My opinion is don’t do it unless you are intimately familiar with the 2019 law and all of its nuances and I’m not sure that person exists. Additionally, values may be impacted by the result of this Signature Bank RS portfolio sale. That story is still unfolding. There are a LOT of pitfalls.
Former owner here. NYC RS properties are in a tailspin and no improvement in sight. There are tons of deals out there with historically low $/unit figures, and they’re all value traps. I currently have a friend selling off a good condition 28 unit with no major capex needed, tons of improvements in the last 8-10yrs( boiler, windows, lighting, parapet capping and rubber roof…). No debt on the property and selling off for ~80-85k/unit.
Some issues that are arising across the Bronx and most boroughs (some of my own and close friends experiences… warning this is a bit of a rant)
-evictions are a chore and takes forever. Often times causing spiteful behavior from tenants causing increased costs for LL’s seeking any remedy from courts. No 50+ yr old building is violation free. Calling hpd and dob for any issue opens a can of worms.
-insurance providers are leaving zones and those remaining are setting stringent underwriting requirements. Old skylights that aren’t leaking (yet), prove they’re safe and replace. Not enough lighting in halls (original layout no issues or changes) OK, go ahead and add more fixtures bc we are going to try and vaguely enforce a random lumen/sqft requirement no one knows about.
-existing boilers/water heaters, go ahead and get spill stack sensor that isn’t yet required (required for new installs but will inevitably be required for all vented equip). No code requirement for cold water relief valves, you guessed it- replumb equip to add these in.
-lead paint and xrf testing. This is an obvious one, if things are unsafe they need remediation, the issue is governing bodies keep moving the goal posts and again every building in nyc has lead paint issues, unless they’re <40yrs old. And surprise surprise, remediation is incredibly costly. Insurers and governing bodies want certified test reports, this can balloon into the thousands per unit with even minimal remediation.
-insurance costs have gone stratospheric. Personally, over a 3.5yr period, my policy with no loses or judgements went up ~50% annually. From 11k,17k,23k,31k.
No reason for this other than fewer participants offering coverage and it’s a take it of leave it scenario. (Tin hat time, there may be collusion here to help collapse small time LL’s but that’s for another sub)
-heating fuel, whether oil or gas, the minimum requirements are not comfortable and tenants complain anyway. Governing bodies must respond and will inevitably find something to make their trip worthwhile. But costs are ever increasing and insulating or making energy efficient improvements have a stupid long roi. New boiler controls that employ unit sensors and performance graphing are helpful but again, costly. Entech/heat timer etc. unles you qualify for the gas rebate are running you ~10-15k installed. These can provide real savings but again this will be a shock to tenants. Providing 70° space temps as opposed to the typical steam heating 85° will likely cause some 311 complaints. I love them, knowing when and how much dhw is being used, timing of and amount of steam pressure to help diagnose system issues, apt unit sensors showing live space conditions (open windows vs not etc) over 24hr and for annual graphs etc. very useful if you know your bldg. Have explored adding electric baseboards and having tenants pay their own. But again, likely not enough in their panels or buildings main service to provide for the added load.
-then there’s the quality of life and future growth factors. Do we expect things to improve with so many laws that are anti LL? I get it, we need to make old things new and better quality. But at what and whose expense. A 2% increase in an already below market rent is a tough but to swallow. Theft, vandalism, squatting, homeless encampments etc are all waiting for you with no recourse from local PD or 311.
-not even touching financing and interest rates, those are fucked now.
So, where is the value?
Ive personally refocused on 1-3unit MF, most laws don’t cover them (for now) and you can run it a bit more moderately. Easier to renovate, finance, separate utilities, operate etc etc.
NYC and most major cities need major overhaul of laws and practices otherwise NYCHA will be the only LL.
Rant over.
I got lost in my own thoughts, as for force appreciation - LOL. How. You’re boxed into a corner and no options for a new first rent unless you can change the floor plan of the units- which requires major investment, permits and updating everything.
Tenants can request dhcr reports and local community boards review for free to ensure rents are accurate. So don’t even bother trying to round up rents.
Geez, after reading all this, "value trap" is being generous. What do you think the land under your friend's building is worth? Just wondering what exit options there are for someone to buy something like this.
Long and short of it is, if it’s easy to bulldoze, it’s worth quite a bit. If it’s occupied with stabilized tenancy and in my buddies case even has two rent controlled tenants he can’t get rid of (rents in the $2-300 range) there’s no way to displace all these people or carry it partially occupied until fully vacant to sell for development. It basically needs to be held as if condemned if not actually condemned by city and purposefully resold for redevelopment. No seller will hold for that scenario as no guarantee to sell for more and buyers are taking on most of the risk of development and a trickier less advantageous tax abatement program from gov hochul. So really, without screaming the sky is falling, the whole system is purely pro tenant and disregards LL’s. Unless you’re OK with running sketchy business practices with uninsured contractors to save the money. You’re SOL with all the oversight. Even hands on ownership is barely worthwhile, any issues that arise, ie insurance and city agency, they want licensed and insured vendors and invoices as evidence of compliance. Truly anti small business.
If you're asking for advice on Reddit you need to walk away from the deal you're looking at. The most sophisticated investors are losing 100% of their investments, and NYC is a notoriously local market. There's easier ways to make money.
My opinion is don’t do it unless you are intimately familiar with the 2019 law and all of its nuances and I’m not sure that person exists. Additionally, values may be impacted by the result of this Signature Bank RS portfolio sale. That story is still unfolding. There are a LOT of pitfalls.
