If you’re looking to invest in Bronx real estate, there’s a good chance you’re targeting the small multifamily sector. Multifamily properties with 2 to 4 units comprised about half of third quarter Bronx real estate sales and more than a quarter of principal value. The sector is a favorite for budding real estate investors following the age old advice to invest in middle class housing.
There are many unique advantages of the small apartment sector. Some regulations only apply to properties with 5 units or more. Falling below that threshold also brings various financing opportunities not available to commercial investors.
Owners living in one unit and renting out another get stronger debt to income ratios, which makes it easier to qualify for financing. That can include high loan-to-value programs like FHA, which aren’t available to commercial owners. Onsite landlords also enjoy tax advantages that further support this asset class that’s so important to the overall Bronx market.
Multifamily Math
Hypothetical Set Up for 3 unit Multifamily Property
Tenants are individually metered for heat and electric
| Annual Income: | |
| Unit 1 | $24,000 |
| Unit 2 | $24,000 |
| Unit 3 | $24,000 |
| Gross Income: | $72,000 |
| Annual Expenses: | |
| Taxes | $7,500 |
| Insurance | $7,500 |
| Repairs and Maintenance | $7,500 |
| Common Utilities | $2,000 |
| Miscelaneous | $2,500 |
| Total Expenses: | $27,000 |
| Net Operating Income: | $45,000 |
| Cap Rate at $750k: | 6% |
Valuing multifamily properties is not limited to bricks and mortar metrics like price per square foot. A financial analysis also needs to include an income based market rate valuation, where price per square foot and capitalization rates align.
For example, our small multifamily benchmarks say the Bronze class of the sector trades around $250/sf and $240k/unit. The price per unit varies widely in the smaller unit sizes, so the price/sf should carry more weight.
The theoretical example above is a 3 unit property receiving $2k monthly rent per unit, accruing to $72k annually. It’s getting tough to keep expenses at the 40% rule of thumb but in this case the tenants pay their own heat and electricity. We are assuming $7,500 each in annual taxes, insurance, and repairs and maintenance. Common utilities, sewer taxes and other miscellaneous expenses leave around $45k in annual net operating income, before financing expense. Dividing that net operating income by the purchase price gives you the capitalization rate, which is hopefully higher than your mortgage rate. That too is getting tougher to achieve so you may need to put more money down and finance less.
The benchmark price per square foot would equate to a value of around $750k if the units averaged 1,000 sf each. The benchmark price per unit would arrive at a similar value which equates to a cap rate of 6% in our example. That’s a big gap below prevailing mortgage rates that have recently risen above 7%.
Demand Drivers
As the Federal Reserve aggressively tightens monetary policy in their fight against inflation, financial assets like stocks and bonds have entered a bear market. This has driven demand for real assets that can appreciate with rising rents. The added investment demand for multifamily housing has kept cap rates below rising mortgage rates.
Owner occupiers account for much of the demand, especially in the prevalent duplex category. Having an extra unit generating rental income not only makes it easier to qualify for financing, but brings tax advantages too. Regular repair and maintenance expenses become deductible and depreciation provides non-cash expensing against your rental income.
My listing pictured above is a prime example on City Island. A long-time family home whose kids have moved on and parents passed away. Always regularly maintained with updated utilities and a well manicured yard. The first floor unit has one bedroom and an office or dining room. The second and third floor duplex has three bedrooms, two living rooms and an eat in kitchen. The AE flood zone will require a $3,500 annual flood insurance policy but low taxes make it a great investment property whether you live in one unit or rent out both. The $665k asking price equates to $295/sf. Some modest updates would still keep you at a discount to the Silver benchmark for a solid property in a lovely Bronx community.
Your rental income can have other tax advantages if you live in one of the units. Always check with a qualified tax consultant who can explain all the distinct advantages of investing in multifamily housing for your particular circumstances.
Small multifamily properties are clearly the most popular asset class in The Bronx real estate market. NYC Department of Finance data report 203 such properties sold during the third quarter. Two thirds were 2 family houses and only a handful had 4 units. You can find examples throughout The Bronx, but they are most prevalent in the neighborhoods east of The Bronx River.
Current Offerings
The interactive map above contains around 350 active Bronx listings on the OneKey MLS of properties with 2, 3, or 4 units. Scroll to your favorite neighborhood and click on a marker to see details about the listing. Please use the Contact function above to inquire further about any of them.
There should be at least a few on that list to meet any investment strategy in this sector. Some are lower priced handyman specials while others are turnkey, almost passive, investments. Your taxes will be lower than the suburbs but your insurance and other expenses will be higher. It’s good to be handy as frequent visits from plumbers, painters and carpenters will determine the difference between net income or losses.
Successful landlords are also careful about the tenants they enter into contracts with. Various housing vouchers have become very common and reduce the risk of having to go through a long eviction process. So, your tenants may not earn three times the rent, but you should look for hard workers who want a nice home to relax in each night. You want tenants who will help you take care of your property.
Tax and regulatory advantages of the small multifamily sector make it an excellent entry point for someone learning the ropes of investing in real estate. Make sure you have good professional advice to take advantage of the opportunities while ensuring compliance with all applicable regulations.
Please use the Contact function to learn more or inquire about any market services.
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