New York’s emerging neighborhoods hold a wealth of deals for savvy buyers, from opportunity zone investments to newly trending co-living operations. But not all opportunities benefit new owners.
Although modern co-living arrangements have become a lucrative way for townhouse owners to leverage a growing appetite among renters for privacy with shared common space, traditional single-room occupancy (SRO) housing offers little reward for landlords.
Buyers are often attracted to SRO-designated properties because of discounted prices and a promise of revenue, but limited financing options and stringent rent regulations can make them an operational headache with little financial gain.
Thankfully, buyers can still reap the benefits of a good deal on an SRO-designated townhouse by converting it to a multi-family opportunity or a single-family home. Here’s how that process works.
1. Determine whether the townhouse is a legal SRO
With the rise of Airbnb and other home-sharing sites, some owners have begun renting single rooms without having an SRO designation. Legal SRO buildings will have a Certificate of Occupancy (COO) with a Class B designation. If a building rents single rooms with a Class A designation, this is an illegal SRO.
The conversion process in this case is legally straightforward since the building’s use must match its COO, but you may incur some expense to bring the townhouse up to code. For example, if you would like to operate a multi-family townhouse, you may need to remove walls, add kitchens, and otherwise reconfigure the layout to ensure that each unit you rent meets the city’s requirements for a stand-alone apartment.
2. Obtain a Certificate of No Harassment (CONH)
If your new townhouse purchase is indeed a legal SRO, you’ll need a Certificate of No Harassment (CONH) to change the designation or perform any major alterations. The easiest way to obtain a CONH is to insist that it be included in the sale. If it isn’t, you’ll need to apply to the city, who will conduct a hearing to ensure that existing residents do not feel pressured or harassed by the change. If the city denies a CONH, the building owner cannot make any alterations for 3-5 years. Because of these consequences, it’s important to get legal help before starting the process!
3. Obtain a new Certificate of Occupancy (COO)
Once you have a CONH, obtaining a new COO becomes straightforward, but expect it to be time-consuming. The process can take six months to get the right permit, and another six months to obtain the actual certificate. Keep in mind that you will likely have renovations on top of these legalities, which can push back your rental or move-in date even further.
The Bottom Line: Are SROs Worth the Hassle?
If you love a particular building and have the time, resources and patience to work through the red tape, an SRO-designated building may be worth the hoops. However, it’s important to look beyond the selling price. What starts as a bargain may soon become unaffordable after the costs of legal fees and renovations. If you’re ultimately looking for income from a multi-family townhouse, make sure your expected return outweighs the costs.
Keeping an SRO
Is there any circumstance in which an owner may want to keep an SRO designation? Until recently, the answer would be “not really,” but the market for single-room housing among affluent renters is changing the landscape. Modern co-living spaces, which have become a lucrative option for owners, operate under an SRO (Class B) designation. To turn an existing SRO into a co-living business, you still need a CONH to make renovations. You’ll also need to abide by existing rent regulations, which means respecting any existing leases.
Read More: Is Co-Living the New SRO? How to Leverage This Trend for a Greater ROI
However you choose to approach an SRO opportunity, professional help and guidance is key to avoiding legal hassles and making the most of your investment. To learn more about existing opportunities in emerging neighborhoods, including Harlem and throughout Brooklyn, schedule a call with me here.
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Authored by: Stanley Montfort
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