I IMPACT PUBLISHING COMPANY NEWSLETTER Investors Zero in on New York By David A. Chodack In July of 1969, my wife and 1 packed our things in a borrowed car and left New York bound for the Promised Land of California. Fourteen years later, we are seriously considering moving back. Not that California hasn't been good to us over the years. We arrived with nothing and now we have a nice home, two cars, investment property and money in the bank. So why leave? Because it is beginning to seem more and more as though California was the place to be for real estate investment in the late 1970s. However, it's looking to us like New York is where it's at for the 1980s. There are several reasons for this, but one of the main stories is rent control. While California is moving towards it, New York City is moving away from it and trying desperately to recover from its adverse effects. In the past few years, the two largest cities in California -San Francisco and Los Angeles -have both adopted rent control ordinances and several smaller cities around the state have followed suit. This, combined with inflated prices and interest rates, has put a serious damper on the rehab market. You can't make money fixing up run-down properties unless you have anxious buyers ready to snap them up at premium prices when you are done - or tenants willing and able to pay top dollar rents. In the California of the 1970's neither one was a problem. Prices doubled and tripled within a short period of time and rents in desirable areas climbed along with them. Home buyers and tenants alike began to get priced out of the areas they wanted and forced into neighborhoods they would never have considered a few years before. Gentrification was the watchword of the day as middle-class buyers and renters moved into the ghettos in ever-increasing numbers, driving up sales prices and rents. In 1979 and 1980, a combination of rising prices and interest rates, plus rent controls, brought the whole process grinding to a halt. People could no longer afford to buy houses to live in - not newly renovated houses anyway -because the payments were just too high. No one wanted to renovate income properties because they just couldn't get the rents they needed to make it pay. The California housing market went into a slump from which it has yet to recover. New York City has become the city of the rich and the poor with little middle ground left. Years of rent control (originally enacted as a temporary emergency measure during World War II and never rescinded) had left potentially desirable neighborhoods neglected. Owners simply found it cheaper and easier to walk away from their buildings than to make needed repairs and/ or pay the property taxes. (One major reason New York City went bankrupt is because a long-time city treasurer and later mayor insisted upon listing all the abandoned buildings on the tax rolls. creating the illusion of hundreds of millions of dollars owed to the city and just waiting to be collected.) While tenants in desirable areas of Manhattan were paying $1.500 a month for studio apartments, landlords in Brooklyn and The Bronx - only twenty minutes away - were letting the city take their buildings for back taxes, or paying local thugs to burn them down. New construction was exempt from New York's rent control. But nobody wanted to build anything but super-luxury apartments unless they got government subsidies. It just wasn't profitable. It was getting to the point where there was simply no place for the middle class to go. Then about 1980 or 1981, just as the real estate boom was dying out in California, it began to pick up in New York, as the city began a determined effort to revive itself. Manhattan became so over- crowded and overpriced that so-called "sliver" buildings have become the latest rage. Squeezed in between existing buildings on lots too narrow to build on under normal conditions, sliver buildings have literally begun to fill the housing gaps around Manhattan. But the prices are not exactly designed to fit the budgets of the poor or even of the upper middle class. One new building was being advertised this summer. Squeezed into a space only 20 feet wide, it offers six two- bedroom flats at a "mere $350.000 each. With 50 percent down ($175.000 cash) the payments on the flat would be around $2.500 a month-plus utilities. But that is cheap compared to the new Trump Towers on Fifth Avenue. Trump used to be one of the major developers of middle- income complexes in the New York area, but apartments in their latest and greatest project start at a $1,500,000, with the penthouse going for ten million. So what do you do if you're not Johnny Carson. Prince Charles and Lady Di. or any of the lucky few who have reportedly considered and / or bought New York apartments lately? You move to Brooklyn. Queens. Staten Island or the Bronx. Or. If you just can't stand to leave Manhattan, you move to a less-than-fashionable neighborhood like the Upper West Side. Or even better, a formerly less-than-fashionable neighborhood in the process of changing - like the Upper West Side around Broadway and Seventy-second Street. The last time I had been in that area was about 15 years ago when it was commonly known as Needle Park and the principal residents were prostitutes and drug addicts. It was even the subject of a movie with AI Pacino, called 'Panic in Needle Park.' Now it is the in place for young affluent singles who still can't afford the Upper East Side, which is even more expensive. When I asked a wealthy investor friend about the changes in the area, she said that two men she knew had bought property in the area before it turned around. Each of them now got more rent in one year than they had paid for their buildings just a few years ago. THE TURNAROUND in commercial property in the area was even more dramatic. Young, affluent residents created a demand for expensive shops and restaurants. and business is now booming. Needless to say, so are rents, But the boom is not confined to the Upper West Side. Harlem