Newbie investor with questions

[Adiel Arvizu]

So as the topic states I have a couple of questions about beginning my first dip into real estate:

1. I live in Jersey City in the heights. So I want to know if the heights is a good investment to make given the steep 300k-900k and more cost.
2. I want to know my financing options. I would go for an FHA loan but given my situation I really can't move away from my current residence. I want to also pay off my student loans so I can get another property signed to me. So what would be the best loan to start out with?
3. What type of house should I look for. Should it be 2,3, or 4 family houses or should I try to go for commercial rentals if they are in a good enough price?
4. How do I calculate expenses? For example, what percentage of the cash flow goes toward future repairs the like?
5. Once I get the nerve and make my first investment using loans how do I snowball that into owning more properties?
6. If I do this how soon will I be able to pay off my student loans?

I think I have a few more questions but this should serve as a start. Thank you for your time.

[John Errico]

Hey @Adiel Arvizu I will take a stab:

1. Re: Jersey City--my suggestion would be to (start) investing near where you know and/or live. Jersey City heights has gotten quite expensive in my opinion and, as a result, there may be fewer good deals, but you're surrounded by a lot of pretty attractive areas to start investing in: deeper into Jersey City, Union City, North Bergen, and basically the rest of Hudson County. Having said that, even in very expensive/pricey areas there still are good opportunities for investing (just that the barrier to entry is higher)... but you'd really have to be looking at a specific deal to be able to analyze it in the context of the market. I don't think there are any "good" or "bad" areas as a rule, just that it may be more or less challenging to find good deals in certain areas, and more or less difficult to purchase them.

2. If you're not planning to move into the house as your primary residence you're basically limited to conventional mortgages or to other creative financing options, like loans from friends/family or non-traditional funding sources. If you're planning to flip properties you may more easily have access to other types of funds (like hard money loans), but from the context of your question it seems like you're planning to buy and hold these properties. A mortgage broker or anyone at a bank could tell you what you might qualify for in the conventional mortgage sense given your income and debts.

3. This is entirely up to you. Obviously, 2 families properties will be cheaper on average than, say, 4 family properties in the same area, but this doesn't necessarily mean they are a better deal. At least in the Hudson County area, properties at the lower end of the market are very competitive, mostly because the barrier to entry is so low: as in, anyone who can afford even a small down payment (3.5% down, for example, for an FHA loan if they're moving in) can potentially purchase the house, and so can every other class of investor/fund/foreign buyer etc. if they're so interested. So for a 2 or 3 family home in the $300k range, you're competing with a ton of people who could potentially buy the house. More expensive properties eliminate people that don't have access to funding/FHA buyers, so the competition is likely less numerous, though likely more sophisticated in general.

On the flip side, depending on what sort of property you get, there is a lot of complexity in the entire process, including in renovating, renting out, and managing a property. I started out buying a 2 family that had been abandoned for several years, and just getting that up and "running" led me to learn a lot and I found it very challenging. I think it'd be harder, though not impossible by any stretch, to start with a, say, 4 family property. There are also rent control issues to consider with larger properties, but that's another story and depends a lot, at least in NJ, on the city you invest in. If you search rent control in New Jersey on BP (or in specific cities like Jersey City, Union City) you'll find a fair amount of information.

4. Again it's hard to calculate expense without knowing the specific property, but there are lots of resources on BP to guestimate this (search "50% rule" or "calculating rental expenses" for example). If you have a specific property you're considering in the northern NJ area, I'm sure I or others who invest here could give you a sense of what we'd expect.

5. Tons of options: broadly, you could use the money you generate with that property, and additional money you've saved up, to buy a second property. You might be able to (hopefully) encourage friends or family that see you've done well with your first property to invest with you and branch out from there. Additionally, once you've owned the property for some time, and/or if the property increases in value to do work you put in or the general market appreciating, you can take money out of your first property by refinancing your mortgage (as in, taking advantage of the equity you've built up or now have in your current property) to invest in additional properties. Again, there are tons of posts on BP on this if you search around.

6. Obviously depends on your student loans, haha. One thing to consider, though, is the interest rate of your loans: given that interest rates are generally so low (right now) it might be worthwhile to consider refinancing. If some or all of loans are or could be at very low interest rates (< 5%, for example), it might be less financially savvy to pay back those loans as fast as possible then, say, invest the extra money in other ways that might generate > 5% returns (stocks? real estate? etc.)... or it may not be, depending on your financial goals, on your current income or projected future income, and so on. Not really specific to real estate though but there are obviously tons of resources on this online. Having extra income generated from an investment property would certainly allow you to pay back loans faster, but you'd also have to consider the amount of money you'd need to save up to buy the property, fix it up, rent it out, and so on.

Best of luck!