Rent Stabilized Co-op Investment

What if the 70 yr old tenant decides to marry his 22 yr old girlfriend?

In one word DON'T!!!

There are ways to make sure that it passes on. depending on size of coop. assuming 2br lets say, adding a relative who lives there with you would continue the lease. The reason these coops sell for no money is because no one will ever know when a tenant may or may note leave, or at what point they legally add a relative to the lease and continues the cycle.

It is definately not worth the investment. if you are curious just look at all the angry landlords who would kill for the end of rent stabalization.

mho59: There are two strategies that can work at least some of the time:

1) Buy in sufficient bulk, at sufficiently distressed prices, and with sufficient knowledge of the building and tenants/rent roll, so that your wins have a chance of outweighing your losses.

2) Lock in a deal with the tenant before buying the apartment.

#1 is what the professionals do. #2 is generally impractical, because if a deal could be made that easily, the current owner probably would have done it. This approach might work where a shareholder covets the apartment of his rent-regulated neighbor; it's less practical for an outside investor.

Thanks for the great comments. Here are the details:

10 units for 50% of market price with avg RS rents of $800 vs. market of $1400. Apts are 700 to 800sf with 3.5 - 4.5 rooms and tenants mostly 60s to 70s.

Total monthly rents - $8,000
Maintenance - $5,500
Mgmt Fee - $400
Repairs ($50 per apt) - $500
Net Income - $1,600 or $19,200 annually for a 2% cap

At what price is sufficiently distressed?

Seems like prospective buyers usually look at the tenant ages but given the loose succession rights mentioned, that only seems partly helpful. Anything else to look for in a walk through?

Condition of apartments. If (and that's a BIG if) and when you get apartment to rent at free market, it will probably need total renovation. So, add that to costs.

50% off seems a little low. closer to 75% would be more interesting. since most tenants are in 60's/70's, you have to expect that they can stay for 20 yrs. given that the maintenance has risen quicker then the rent regulated rents, you'll be losing money each month within 5-7 years.

50% of value-if-vacant is WAY over the going rate. 30% is more like it, especially if prior owners have worked the pool already (sales to tenants, buyouts, apartment swaps, decontrol, etc.).

Be sure to check the latest tax and utility bills. The actual expenses may not be reflected in the maintenance yet.

In a walk-through, look for:
1) Signs of younger occupants (generally bad, unless the tenants are a family who have clearly outgrown the apartment, in which case a buyout may be attractive);
2) Medical or financial distress (generally good, as perverse as that is);
3) Signs of incongruous affluence (with the low rents you mentioned, high-income decontrol probably isn't an option; but wealthy tenants are candidates to either buy their apartments or take a buyout and move someplace nicer);
4) Possible lease violations (this is a scummy tactic, since it's not the stated purpose of your walk-through, but it's a scummy business).
I'm sure there's more; that;s just off the top of my head.

On the other hand, succession rights aren't all that loose.

The relative has to be living with the tenant for two years before the tenant departs. Since the relative isn't prescient, no way to know when the two years should start.

Living with grandpa in a one-bedroom or full-of-old-people-stuff two-bedroom for who knows how long is a high price to pay for succession. Or so my sponsor says. His tenants' relatives appear only to clean the place out.

I'm with 41.

I feel like we spend under $600/yr to maintain our (non-RS) investment studio, but only after a recent $25K renovation. I'm not sure $600/yr. is a big enough budget to maintain an unrenovated apartment that is old enough to fit around 4 rooms in 750 sf.

Remember old plumbing is going to leak; refrigerators blow and you'll need new ones, and you have to paint the apartments every three years.

ali r.
DG Neary Realty

also, W81st points out that you should look for signs of incongruous affluence -- but those should be red flags; residents who are wealthy can afford lawyers to fight decontrol, as the owners of Stuy Town learned to their peril.

ali r.
DG Neary Realty

>>The relative has to be living with the tenant for two years before the tenant departs. Since the relative isn't prescient, no way to know when the two years should start.<<

That's difficult to prove or disprove. A younger relative could claim residency (create a mailing address, etc) without actually living full-time in the unit.