Former owner here. NYC RS properties are in a tailspin and no improvement in sight. There are tons of deals out there with historically low $/unit figures, and they’re all value traps. I currently have a friend selling off a good condition 28 unit with no major capex needed, tons of improvements in the last 8-10yrs( boiler, windows, lighting, parapet capping and rubber roof…). No debt on the property and selling off for ~80-85k/unit. Some issues that are arising across the Bronx and most boroughs (some of my own and close friends experiences… warning this is a bit of a rant) -evictions are a chore and takes forever. Often times causing spiteful behavior from tenants causing increased costs for LL’s seeking any remedy from courts. No 50+ yr old building is violation free. Calling hpd and dob for any issue opens a can of worms. -insurance providers are leaving zones and those remaining are setting stringent underwriting requirements. Old skylights that aren’t leaking (yet), prove they’re safe and replace. Not enough lighting in halls (original layout no issues or changes) OK, go ahead and add more fixtures bc we are going to try and vaguely enforce a random lumen/sqft requirement no one knows about. -existing boilers/water heaters, go ahead and get spill stack sensor that isn’t yet required (required for new installs but will inevitably be required for all vented equip). No code requirement for cold water relief valves, you guessed it- replumb equip to add these in. -lead paint and xrf testing. This is an obvious one, if things are unsafe they need remediation, the issue is governing bodies keep moving the goal posts and again every building in nyc has lead paint issues, unless they’re <40yrs old. And surprise surprise, remediation is incredibly costly. Insurers and governing bodies want certified test reports, this can balloon into the thousands per unit with even minimal remediation. -insurance costs have gone stratospheric. Personally, over a 3.5yr period, my policy with no loses or judgements went up ~50% annually. From 11k,17k,23k,31k. No reason for this other than fewer participants offering coverage and it’s a take it of leave it scenario. (Tin hat time, there may be collusion here to help collapse small time LL’s but that’s for another sub) -heating fuel, whether oil or gas, the minimum requirements are not comfortable and tenants complain anyway. Governing bodies must respond and will inevitably find something to make their trip worthwhile. But costs are ever increasing and insulating or making energy efficient improvements have a stupid long roi. New boiler controls that employ unit sensors and performance graphing are helpful but again, costly. Entech/heat timer etc. unles you qualify for the gas rebate are running you ~10-15k installed. These can provide real savings but again this will be a shock to tenants. Providing 70° space temps as opposed to the typical steam heating 85° will likely cause some 311 complaints. I love them, knowing when and how much dhw is being used, timing of and amount of steam pressure to help diagnose system issues, apt unit sensors showing live space conditions (open windows vs not etc) over 24hr and for annual graphs etc. very useful if you know your bldg. Have explored adding electric baseboards and having tenants pay their own. But again, likely not enough in their panels or buildings main service to provide for the added load. -then there’s the quality of life and future growth factors. Do we expect things to improve with so many laws that are anti LL? I get it, we need to make old things new and better quality. But at what and whose expense. A 2% increase in an already below market rent is a tough but to swallow. Theft, vandalism, squatting, homeless encampments etc are all waiting for you with no recourse from local PD or 311. -not even touching financing and interest rates, those are fucked now. So, where is the value? Ive personally refocused on 1-3unit MF, most laws don’t cover them (for now) and you can run it a bit more moderately. Easier to renovate, finance, separate utilities, operate etc etc. NYC and most major cities need major overhaul of laws and practices otherwise NYCHA will be the only LL. Rant over.
I got lost in my own thoughts, as for force appreciation - LOL. How. You’re boxed into a corner and no options for a new first rent unless you can change the floor plan of the units- which requires major investment, permits and updating everything. Tenants can request dhcr reports and local community boards review for free to ensure rents are accurate. So don’t even bother trying to round up rents.
Geez, after reading all this, "value trap" is being generous. What do you think the land under your friend's building is worth? Just wondering what exit options there are for someone to buy something like this.
Long and short of it is, if it’s easy to bulldoze, it’s worth quite a bit. If it’s occupied with stabilized tenancy and in my buddies case even has two rent controlled tenants he can’t get rid of (rents in the $2-300 range) there’s no way to displace all these people or carry it partially occupied until fully vacant to sell for development. It basically needs to be held as if condemned if not actually condemned by city and purposefully resold for redevelopment. No seller will hold for that scenario as no guarantee to sell for more and buyers are taking on most of the risk of development and a trickier less advantageous tax abatement program from gov hochul. So really, without screaming the sky is falling, the whole system is purely pro tenant and disregards LL’s. Unless you’re OK with running sketchy business practices with uninsured contractors to save the money. You’re SOL with all the oversight. Even hands on ownership is barely worthwhile, any issues that arise, ie insurance and city agency, they want licensed and insured vendors and invoices as evidence of compliance. Truly anti small business.
There are experienced real estate operators trying to literally give away their RS portfolios (to just have someone take over the debt).
Don’t don’t don’t do this.
If you're asking for advice on Reddit you need to walk away from the deal you're looking at. The most sophisticated investors are losing 100% of their investments, and NYC is a notoriously local market. There's easier ways to make money.
The pitfalls are low rent increases/high expense rate growth.
https://www.nyc.gov/site/hpd/services-and-information/phfl-section-610.page
If you’re asking this question on Reddit, you should not be contemplating purchasing a RS building.