Finance for eventual retirement coop

I assume the coop has a generous rental policy unless you are planning to keep it vacant for 4-5 year while you are working abroad. You may not get coop approval either. Bank loans will be very hard as banks tend to lend against coops as a primary residence. If you have a lot of assets and a private banking relationship, anything is possible. Curious why even bother buying if you are not here?

I find this a curious question too -- are you planning to buy the apartment and then warehouse it for four-five years (which most boards won't like)? Or are you planning to purchase and then rent it out until you come home? (in which case, you're looking for a bank that will lend to you as an investor). what price point are we talking about?

ali r.

Sounds like a challenge, both in getting financing and Board ok

I feel like interest rates like these aren't going to last long and the market is in for a coorection at some point and Manhattan real estate is going to increase in value. Maybe in 4 or 5 years it will just be too expensive for me to get into. Yes, I'd thought I would like to rent to at least defray the cost of interest, principal and maintenance. And it seems like most banks are telling me I'd be considered an investor even if the property is a place I'll live in in 4 or 5 years, max. I guess I should be looking for that odd sub-520k condo but I'm looking on the UWS where there are very few condos to begin with.

I think I found board of a place I'd like - a little studio on the UWS - that would be OK with it. They allow renting from day 1. It's the financing part I can't figure out.

As for assets, I have the value of the apt and then some. My salary would allow me to carry costs if there were periods when it went unrented. And even if rent didn't cover the entire cost, it would defray it. I feel strongly about owning vs renting. I don't want a landlord telling me I have to move at 75.

I think I have found a coop that allows renting from day 1 but it sounds like lenders still might not like it as a non-conforming loan. I don't really undertand the hesitancy of lenders: wouldn't the risk to them in such a lenient coop be the same as that with a condo purchase? I guess boards can change rules but if they did, wouldn't the place I bought be grandfathered in?

Lenders are resistant to take on non-conforming loans because it's harder and more expensive (i.e., less profitable) for them to securitize the loan and get it off their books. Also, as a co-op loan, they don't hold first lien position in the event of default, so they take greater risk than in a condo purchase.

A couple of months ago we were considering making an offer on a studio condo in Hells Kitchen in the $520-530k range. It’s probably tougher to find a nice studio condo in a good area for <$550k now but given your requirements, I would really try looking for a condo vs. coop. We were in a similar position, wanting to lease the unit for 1-2years before actually using. Coops just had too many hoops to jump through and most wouldn’t allow leasing from day 1.

You are an investor if you don't plan to live in the place and plan to sublet from day 1. Expect interest rate 4%+ and 20% down minimum. Investors are considered a high risk category.

You are buying a 2nd home if you don't plan to live there, but buying for yourself. Expect interest rate ~3.5%+ and 15% down minimum if building allows.

Primary residents get the best deal - around 3.0%+ interest rate, as low as 10% down if building allows it.

Coop share loan under 822mm a conforming loan, so the building being a coop is not not an issue. What could be an issue is ratio of investors in the building to primary residents. If ratio is high, some banks shy away from such high risk buildings and others only loan to those buying a primary residence.

Correction to above^^^ believe 822k (not m) is the ceiling for conforming loan in a high cost area.

Also, the exact pricing is based on recent personal experience of myself / friends and will of course depend on market conditions and personal factors like the credit score.

Thank you, Krolik & Aaron2! It sounds like an expensive proposition. Could I get a lower interest rate once I moved in or would I be stuck with that higher rate for the life of the loan? And could a coop be enticed to allow an investor unit in their building if it were stipulated that if I didn't move in by (date), maitnenace hikes and other penalties would kick in?

Does anyone know about taking out a securities based loan to finance a coop? Just thinking this might be easier for me as an investor and maybe the coopy would allow me a 5-year grace period before I moved in. Thanks!

@MTH: You could refinance your loan after you moved it, and, all else being equal, probably get a lower rate, as it would be owner occupied. But "all else being equal" is a big question mark, given that rates are more likely to go up than down in the next five years. So, you may end up with a refinance that is at the same or higher rate than what you could get now.

To your other question, I can't think of a thing that would entice a board to accept an investor owner if they don't already have a number of them (well, maybe huge bribes). If they don't want investor units, they don't want them. That's generally the point of co-ops.

What do you mean by 'securities-based loan'? If you have significant assets in securities, you may be able to leverage those to get a loan (i.e., from your broker, rather than your bank), but it won't make your balance sheet look any better to the co-op board than a regular loan.

Seems like you're jumping through a lot of hoops to make this work. Why not just wait? Maybe rent a place when you get back to the city and then take your time looking.