Also, to your point about 'renting on the free market'--unless you purchase the sponsor rights to these units you will be required to adhere to the co-op's rules on subletting. Some co-ops allow intermittent subletting (three years out of every five, for example) but some do not permit shareholders to sublet at all.

If you intend to use these as investment/income-producing properties then you MUST work out a deal for the sponsor rights, and be prepared to pay extra for that.

I have always played a game with friends as to what is the worst real estate investment other than buying a RS unit? We just couldn't come up with anything. An abandoned foreclosure of several years in the middle of nowhere would be a good idea compared to this. I think that ph41 said it best, "DON'T".

My plan would be post vacancy many many years later, minimal renovations and sale. Agree that only less than 30% is interesting. Insightful comments on the maintenance potentially exceeding the rent in 5-7 years. Regarding the maintenance, I have a cheap handyman that can do the painting / plumbing. Also, I believe banks typically use $500 per apt as maintenance.

West81 - I like your wording of "incongruous affluence". I'll keep my eyes open, the walk through is next Monday. Off the top of your head, what are the top 3 lease violations that one could pursue?

NWT - I imagine the relative would try to claim residence via addresses changes earlier. Knowing this in advance, how do landlords typically preempt and prove residency elsewhere two years prior?

>>Off the top of your head, what are the top 3 lease violations that one could pursue?<<

If you have to 'pursue' lease violations then it is NOT worth purchasing. It is virtually impossible to prove violations, and the courts frankly often just don't care. The city favors tenants above landlords. You could find yourself tied up in court for years trying to evict a tenant for a real or perceived violation.

Anyone can change their address on checks. Then they can change the ConEd or whatever acount to their name long before two years. Then what do you do, hire a forensic scientist? That would be the only person who could soley define if the person lived there for that period of time. There are more ways to scam residency than there are to fight it. Look, landlords wanted to coop and condo buildings in the worst way. They could not do it fast enough. Now they have some RS tenants left over. So? What has that got to do with savy investment?

RS tenant in place, co-op, asking SE one of the most basic questions...

Let me guess: You are not a seasoned RE investor, but you do have a lot of money to invest?

(the lat past was not a guess, as you did not list the cost of financing under expenses)

btw, what location are we even talking about

The courts do favor tenants above landlords, but only to the extent of cutting them slack when appearing pro se, etc. That helps offset the usual situation where the landlord has better representation.

To get anywhere, a landlord has to be extremely punctilious with dates, paperwork, and on and on. It isn't easy, nor should it be.

I see quite a few cases where potential successors weren't able to prove residency, but it may be that they're reported only because the outcome was unusual.

One other issue: if the typical rent is $800, won't you have to put a lot of money into renovations after a tenant moves out in order to push the legal rent up over the $2500 threshold for vacancy decontrol? Under the new rules, it's likely to take $90K in well-documented renovations to increase the legal rent from $1K to $2500. Do coops deregulate automatically upon vacancy, just because they are coops? (I don't think so.)

And if we're talking about apartments with a market rent of just $1400, is there really enough upside in the deal top justify all the risk and hassle?

Great point on the sponsor rights.

I wouldn't renovate much as a sale would be more profitable. At 25 cents, cap of 4-5%, seems like people agree these RS coops merit strong consideration...

If you don't know what you are doing stay away. Also NYC likes to give tenants the chance to cure so any default wont necessarily mean you can get them out.

Also, is this a good way of looking at it - portfolio of RS coops like a building w/ 10 RS apts? But may warrant a lower cap because of more upside via the sale option vs. rent increase upon vacancy.

Manhattan landlord tenant court still favors the tenant. I wouldn't go near a rent stabilized apartment.

i thought that there was a way to get the tenant out if you could prove that you need the apartment for your own family use, which i believe can include anyone in your immidiate family, like a parent or sibling? if that's true (and i'm pretty sure it is. i know for a fact this is true for a multi fam townhouse that you can prove you intend to combine into a single fam home for your own use, there was that case in EV) you could have a legit lease for your family member but sublease it under the table. granted, not the most upstanding thing to do, but still, this is new york right? everyone is fudging something.

