As the Brooklyn market undergoes dramatic changes, it’s increasingly important for us to regularly ask: are we doing enough to maximize the return on our real estate investments? Any number of obstacles can get in the way; fortunately, we think about these things a lot over here.
Rule #1: Maximize Rents
All too often, landlords don’t properly register their rents with the Division of Housing and Community Renewal (DHCR). Bottom line: this leads to a loss of value for the building. It’s easy to be lazy, but bad management will soften your ROI. I recently saw a deal sheet for a building with a 421A tax abatement listed at $24 MM, which represented a 6% cap. If the rents had been properly registered, they’d get more for their building. Period. Improper registration limits the upside for the potential buyer.
Rule #2: Vet Suitors
If you decide to sell, be sure your buyer is able to close. Don’t be afraid to ask for proof of funds regardless of how many deals they’ve done. All too often, developers have most of their equity tied up in deals. It’s not unusual for a developer to have to hustle to line up their equity, but because good deals are highly sought after, properties aren’t just sitting, so if funding isn’t clearly in place, you can’t bank on that closing. Remember 10% for the contract price is table stakes.
Not all tenants are created equal. The wrong retail tenant—someone who isn’t going to keep up with repairs, provokes noise complaints or breaks laws—can devalue your property and cost you money in ways you might not even imagine. Take the time to look at their business plan and at their books, because if they hit hard times, it will be your problem as well.
Rule #3: Understand the Upside
The difference between a good deal and a great one is knowing the market, parsing the numbers and genuinely understanding the upside. For multifamily properties, I look at four factors: (1) Is this the right neighborhood to convert the ground level residential to retail? In one recent case, I advised a landlord to pursue this route as retail on a particular North Williamsburg property can yield $90 a square foot vs. $60-$65 a square foot for residential. (2) Rent regulation, which we scratched the surface on above, can be a complex subject, which varies from case-to-case, but if you don’t understand it intimately, consult an expert. I’m happy to share my knowledge with you. (3) Is gentrification happening, and at what speed? Knowing that an overall overhaul is coming to an area will enable you to project what the landscape will look like in the future. Hip coffee bars are an indicator because this is a low cost business. (4) Is the property being well managed?
I’d love to hear your opinion on the subject. Let us know what you think.
– David Behin