It used to be the dream of aspiring investors to buy a 2-4 family. They would live in one of the units and rent the remaining units to cover the expenses and live rent free.
In Manhattan, that window of opportunity has shut as the highest and best use for a multi-family townhouse is to convert it back to a single family. We surveyed the 2-4 families which have sold this year in one of the strongest townhouse markets – Greenwich Village. We found that at least six of these sales will be converted back to single families.
It's easy to see why. In 2011, Greenwich Village 2-4 families sold for between $1,059/SF and $2,008/SF with an average of $1,389/SF; whereas several finished single families traded at above $3,000 per square foot. There's still a great case to be made for speculators to convert these multifamily townhouses back to their original configurations. The challenge is that the investor must come in heavy with equity, as financing for this type of product is remote.
However, the competition for investors is steep. Users have caught on to this disconnect in pricing and are actively buying these properties to convert for themselves.
A recent example is 211 West 22nd Street, a completely renovated three family, located between Seventh and Eighth Avenues in Manhattan's Chelsea neighborhood. It sold for $3,850,000 or $1,132/SF.
The five-story property is 17' wide with about 3,400 SF. It contained three residential units: an owner-occupied triplex apartment and two floor-through units on the third and fourth floors. The triplex renovations include, marble bathrooms, stainless steel appliances, central air, laundry room, custom woodwork, and surround sound. The two floor-through apartments also include marble bathrooms, and A/C units. The triplex benefits from an outdoor garden while the fourth floor unit features a private roof deck.
Even though the property was in immaculate condition, the buyer, an end user, will opt to convert it back to a single family. Massey Knakal Director of Sales Brock Emmetsberger, who worked along side me in the sale, attested that this buyer outbid several investors.
For argument sake, someone could have bought 211 West 22nd Street to live in the triplex and collect income from the two floors above, which would have more than covered the building expenses; however, they could not have lived rent free if they financed it.
The two floor-throughs were rented for $3,200 and $3,500 per month for a total of $78,600 per year. The building expenses were only $38,000, due to the low real estate tax bracket for 1-3 families.
Thus, in an all cash transaction, a buyer could live in the triplex and get a 1% return on their money from the two apartments. However, if someone wanted to put a 75% mortgage on this property to take advantage of today's low rates of around 3%, they would not have been able to come close to servicing the debt of around $150,000 per year. I guess the American dream is over!