, then yes, you can still do it based on the programs you mentioned in the first bullet, if the latter, then you can always do a multifamily REIT investment if you want something passive.

-Pitfalls, literally everything you could imagine. It would behoove you to befriend someone at a large institutional multifamily operator (think Greystar) and someone who does residential flipping and pick both of their brains. This will (hopefully) give you an idea on operating expense estimates and capital issues you could encounter.

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Jul 9, 2018

Thanks a lot for this - answered a lot of my initial questions.

Jul 9, 2018
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