Investment Sales: Is N.Y.C. multifamily still a good buy?

With all the hype and drastic run up in prices, now is perhaps better than ever to find value under the right circumstances. The suggestion I make to clients looking for new multifamily investments is to look for properties with low average rents, especially in transitional and up-and-coming neighborhoods. This acquisition strategy offers an investor long-term potential for steady and stable growth through increasing rents. Almost always however, these type of deals demand higher equity requirements. This is due to the building's low net operating income as a result of the lower rents, which does not support a high loan-to-value ratio. Furthermore, these types of investments typically require capital reserves to improve the property in order to achieve the higher rents, thus they will not show a return in the early few years of ownership. A real estate investment typically rewards those who hang in there over time. As lenders are presently financing cash-flowing assets, those who come in with higher equity and gradually maximize the income over time realize the payoff (typically a tax-free payoff upon refinance). As an example, I recently sold 174 Delancey St., a 5-story mixed-use building consisting of 22 apartments and two stores in the Lower East Side. The average rent per apartment was $1,434/month, which is about 30% under market rate rent. The property traded for $7.45 million, which amounts to 15.6 gross rent multiplier and $687 price per s/f, a solid value for the new owners with considerable upside potential. Even though this approach demands higher equity requirements, the compelling reason to invest in a lower rent apartment building is the ability to grow the income. Buildings appreciate for many reasons, including gentrification and population growth. However, the prime reason for an asset's appreciation in value is increased income. This broker's advice: "Buy the low rents, sell the high rents." Lev Mavashev is a senior director at Besen & Associates, New York, N.Y.