Keith
TBG

Just speculation- perhaps the original poster wants to retire after overseas work and there may not be any mortgage after retirement. So he just want to lock in a nice low rate.

I don’t think it’s a bad idea if you can rent the unit before using it…that is what we are doing although our time frame is rent the unit for 1-2 years then use it. But I would still do exactly the same if the timeframe was 5 years. But leaving the unit vacant for such a long time before using does not make sense. This and all the other issues raised on this thread are the reason we bought a CONDO not COOP. Even if the coop allowed subletting from day 1, the financial requirements of many coops are stricter than banks and it is just something we did not want to deal with. Sure we paid more for a condo than a similar coop but the purchase process was just so much easier and hopefully when we sell in the future, we will get that condo premium back in the sales price

Original poster - maybe give us some more details on where you are looking to purchase, size of unit, and price point, so we can further help brainstorm solutions? Most coops do allow sublets but do not prefer applicants that want to rent out the units.

Some ideas:
1) Look for a sponsor unit (easy to do on streeteasy). Coop boards have no say in sales of such units (however, you will be subject to coop rules after you purchase, so make sure the coop does allow sublets, most of them do).

2) Look for a unit that requires a gut renovation and try to negotiate a BIG discount.
https://streeteasy.com/building/440-east-56-street-new_york/4g
Renovating this unit would probably cost 300k. Tell the board you want to spend a year renovating the unit and plan to move in later. This building seems to allow sublets.

3) Do not buy now. Wait to retire, rent for one year, and then buy a "HDFC" coop in cash. This is a special city program that has an income limit (but usually no limit on assets). HDFC units are cheaper and pay less taxes.

Thanks, Krolik, 911turbo, theburkhardtgroup! Those are great ideas (and questions). My main concern would be interest rates. They're enticing. And generally speaking prices in Manhattan will only go in one direction going forward. Condos do make sense and yes, I guess I could buy one now and sell it on later but they're expensive to begin with (my price range is up to $525,000 for a studio -it is what it is) and there aren't many out there at all (below 110th on the West Side, below 96th on the East). Krolik, not sure I understand your suggestion about sponsor units. Is the residency requirement (usually after 2 years of residency) after each new owner takes possession or, in the case of a sponsor unit, would that period have started under the previous owner (the sponsor)? As for securities based loans, I'm told that they allow loans of up to 30% of your portfolio and that for the seller they amount to cash deals. They don't help or hurt your balance sheet - you keep on earning on those investments.

I haven't read carefully though all the replies so this may be redundant.

Many co-ops have a policy that a shareholder must occupy the unit for a certain period of time before being eligible to sublet it. So--a board may not allow you to sublet you apartment for the time prior to your moving in. In addition most co-ops have limits how long a shareholder may sublet the unit within any timeframe; for example, three years of sublet allowed out of five years (meaning you would not be able to sublet for the entire five years of your vacancy in any case).

And co-op boards are often wary of pied-a-terre purchasers or anyone who appears to be purchasing as a rental investment (hence the common bylaws outlined above).

Unless you find a co-op with a very lenient board this plan may be a challenge for you.

Have you looked into the Worldwide plaza complex/buildings in Hell’s Kitchen. There are a few studios just above your price range and once recently sold for $500k so depending on how long the studios have been on the market, maybe you can negotiate into your price range. It’s a condo so should be able to rent from day 1. We are about to purchase a 1 bed a couple of blocks south in the mid W40’s. We loved Hell’s Kitchen when we visited. The prices per square foot are definitely less than “prime” areas like Chelsea but we did not feel we were sacrificing anything with the area, it was a real eye opener since we were not familiar with the area. Although full disclaimer, I know nothing about this building. It seems very large and there are a lot of units available. Maybe a bad sign, who knows but maybe someone who is more familiar with this building can chime in

https://streeteasy.com/complex/worldwide-plaza#tab_building_detail=1

You don't seem to care where in Manhattan, so might as well be opportunistic and find a great deal.
Check out this building and other condo buildings in the area. Note that mortgage lenders will only lend for a purchase of a primary residence in this building. You would have to use the securities loan.
https://streeteasy.com/building/140-east-56-street-new_york/6a

What is the interest rate on securities loan?

Given your plan, you have not one, but two issues: 1) getting a loan at an attractive rate for effectively an investor unit (that's how lenders will see it), and 2)getting approved by coop board (they typically dislike investors).

Interest rates on a first mortgage primary residence right now are around 2.5%. This you do not qualify for, full stop.

Margin loans on an investment portfolio will probably be 5% or more and floating not fixed, unless you have millions of dollars with your broker, which it seems you don't.

