Newbie quesion about rentals in Northern NJ/Metro NYC

[badmash007]

Hi,

I've learned a lot from the posts and advice from the experienced investors here.

I live in the northern NJ/Metro NYC area. When I look at the multi-unit residential properties, especially close to the subway stations (NJ subway and NYC subway), I fail to see properties that would satisfy the 2% rule (Monthly rent > 2% of purchase price). The only properties that I see satisfying this requirement are those which are in sub-prime neighborhoods and not close to the subway stations (though close to the commuter train station).

I'm familiar with the residential rental prices in the area and it boggles my mind how do property holders make money.

The only way I can fathom that is possible that the vacancy rates are really low because housing is tough to get around here. I'd really appreciate if the experienced investors throw some light on this.

I'm only looking at this area because this is where I work and I consider it too risky to invest/manage long distance.

Thank you for your thoughts and advice!

[justin0419]

Welcome!
A little over a year ago, I moved from a place where property was horribly overpriced to an area where I can buy cash-flowing properties all day long.  People that rented houses in the expensive market area either:
1.  had owned the property for so long that they were able to purchase it at a much lower price and therefore had lower expenses.  the rent amount probably more than covered the mortgage.
2.  got stuck with a house they paid too much for and decided they'd rather rent it and hope the market would turn around.  in the meantime, their rent doesn't even come close to covering their mortgage and they pay out of pocket each month just to keep the bills current.
 
A third option for how people rent properties in expensive areas where the rent doesn't justify or cover the higher acquisition cost is that maybe the owner is using it as a tax writeoff to offset income from their other business and investments.

Some people buy properties where the rent amount doesn't justify the high acquisition price, but it's in a desirable area and they hope for price appreciation.

We buy for cash flow.  If the house can't be purchased for a price where the rent will cover all the expenses as well as provide cash flow, we don't do the deal.  Some people think just owning property will eventually make you wealthy.  There are tons of people who buy wrong and are losing money. 

[badmash007]

Dear Justin,

Thank for for the insight! I had similar thoughts on 1 and 2, so I'm glad that not only you confirmed my suspicion, but also gave me a new insight via the 3rd option.

The one option I see is in the sub-prime towns which probably house a lot of section-8 or similar folks. It is only in these areas that I can find properties which satisfy the 2% loan. However, these properties are more than 50 years old. Is it worth investing in a rental if the properties is that much older or older? Based on people's experiences, what % of purchase price is typically spent annually on maintaining an older rental (50+ years) versus a 20+ year old multi-unit apartment?

Thank you again for the guidance!

[jmd_forest]

badmash,

New Jersey is a tough market, especially North Jersey. Remember, a multi-unit is a business and an investment. If you overpay for the property your business will lose money and will lose money for a long, long time. Not many businesses can continue to operate in the red for expended periods.

DO NOT OVERPAY FOR PROPERTY. It will bleed you dry.

I do business in South Jersey and the only way I am able to get cash flowing properties is to buy distressed (sometimes significantly distressed) properties directly from owners at significantly reduced prices. It takes a lot of work and time to get these properties into rentable condition, but the upside to that is I usually wind up with 40% to 50% equity in the property when the rehab is complete; and that is real equity in today's market (at what I call the "30 day sales price"), not "make believe it's worth  a million dollars" equity.

Regarding vacancy rates: I'm a small investor and I personally tend to all my properties. All my properties are in nice areas with good to great school systems. I set the rent at the lower end of the competitive market and my vacancy rate is VERY low

Regarding maintenance cost: since my properties generally undergo a serious rehab, they are more like new properties and have minimal maintenance issues.

Regarding sub-prime areas: unless you have a thick skin and don't mind dead-beat tenants and the local landlord-tenant court I'd look in neighborhoods at least a step or two up from "sub prime" (although even nicer neighborhoods and higher rents are no guarantee you'll actually get paid).

Best of luck

jmd_forest

[justin0419]

Most of our places are about 50 yrs old or just a little older.  Keep something in mind about older properties - major systems need replaced from time to time so you need to look at how old different components are before you rule out an older property.  What I mean is you can get 15 maybe 20 yrs out of a new roof, 10-12 yrs out of a water heater, etc.  So most of these things will have been replaced at some point over the life of the home.
We bought a house that needed a lot of drywall repair, some flooring repair, paint, etc.  But the roof was maybe 5-7 yrs old, central HVAC was probably 5 yrs old or less.  No one wanted to do the work needed to bring this house back up to standards.  We got it for a steal, put a few months of sweat equity into it, and it's a good cash flowing rental.  That house is about 85 yrs old.  The tongue and groove subfloor was very solid in almost the entire house.
Some of these older houses have stronger wood than new construction.  Don't rule something out solely based on its age.  Look at things like if it has old wiring, fuses, non-galvanized/copper pipes, etc.