and the surrounding areas are making a comeback as the new black middle class is making its economic power felt. Downtown, the seedy warehouse district south and west of Greenwich Village has become SoHo (South of Houston Street. formerly the dividing line between the warehouse district and the residential-commercial-tourist area). As factories move to North Carolina to escape the unions, their industrial lofts are being renovated and converted to artist's studios, living space and shops. And as SoHo gets priced out of reach, people have started moving into lofts in other industrial areas of Manhattan, Astoria. and Long Island City in Queens. Even Wall Street. the financial heart of the world, has not been immune from the trend. Manhattan, like many other urban areas, has had a glut of office space in recent years. Now some vacant or under-utilized buildings have been converted to residential co-ops and condominiums. And across the river in New Jersey, close-in areas like Jersey City and Hackensack are no longer cheap. Gentrification fever is everywhere. But it is Brooklyn that I am most familiar with and that is where I saw the most activity and the most changes going on. Brooklyn is New York's largest borough, both in area and population. It bills itself as America's fourth largest city, with a population close to four million people. But up until recently, it was a place with nowhere to go but down. Even the beach areas had become the dumping grounds for the poor, instead of the playground for the rich. In East New York/Brownsville, where I grew up, many blocks had only one building in five standing, and only one in ten legally occupied. In Bedford-Stuyvesant, the largest black ghetto in the country, beautiful brownstone buildings stood next to burned-out, boarded-up shells inhabited by squatters. These people paid no rent and lived without benefit of heat, electricity, or running water. Now those buildings are being renovated and restored, and those that are too far gone are being torn down and replaced with brand- new houses that carry subsidized mortgages. Things are truly starting to turn around, Friends of mine live in a ghetto neighborhood where everyone not only knows who the local drug dealers are, but still count on them to keep the peace and scare the muggers away. They are both college professors, and they bought their duplex for $15,000 several years ago. It is now worth over $100,000, and if they decided to fix it up and sell it as co-op flats, it would be worth even more. There are low-income housing projects at either end of the street, but the private houses and apartments are all filling up with black and Hispanic professionals and some whites as well, paying as much as $800 a month for two-bedroom apartments, or $80,000 for co-ops and condominiums. Several factors have contributed to the New York Renaissance. First of all is the population crush. There simply is too much demand for property anywhere close to Manhattan. Not everyone who wants to, can afford to live in Manhattan and many people have discovered that they would rather live in close-in ghetto areas than1n far-away suburbs. Secondly, there are a lot of immigrants still pouring into New York, concentrating in many of the decaying areas and thereby helping to revive them. Last, but not least, there is opportunity. The run-down properties are there and there is money to be made fixing them up. For those of you who have read Wayne Phillips' book How to Get Government Loans or have taken his course, there are lists of HUD repo's in the newspaper every week. There is also money available, private money as well as public money. Banks and S&L's are giving out mortgage and rehab loans in areas that were formerly redlined. The state and city are making mortgages available at 9.9 percent interest for middle-income home buyers. There are also loans and tax incentive programs for rehabbing rental properties and even the Brooklyn Union Gas Co. has gotten into the act. All over Brooklyn's decaying areas there are rehabbed properties bearing signs identifying them as part of the gas company's "Cinderella Project." It makes good economic sense. Besides gaining new customers, the gas company is protecting its assets and promoting good will in the community. After all, if you were living in a house that the Brooklyn Union Gas Co. had helped to renovate, would you let the kids in the neighborhood damage the gas meters? But there is more to it all than even the availability of money. One more obvious factor is rent control. As I said at the beginning of this article, New York is moving away from it. A few years ago the law was changed. and as tenants in rent- controlled apartments move, their apartments become decontrolled and the landlord can raise the rents to market level. Instead of rent control they now come under a program called rent stabilization. Rent Stabilization means that the tenant gets a lease for one to three years, so his rent is set for that period of time. But if a landlord sells his property or rehabs it, then the rents can be raised to cover the costs. Rents cannot be raised while the leases are still in effect, but once the leases expire, the rents rise to a level that is high enough to cover the landlord's expenses. This means that it pays to buy run-down properties and rehab them. It pays to go into run-down neighborhoods and build new housing. And, if you like to make money, it makes sense to pack up your hammer and nails and head for New York. It seems to be more than just coincidence that the Old House Journal (probably the best and the most widely circulated newsletter on rehabbing older properties and doing it right) is headquartered in Brooklyn, America's most rapidly rehabilitating city.  David A. Chodack is the author of  Fortune Builders from Impact Publishing. His latest books are Magic Contracts, just off the presses and. with co-author Joseph Marino, The Ugly Duckling Game -How to Turn Unattractive Properties into Beautiful Dollars. RETURN TO NEWSLETTERS PAGE HOME PAGE