That's difficult to do, and not possible if the tenant is 62 or older. See http://nysdhcr.gov/Rent/FactSheets/orafac10.pdf

As with most things, we've covered this before: http://streeteasy.com/nyc/talk/discussion/6030-buying-an-apartment-with-a-rent-stabilized-tenant?

The owner use and occupancy rules dont apply to rent-stabilized and
rent-controlled coop and condo tenants.

ok, then. i tried. no dice, op.

http://books.google.com/books?id=ea9JDnnivl4C&lpg=SA14-PA18&ots=pzdPE7NNC8&dq=%22owner%20use%22%20cooperative&pg=SA14-PA18#v=onepage&q=%22owner%20use%22%20cooperative&f=false

says the relevant law is at http://public.leginfo.state.ny.us/LAWSSEAF.cgi?QUERYDATA=GBS352-eeee but it hurts my head to read it.

40 East 66th Street Apt. 7C
Guess this gives an idea of the discount for a rent stabilized tenant in place!!
03/29/2011 Listed in StreetEasy, already in contract, by Corcoran at $5,100,000.
05/03/2011 Sale recorded for $637,500.
07/13/2011 Listing is no longer available.

I think the $637K is the tenants selling their rights.

The sponsor is the buyer, and it's reported via an RPTT rather than a deed. Makes sense, as title to the block/lot vested in the sponsor at conversion and sponsor never deeded it to anyone.

The male of the sellers was in dental school in 1965 when he married a woman whose parents lived at 40E66. His address has been 40E66 #7C over the years. Other addresses, but can't tell whether residence or office.

Father-in-law died in 1985 and wife in 1992. Can't find mother-in-law's death. The female seller might be daughter or second wife.

Further NYT results: sellers are husband and second wife, both dentists, married in 1993. They're now 70 and 65.

@rb345

The building that LucilleBluth references is 47 E. 3rd St. It was a rent-regulated building.

Re: the $637K Vornado paid as a tenant buyout, it makes sense. If I'm reading Vornado's 10K correctly, they figure $115,000,000 as the cost of the residential part of the building, or an average of $3,500,000 per apartment. (The other $43,000,000 was for the Madison Ave. retail, which is what they really wanted.)

The RS apartments would be worth less, so say $3,000,000, plus the $637,000, plus $500,000 or more for renovation. They've been selling for ~$5,500,000, so Vornado did OK.

NWT - I saw that Vornado was the "buyer", but did not know any of the other info. Thanks for that.
I think this really goes to show that the only people who can make money buying occupied rent stabilized apartments are those (like Vornado) who basically own the building, have made their money on it, have a tenant they can buy out for a "reasonable" amount (and I guess $600K vs. $5,500,000 is "reasonable), and have deep pockets.

In our case, the successor sponsor bought our apartment in a bulk purchase from the original condo-conversion sponsor for something in the $300/SF range. (It's hard to be precise, because the transaction was complex and each apartment was probably valued differently.) They flipped the apartment to us a year later for about $750/SF. That's a nice profit, but it's way too early to say the bulk purchase was a good trade. The successor sponsor still holds about 55 rent-regulated apartments, including many with negative monthly cash-flow and firmly-entrenched tenants.

Congrats! Looks to be a good deal, and lots more room. Did your giving up the smaller unit you were renting help in negotiating this one?

And I'm ashamed at not seeing the sale go by the other day....

Thanks, NWT. Actually, it's the same apartment we've been in all along.

Swaps and buyouts make sense in theory; they seem to have figured prominently in the original sponsor's plans (and to a lesser extent in the successor-sponsor's). In practice, though, most of the longstanding regulated tenants were reluctant to move, no matter how much their apartments exceeded their evident needs. Attachment to one's home is an emotional area that can't be expressed in simple economic terms.

As for you not jumping on the transaction as soon as it hit ACRIS, everyone deserves a vacation.

"if you are curious just look at all the angry landlords who would kill for the end of rent stabalization."

Not to mention landlords who MAY have killed:

http://gothamist.com/2007/11/07/mother_still_ho.php