Investing in multi-dwelling units (in New York)

Question: I own a couple of homes, but they’re both two family and not really complicated from an operational or investment perspective. I was considering getting into the multi-dwelling game (probably 6 family), and wanted to know a good place to start as far as understanding the expenses and risks.

I want to invest soon because I’m too liquid (I’m the diarrhea of investing), and I’m concerned that I’ll get killed by inflation. Right now, it’s wrapped up in a CD because I was expecting to pull the trigger on something this year, but the prices hadn’t dropped as much as I’d hoped so I’m stuck in the waiting phase. I guess it is better to wait and get screwed a little than rush and face the potential of getting royally screwed. Anyway, I’d appreciate some advice.

Answer: The only people who need to be worried are the ones who are illiquid when the sh%t hits the fan. It sounds like you know the game in your other investments, and if you have the liquidity for a multi-family, it means you’re probably in good shape. Every bad decision I’ve made as an investor has come when I’ve been in a hurry to put capital to work.

I’d rather give up a little to inflation than force a bad investment. When an investment is right, it’s scary but you know that you’ve got the right call. If you are overly concerned about inflation, add a little gold or oil to your portfolio as a hedge.

Now for some advice. Good value is good value — you have to analyze the building cost soley on its expenses vs it’s income — and not it’s intrinsic value — that’s a separate calculation — and if you’re paying more than 8x the annual rent roll you have to look at the bottom lines even more carefully

Of course, here in NYC right now, getting anywhere near 8x (interesting rule of thumb there) seems to be impossible. Especially if you’re considering that 8x after expenses, most of the places I’ve seen haven’t come close.
Most sellers ask for 10x plus in my experience — most banks won’t give a valuation larger than 8x — there is your profit margin in a nutshell — if there is no high upside and the price is 10x you gotta walk — if you are just going to be staying even — going higher than 8.5x is suicide in this market unless the rent roll is exceptional against the expenses.

Also, make sure you get realistic numbers on expenses. When I bought apartments I got lied to more than the guys who rent hotel rooms out by the hour.

6 Responses to “Investing in multi-dwelling units (in New York)”

  1. charles says:

    Want some advice from a full time landlord?

    Think twice before you invest in small investment properties. There is a lot more to it than opening your mail box and dancing down to the bank.

    I disagree with the statement about looking at a building soley on its current expenses vs its income. I bought my 91 unit apartment building off the bank. Its former owner, bankrupt, was a formula investor who had a great eye for investments and had no clue about management.

    Many times you will find that the best investments are poorly managed with the income substantially below what it should be and the expenses substantially more than they should be.

    Look at the rents. Look at the neighbors. Look at the building.Look at the location. Then look at the numbers.

    Out of 91 apartments I started with 19 rentable and a rent roll of 3,700.00 a month (and yes, less than 4,000) In 2003 I was at 90 units with a rent roll of 37,000 a month. Now its 52,000 a month. If everything was at market it would be about 640,000 a year.

    Looking at investment property is more than just looking at current, you have to look at future!

    Now, if you want an investment mine is going on the market for 5.25 mil. 100% occupancy and great tenants.

  2. charles says:

    Thanks!

    We actually had the pilot for a sit com writen based on our experiences when we started. We ended up evicting the writer.
    🙂

  3. Annet says:

    Denver ranks No. 8 in the country in new cost-of-living rankings, with expensive groceries but cheap utility bills and booze. The cost of groceries in Denver and New York are roughly the same. One of the important issues is Housing. Investing their would require huge sums but i think the profits too would be huge too. Since all wealthy people dwells there being one of the most expensive cities, so i believe it would be worth investing in Denver.

  4. charles says:

    But if the costs of doing business are also high then I think it will even things out.

    I would also be concerned about what would happen during economic down swings. I went to school for architecture in Boston and worked for a developer in the exclusive little town of Marblehead. In 1988-89 construction came to an abrupt stop and a the developers who were caught with unfinished buildings or unsold condos got caught.

    One funny story (funny for me as I didnt lie there) a brand new building went up, they sold about 1/3 of the high end condos and then got caught. They ended up renting the rest of the builing to Section 8 low income. How would you like to have spent a half a mil on a condo in 1988 and have somone on welfare move right next door.

    Unless you lie in the area I would also avoid regions known for their “social activism” because these activists tend to like promote laws that are one sided and pro-tenant. Here is Albany I can usually get an express eviction if I needed to (although I actually havet been to eviction court in 6 years!) I can have someone out in a month. In New York City I know someone in a rent controlled apartment and his landlord has been trying to evict him since 1992.

    There was also a story in this weeks village voice about a group of illegal loft tenants that the landlord couldnt get the city court to even hear the eviction cases.

    Again, invest in an area that is more landlord friendly. You can easily find yourself with a tenants association that is staging a rent strike if you are not careful.

  5. Jackie says:

    Denver housing is not as expensive as many cities, but more expensive than most. Denver’s overall cost of living is 35% above the national average.

  6. Art says:

    If you are so liquid, put your money to work for you investing them in other fields for a while.