Underwriting a Three‑Family in Bed‑Stuy: A Practical Guide

Thinking about buying a three-family in Bed-Stuy so the rent helps cover your mortgage? The numbers can work in your favor, but only if you underwrite the building with local realities in mind. Pre-war systems, potential violations, and tenant status can swing your outcome more than headline rents suggest. In this guide, you’ll get a practical, step-by-step framework tailored to Bedford-Stuyvesant, from rent roll validation to expenses, CapEx, financing, and value-add plays. Let’s dive in.

Start with the property profile

Before you model income and expenses, confirm what you’re actually buying.

• Verify the legal unit count and Certificate of Occupancy match the listing and the physical layout. Illegal units create financing and insurance problems.
• Expect pre-war systems in many Bed-Stuy three-families, often with a single boiler, shared hot water, and older electrical. Plan for deferred maintenance.
• Pull records for permits and violations from city agencies. Open violations and unpermitted work can add time and cost to your plan.

Validate the rent roll

Turn the seller’s rent story into defensible income.

Documents to collect

• Signed leases, renewal history, and security deposit details.
• Bank statements or ledgers that show actual rent deposits for the last 12–24 months.
• Records from payment platforms, plus any tenant estoppels when available.

Confirm tenancy and payments

• Visit the property to confirm who occupies each unit and its condition.
• Reconcile advertised rents with collected rents. Note any free months or concessions.

Check regulation status

• Small three-families are usually not rent-stabilized, but there are exceptions. Request rent history from the state housing agency and review registration records before you assume market-rate units.

Utilities and other income

• Clarify who pays for heat, hot water, water and sewer, and common electric. Owner-paid utilities increase your expense ratio.
• Add reasonable other income only if it exists today, such as storage or laundry.

Red flags to avoid

• Missing or expired leases with no consistent payment proof.
• Discrepancies between legal unit count and the occupancy you observe.
• Undisclosed rent regulation history or unusual side deals.

Baseline assumptions

• Use a 5 percent vacancy and credit loss as a starting point in Bed-Stuy. Increase to 7–10 percent if multiple leases expire soon or the market softens.
• Model turnover costs, such as one month free or 5–10 percent of annual rent during re-leasing.

Build your operating pro forma

Your goal is a conservative, local model you can refine with quotes.

Income and EGI

• Start with current scheduled rent. Apply your vacancy and credit loss.
• Add verified other income. The result is your Effective Gross Income (EGI).

Operating expenses

• Common lines: property taxes, insurance, owner-paid utilities, repairs and maintenance, property management, legal/accounting, garbage, and common area costs.
• A reasonable expense ratio for Bed-Stuy three-families is 35–50 percent of EGI, excluding debt service and CapEx.
  • Use 35–40 percent if you occupy a unit, have newer systems, and tenants pay most utilities.
  • Use 45–50 percent for older buildings with owner-paid heat or higher repair needs.

Reserves and CapEx

• Set a CapEx reserve of $1,500–$5,000 per unit per year, based on age and condition.
• Typical big-ticket items to plan for:
  • Boiler replacement: $8,000–$25,000.
  • Roof replacement: $10,000–$30,000.
  • Kitchens/baths per unit: $8,000–$40,000.
  • Masonry and facade work can exceed these numbers in brownstones.

Insurance and escrows

• Price a multi-family landlord policy early. As a rough starting point, $1,500–$4,000 per year is common for three-family buildings, then replace with a quote.
• If you plan renovations, factor renovation insurance or any required escrow.

Example numbers (illustrative)

Consider a purchase price of $1,200,000 and current scheduled rent of $6,600 per month. With a 5 percent vacancy assumption, EGI is about $75,240 per year. Using a 40 percent expense ratio, operating expenses are roughly $30,096, creating an NOI near $45,144. That pencils to an illustrative cap rate of about 3.8 percent, before financing and CapEx.

If you complete a targeted refresh and increase rents 25 percent over time, and expenses rise modestly, your stabilized NOI can improve meaningfully. Always run sensitivity cases for best, likely, and conservative outcomes.

Value-add paths in Bed-Stuy

Conservative: light upgrades at turnover

• Scope: paint, flooring, minor kitchen and bath updates, and corrective code work.
• Spend: roughly $8,000–$20,000 per unit.
• Upside: 8–15 percent rent growth with improved tenant appeal.
• Assumptions: 6 percent vacancy, 40 percent expenses, about $3,000 per unit per year for reserves.

Moderate: targeted reposition

• Scope: full kitchen and bath refreshes, boiler and hot water replacement, utility improvements where legal, curb appeal upgrades.
• Spend: $20,000–$50,000 per unit plus $15,000–$40,000 for building systems.
• Upside: 15–35 percent rent gains, stronger leasing velocity.
• Financing tools may include renovation options for owner-occupants or higher LTV conventional loans with contingency reserves.