I just ran a report on our rehab/repair expenses for our apartment building last year.  It was only $1164.00.  That was for a couple of plumbing calls, a new window a/c/ unit, etc.  So for last year that looks really good.  The building was full for the entire year and (thankfully) we didn't have any big ticket items go bad.  The building will probably need a new roof in a few years.  That will probably run about 6k or so.  Some years are good, some are not.  This is why the 50% rule you see so much posted about is a good estimate because it's fairly conservative and will take into account the fact that some years you'll have lots of repairs and other years you won't.

[badmash007]

I do business in South Jersey and the only way I am able to get cash flowing properties is to buy distressed (sometimes significantly distressed) properties directly from owners at significantly reduced prices. It takes a lot of work and time to get these properties into rentable condition, but the upside to that is I usually wind up with 40% to 50% equity in the property when the rehab is complete; and that is real equity in today's market (at what I call the "30 day sales price"), not "make believe it's worth  a million dollars" equity.

Dear jmd_forest,

It is great to get a local perspective. Thank you for sharing that! You are right about paying too much is like a death wish. I guess I have to be extra diligent around here. I see the RE shows on HGTV channel and, even when they are discussing investment properties, I'm amazed that they never bring up the point that the buyer is paying too much.

Best regards
Badmash007

[badmash007]

Most of our places are about 50 yrs old or just a little older.  Keep something in mind about older properties - major systems need replaced from time to time so you need to look at how old different components are before you rule out an older property. 

Dear Justin,

That's a very interesting point that you've brought up. I guess that, as most people deal with areas with newer properties, this point doesn't come up. I appreciate this tip. I'll keep this in mind. Thank you very much!

Best regards,
Badmash007

[tatertot]

I like the older houses, but if you go that route, make sure you understand the lead paint rules.

Lead paint laws in NJ are brutal from the LL's point of view.

[badmash007]

Dear Tatertot,

That's a very good suggestion. Thank you for that!

Do you recommend any article, book, resource for lead paint and relevant laws in NJ?

Thank you!

[jmd_forest]

Regarding lead paint in NJ: I completely eliminate any possible problems by removing ALL trim and woodwork that is painted and "encapsulate" any sheetrock/plaster that may have lead paint by repainting.

All tenants are provided the Federal Lead Paint pamphlet.

jmd_forest

[badmash007]

Dear Jmd_forest,

That's really good advice! Thank you very much for sharing this. I'm absolutely amazed how much I'm learning by just hanging out here.

I'm still in the learning phase. I just finished reading 3 books and ordered four more used ones from Amazon. I can't make a purchase until I know where I'll be moving, as I'm looking to move on from my current job. I suspect that I'll remain in the NYC area but it seems that, almost any other area would be easier to work on in terms of rental investments.

[justin0419]

My wife noticed that our Lowe's store now has the EPA Lead Based Paint Pamphlets hanging in the paint section.  We grabbed a few this time.  I also like to get a couple paint stir sticks when I'm in there.  They make nice shims.
Make sure you not only give the new tenant the LBP pamphlet, but also have them sign the LBP disclosure form.  Keep that on file with your lease.

[naqueen]

I am also from the Northern NJ area (Newark, East Orange, Irvington) and I find that it is very profitable to invest in these areas.

You can get a multi family for under $190,000 and the rent more than covers the mortgage. You can profit at least $500 (which is my rule). Especially in Newark with their low taxes.

If you are planning to live in the property, I do not advise to go to these areas unless you are already from there.

Anything north of Essex County (Bergen Co) are still highly priced even with the foreclosures and the rents definitely do not cover the mortgage.

However, these areas are highly desired areas so some may think it is wise to invest for the long haul.

[badmash007]

My wife noticed that our Lowe's store now has the EPA Lead Based Paint Pamphlets hanging in the paint section.  We grabbed a few this time.  I also like to get a couple paint stir sticks when I'm in there.  They make nice shims.
Make sure you not only give the new tenant the LBP pamphlet, but also have them sign the LBP disclosure form.  Keep that on file with your lease.

Dear Justin,

That's a good tip. Thank you for sharing!

[badmash007]

I am also from the Northern NJ area (Newark, East Orange, Irvington) and I find that it is very profitable to invest in these areas.

You can get a multi family for under $190,000 and the rent more than covers the mortgage. You can profit at least $500 (which is my rule). Especially in Newark with their low taxes.

If you are planning to live in the property, I do not advise to go to these areas unless you are already from there.

Dear Naqueen,

I'm glad to meet someone who is already investing in the northern NJ area. The towns and prices you had mentioned are what I've found attractive as well. I'm guessing that you'd put Elizabeth in the same category.