Interest rates on an investment property are often 0.5% higher than primary residence.

Some lenders will further jack your rate bc you don't live in the US so it's harder to go after you if you default.

And you have the carrying cost till you move in.

Why not just wait? If you wait, yes, prices might rise, but your investment portfolio could rise too. Interest rates could rise, but your rate might fall.

"Interest rates on a first mortgage primary residence right now are around 2.5%"

Is this for 30 years fixed with zero discount point? I didn't find anyone offering such a low rate. Can you give some information about this low-interest rate so that I can refinance my apartment from 3.0% to save some money

>> Margin loans on an investment portfolio will probably be 5% or more and floating not fixed, unless you have millions of dollars with your broker, which it seems you don't.

Not really. Interactive Brokers has been providing reasonable margin rates to clients for at least a decade. Current rate is 1.58% for <$100K, then 1.08% for balance put to $1M, then 0.75% beyond that. Basically, LIBOR (which is 0.08% at the moment) plus 1.5% / 1% / 0.5% / 0.3% for various tiers, with a minimum of 0.75%.

Not suggesting that you should use them, or consider margin loans for any purpose. Just wanted to clear up the misconception that as a retail investor you don’t have access to competitive financing rates.

https://www.interactivebrokers.com/en/trading/margin-rates.php

I briefly read the advice given on investment loans by various people.
The advice given is incorrect by every “expert” on this tread.
A loan for an investment property is a conventional loan so long as it meets Fannie Mae guidelines. In your case the loan would meet the Fannie Mae guidelines and your interest rate while not the same for an owner occupied apartment, it will still be very reasonable, depending on your credit score and LTV.
And the down payment is less than 20%.

Licensed Mortgage Broker, NMLS#60631

Everyone is wrong, but you only "briefly read" what they said. You must be a real hit at cocktail parties.

Perhaps things changed.
https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-2-Project-Standards/Section-B4-2-3-PUD-and-Co-op-Eligibility-Requirements/1032997041/B4-2-3-04-Loan-Eligibility-for-Co-op-Share-Loans-08-07-2018.htm

Fannie Mae will purchase co-op share loans provided borrowers occupy the property as a principal residence or second home. ***Investment properties are prohibited.

@300, Fannie loans for investment co-ops seems to have been eliminated but I do not believe this is the case for investment condos.
Nevertheless even allowing co-op financing for a second home seems very reasonable.

But MTH and everyone else is talking about coops, not condos.

I think he did mention he would consider a condo.

And there are very few co-ops that will allow renting immediately.

I would have to check to see if there are any Fannie Mae updates to owner occupancy, but it used to be a one year requirement to live there.

Seems like you are agreeing with the "experts" on this thread.

@author
"not sure I understand your suggestion about sponsor units. Is the residency requirement (usually after 2 years of residency) after each new owner takes possession or, in the case of a sponsor unit, would that period have started under the previous owner (the sponsor)? "

My understanding is once you buy from sponsor, you are subject to the same rules as everyone else, including residency requirement. You really need to look for a building that does not have those requirements. Place such buildings on your watch list and check for new listings. Here is one such example that could work:
https://streeteasy.com/building/the-hawthorne/5b
Note that if you rent out your unit, you have to pay an increased Maintenance fee. This is done to discourage rentals.

Even flexible boards (that allow rentals from day 1) do not like investors, so your best bet not to tell them details of your plan, or buy from a sponsor. Purchase from a sponsor does not require a board approval.

But how many sponsor coops under $500K are being built in Manhattan south of 96th these days?

@ 300, the “experts” should have realized the minimum occupancy requirement which they did not.
MTH can therefore get a great loan at a low rate.

@ George, I have seen your mortgage advise on other threads, and never bothered to call you out on your errors.
I can pull them up for you.

@George Sponsor co-ops are not recently built co-ops for the most part.

@George - I occasionally see sponsor sales in post-war coop buildings.

Here is an example:
https://streeteasy.com/building/the-churchill/11l

No idea about the sublet policy in this building though.

MTH I do believe you would be better off with a condo.
If you buy a co-op rules can change with a new board and they could decide to disallow investment apartments and can also increase their fees. And at that point in time it could be a buyers market if you decided to sell.

In my building in BPC, that is a condo, a studio just sold for about $500K. And my building has a pool on the 45th floor. There is also a great gym and lots of setback terraces. It is a luxury building with 24/7 doormen. That will get you a lot of renters.

This has all been really helpful so thank you streetsmart, George, 300_mercer, 911turbo, burkhardtgroup, ionada. It seems like it boils down to getting a condo (which from what I see so far are out of my price range) or wait. Unless I find a flexible board but how do you know a board is flexible? There was a place at the Berkley I was interested in but finding financing for that will be challenging. I can wait and just keep saving but am worried by the time I move I'll be priced out of Manhattan by very high interest rates and/or higher home prices.