Aggressive: major rehab or conversion

• Scope: legalizing space, reconfiguring layouts, or separate metering, if permitted.
• Expect higher cost and complexity with permits and reviews. This approach is often less feasible in historic brownstones without significant capital and time.

Financing paths for 2–4 units

• FHA offers owner-occupant loans for 2–4 units with as little as 3.5 percent down. Renovation options may be available for eligible repairs.
• Conventional and portfolio loans vary by lender. Owner-occupants usually receive better terms than pure investors.
• Local banks and credit unions can be competitive on small multi-family loans in NYC.
• Ask lenders about debt service coverage requirements, reserves, treatment of deferred maintenance, and documentation needed to count rental income.

Practical underwriting workflow

Use a repeatable process so you can move quickly on good deals.

1. Preliminary screen: compare asking price to fast cap rate or GRM using advertised rents.
2. Request the rent roll, leases, and proof of deposits. Pull the latest tax bill and review building and housing records for violations.
3. Conduct a site visit to confirm unit count, mechanicals, and occupancy. Take photos of any issues.
4. Run sales comps for 2–4 unit properties and rent comps for realistic targets.
5. Build your pro forma: scheduled rent, vacancy, other income, expenses, CapEx, and financing costs.
6. Run sensitivity scenarios for rents, vacancy, and major CapEx in the first 3–5 years.
7. Structure your offer with appropriate contingencies or a pre-inspected approach if you want a price advantage and accept the risk.

Due diligence checklist

Request from the seller

• Rent roll and all leases, including month-to-month agreements.
• Bank statements or ledgers confirming rent deposits for the past 12–24 months.
• Owner-paid utility bills for the last 12 months.
• Property tax bills and assessment history.
• Certificate of Occupancy, permits, and violation records.
• Insurance declarations and loss history, plus any warranties for recent work.
• Security deposit ledger.

Actions to take

• Confirm legal unit count and occupancy certificate details.
• Pull rent history from the state housing agency to verify no rent regulation applies.
• Order a title search and check for liens.
• Hire a qualified contractor to inspect roof, structure, HVAC, electrical, and plumbing.
• Review lead-paint disclosures and compliance for pre-1978 buildings.
• Check for open violations or pending litigation.
• Get an insurance quote early to align with lender requirements.

Deal sourcing that works locally

On-market

• Monitor MLS and broker listings that focus on 2–4 unit properties.
• Use local platforms to track comps and set realistic rent expectations.
• Keep an eye on auctions or bank-owned channels in case opportunities arise.

Off-market

• Mail absentee owners identified through property records, including LLC owners.
• Walk target blocks and network with supers, contractors, managers, and attorneys.
• Engage reputable wholesalers and investor groups, but vet their numbers.
• Watch public records for pre-foreclosures, tax liens, and estate changes.

How a guided approach helps

• Pre-underwrite your buy box so you can move quickly on the right building.
• Use a 30-minute screen on first contact to confirm unit count, rents, and key systems.
• Offer structures that reduce friction, like quick-close or seller-friendly timelines backed by organized vendor and financing options.

Pitfalls to price in

• Open violations or unpermitted work that delay financing and add carrying costs.
• Property taxes that rise faster than expected. Always price current bills, not estimates.
• Aging boilers, roofs, and electrical that increase both repairs and insurance costs.
• Any sign of rent regulation or unclear tenant status, which can constrain your plan.
• Turnover costs and concessions needed to reach market rents.

Ready to run numbers together?

If you want clear underwriting, local comps, and a practical plan to stabilize or reposition a Bed-Stuy three-family, let’s talk. With team-backed resources and hands-on guidance, you can move from first look to a confident offer. Reach out to Alex Fincham to review a deal or get access to private and off-market opportunities.

FAQs

What is a typical expense ratio for a Bed-Stuy three-family?

• Many investors model 35–50 percent of Effective Gross Income for operating expenses, using the higher end for older buildings with owner-paid utilities.

How do I check rent regulation status for a small NYC multi-family?

• Request rent history from the state housing agency and review city housing registrations to confirm whether any units are regulated before you assume market-rate.

How much vacancy should I underwrite in Bed-Stuy?

• A 5 percent baseline is common, with 7–10 percent if multiple leases expire soon or if you expect slower re-leasing.

What financing options exist for owner-occupants buying a 2–4 unit?

• FHA can allow as little as 3.5 percent down for owner-occupants, with potential renovation options, while conventional and portfolio loans vary by lender.

What CapEx items most often impact Bed-Stuy three-families?

• Boilers, roofs, kitchens and baths, masonry, and electrical upgrades are common big-ticket items; set aside $1,500–$5,000 per unit per year in reserves and plan larger projects over 5 years.