THE WISH LIST:
“I want to buy a 2-4 family house/building for myself. I’m a single male in my mid-40s and I work primarily in Manhattan. I’d like a place that needs work, but where the construction cost is affordable. Why is construction so expensive in Manhattan?
If possible, I’d like to keep the cost below $1 million to avoid the mansion tax. However, I’m open to going over for the right place and location. Ideally, I’d love the rent to cover my loan(s). A place that qualifies for the 203K loan program would be great. I’d love to hear your suggestions.”
First off, if you’re looking at multifamily, the mansion tax is unavoidable in Manhattan, vast parts of Astoria, and the prime areas of Brooklyn. The lowest-priced single or multifamily inventory in the city is located in Upper Manhattan, and starts at around $1.25M.
Lower-priced alternatives can be found in Queens, where the neighborhoods are historically comprised of low-rise to mid-rise multifamily properties.
Construction costs are high in Manhattan because it's extremely expensive for general contractors to keep up with the city’s requirements each year, thus some of the costs are pushed down to independent homeowners and investors like yourself. Also, depending on the scope of the work, aside from the obvious labor and materials costs, there are the additional funds required to hire an architect and file the permits through the city to get the job approved. This takes time and patience.
Also factor in the fact that since you’re potentially leasing the units for income, you will likely be required to hire a NYS Registered Architect or professional engineer to assess the site and advise you of zoning and construction requirements. You may also need to obtain a new or amended Certificate of Occupancy for multifamily dwellings. This—not to mention your closing costs and mansion tax—will further add to the cost.
Let’s move on to the question of whether you can find a place that qualifies for the FHA 203K loan program, which will allow you to finance both the value of the home and the construction costs. In order to be eligible for the loan program, the property must be a one- to four-family dwelling that has been completed for at least one year. What you are intending to do, which is to create leverage by leasing some floors as rentals, is allowed within the 203K loan program.
Other eligible homes include buildings that have been demolished, or will be razed as part of rehabilitation work, as long as the existing foundations remain in place. Additionally, this program may be used to convert a one-family dwelling into a two, three, or four-family unit.
Keep in mind that few lenders offer 203K loans, so you will have to find a qualified lender that is able to work with you.
As the program is with HUD, expect to spend a lot of time with compliance, document preparation, and dealing with the bureaucratic system of banks. Further, the closing for this type of loan could take 90-plus days, which does not put you as a buyer in a great position to sellers, who are oftentimes looking for cash deals. In my experience, multifamily units priced very low are often traded via cash buyers, so your leverage in terms of negotiations would be slim. Also, interest rates are higher for this type of product due to the risk involved to the lender.
If you want to stay in Manhattan, here are some multifamily listings that could work:
- Washington Heights townhouse, $1,250,000: This 4-floor, 3-unit townhouse at 914 St. Nicholas Ave. between 155th and 157th Sts. can work as a single-family, multifamily or mixed-use property. With a few minor alterations, the property can be further divided into up to six separate apartments.
- East Harlem townhouse, $1,425,000: This 3-story, 2-family house at 285 Pleasant Ave. between 115th and 116th Sts. is located in a great neighborhood, though it’s pricier than you wanted.
If you’re willing to branch out to Queens, here are a few more listings:
- Jackson Heights, Queens multifamily home, $950,000: Located at 80-17 Northern Blvd. between 80th and 81st Sts., this multifamily property has two storefronts on the first floor and two 3-bedroom apartments on the second and third floors. It’s one of the few multifamily properties I found that are priced under a million, but are you interested in owning a building with commercial property?
- Ridgewood, Queens multifamily home, $915,000: This two-family brick home at 60-22 Grove St. between Fresh Pond Rd. and 60th Pl. has two bedrooms, a living room, a dining room, a full bathroom and an eat-in kitchen on the first floor, and three bedrooms, a living room, a dining room, an eat-in kitchen and a full bathroom on the second floor, as well as a two-car garage and backyard. It’s well within your budget, but the location might be an issue if you have your heart set on Manhattan.
- Ridgewood, Queens multifamily home, $1,100,000: This three-story, six-family walk-up located at 961 Seneca Ave. near Myrtle Ave. is about $100k above your price range, but since the rental building takes in over $127,000 annually, that’ll more than even things out.