Keep in mind for most sponsor units, you will have to pay transfer taxes, basically the taxes of the seller. Normally seller pays transfer taxes, buyer does not. Also BPC (I’m assuming batter park city) and financial distract DO have lower priced condos, maybe you could indeed snag a studio for low $500k range. We looked at several. But almost all had really high real estate taxes and monthly common fees. Some were land leases. Not sure it’s worth it pay a “low” price for a studio but be stuck with $2k in monthly expenses. Battery City Park does seem like an interesting area. But Fidi we did not like at all. We felt it would be totally dead during weekends. Maybe a great area to get quality tenants but IF you are going to live there one day in the future, I would think long and hard

MTH, There are small condos in Midtown east or Hells Kitchen which come up at a reasonable price from time to time. Just make sure to calculate price per sq ft so that you aren’t paying more per sq ft vs larger units in the building.

https://streeteasy.com/building/the-continental-condominium/3f

https://streeteasy.com/building/350-east-54-street-new_york/5g

Then you can check with your bank if they will do a “condop” which as listed by Streeteasy are Coops with condo rules with typically unlimited renting from day one. And you don’t have to pay mortgage tax on a “condop”.

"condop" is really just a coop that sits inside a condo. In such buildings some units (typically commercial ones) are condo, while the residential part is a coop. Units in a coop of such buildings are priced and financed as a coop, and the board has the same rights as a regular coop board.

To figure out the rules of coop board regarding rentals you need to read the listing description and possibly talk to the listing agent if the listing description is not clear on this point.

I linked above to a studio, within author's price range, at "The Hawthorne" on 53rd street, which is a "condop" with flexible subletting rules, permitting rentals from day 1 (30% extra maintenance fee though to act as a deterrent).

@300 mercer
This is a pretty good find.
https://streeteasy.com/building/the-continental-condominium/3f
I saw this unit when I was apartment hunting about 6 months ago. It appears that it has been sold for less than 500k in the summer, renovated, and has now been relisted for $550k.
One thing i would mention, the alcove in this unit is very small. If you fit a full size ben in there (as pictured), you end up blocking access to the closet. Unless this has been fixed during renovation somehow, I am afraid the alcove is not really for sleeping.

"My understanding is once you buy from sponsor, you are subject to the same rules as everyone else, including residency requirement. "

It depends on both the specific Offering Plan and how you purchase the shares. If you purchase the shares from the Sponsor as a "Holder of Unsold Shares" you generally retain all the rights of the Sponsor WRT subletting, Board approval of sales or sublets, etc.* In addition some Offering Plans are written so that all purchasers from the Sponsor retain certain rights. If I remember correctly most of the Rockrose Offering plans made the original purchaser's subsequent sale no Board approval, just managing agent, and unlimited subletting.

* There has been some litigation in this area so the specifics of each situation need to be examined individually.

NB even if you purchase as a "Holder of Unsold Shares" in general if at any point you occupy the unit yourself it voids the status from that point forward.

Thanks, Krolik - interesting places. Generally favor sacrificing size if it means the location is closer to a subway stop. And I'm keeping a close eye on maintenance/tax/common charges. Those don't go away and only go up. There's a new development in East Harlem 1790 3rd Ave with low monthlies just don't know about the neighborhood - not many amenities nearby. And my preferred area is slowly narrowing to UWS and UES. Dunno.

@30yrs_RE_20_in_REO that is interesting - so depending on the offering you may or may not be able to sublet, depending on whether old rules are grandfathered in. Coops boards must not like that kind of deal! I am a bit concerned about that. It would have to be ironclad. NY is a litigious environment, from what I understand. And I'd hate to establish a contentious relationship with the board from the outset by not telling them I might not move in till later and plan to rent till then.

@911tubo - Yes, would consider Worldwide Plaza there is a studio there. Will have to tour. There's also a place in the Savannah on the UWS. I must say I worry a little about construction standards for bldgs built in the 80's, 90's and even early aughts but that is obviously a generalization and apart from living there I'm not sure what questions to ask to find out about that.

@theburkhardtgroup - this really is threading a needle. I love a good challenge but your advice is appreciated. I should be ready to hold off for a while if I don't find sth that really speaks to me. The place that seemed a perfect match in every way (8BR at 415 CPW) is now in contract. I would have carried the relatively low monthlies as a pied a terre if the board had allowed. Seemed like a bargain to me with open West-facing views and a real kitchen.