Why so much action in Ghetto, NJ?

Question

There are a lot of properties listed in the marketplace in the horribly ghetto cities of New Jersey like Newark, Trenton, Elizabeth, Paterson, etc.  Is there a market there? Are people actually looking to move into those areas?

Jessica Zolotorofe · Answer

haha, well, I'll refrain from commenting on the "ghetto" part, but the state is doing a lot to try and clean up the inner-cities, so there are pockets that are really lucrative investments now. For example, Newark-near the university, law school, courthouses and the business district are starting to really come along. It has some great restaurants and shops, quick Path ride to Manhattan, easy access to major highways, the stadium and some nearby bars, etc. In this day and age, a huge part of the draw in the residential real estate world is convenience factor, so whereas people (especially younger people) used to live in the burbs and commute in to restaurants and work and events and school, they now just want to just live close by, which has resulted in a ton of gentrification happening throughout NJ neighborhoods that used to be not so enticing.

Also somewhat unique to NJ (and pretty weird to a lot of non-Jersey people) is that there can be million dollar homes and a town or even a few streets away the houses average $250,000 and have terrible schools. The benefit to that is that slowly the good neighborhoods have been able to expand into the not so good neighborhoods, which is tougher to do with a cluster of 5 or 6 towns that just aren’t desirable. So, for example, you have the areas like Asbury Park’s east-side. No one wanted to touch Asbury a few years ago, but it is surrounded by a lot of really high end beach towns, so slowly it became, I live on the edge of Asbury, but I "basically" live in Deal or Loch Arbor, or Allenhurst, or Bradley, etc. and slowly the stigma disappeared and now there are condos on sale for a million.

If you look at cities like Jersey City, where I live, you have a perfect example. I would go ahead and say with some confidence that you would never have wanted to live there, or even really be anywhere near there 10 years ago...even maybe 5 years. Now, a small one bedroom Downtown goes for $750,000 with parking spots selling for an additional maybe $30,000 to $65,000 a piece. New high end retail, restaurants and bars are popping up weekly. Rents go up to crazy numbers, like $4,500 for a 550sf apartment not even on the waterfront. People who bought when things were not so great, or "up and coming" are sitting on a major pile of cash now. In my opinion, it's all really about whether you intend to hold a property and if you have the time to wait on it before you see your real return.

You can rent them out in the interim, but like you said, the areas that are a little bit rougher or farther from public transportation probably won't rent for as much just yet. But all of those cities have proximity to NYC or easy access to Path or otherNJT options, and that is tremendously valuable today. There are still parts of JC I wouldn't walk alone in or even want to drive through at night (just a few blocks from the very expensive areas I mentioned above, by the way), but in time, each neighborhood is cleaning up. Other considerations are that in inner cities like that, there are people who have families that have lived there for generations, and while there are bad pockets, those people really do take pride in ownership and want to see the cities thrive. Also, those areas had a high number of foreclosures when the market crashed andmultiple houses on a single block might be vacant. If other developers are picking up a bunch of those properties and making the street pretty decent, you attract a different kind of buyer for yours, too.

A lot of NJ has lower inventory for rehabbers because the high property prices, and high taxes,make the margins too tight. The alternative is, again,to buy in the areas that aren't as "upgraded"and hope for the best, which the pattern throughout the state seems to indicate the best may be realistic.

So I apologize for the stream of consciousness and very long post, but bottom line is that, in my experience (some people may have differing views or experiences as to the quicker sale part) you’re not so much investing for a quick return in those types of areas. It's more of an investment in the city as much as in the property, but with patience, it can be a huge success!

Jim Kennedy · Answer

Its a great deal for the right person. I have a client who buys houses in one of the worst cities in the US - Camden NJ. She owns about 40 units. She buys for 30K, puts 5-10K into it and gets $900. She is a Hispanic lady who rents to Hispanic tenants, and she has two men who assist when she goes to the property. Shes been doing it for years and these properties cash flow. Its about screening the right tenant and training them properly as we do in my own properties. There's not a lot of depreciation writeoffs because of the low basis, but she makes so much cash flow that there's enough to pay the taxes, but she has other writeoffs outside the scope of this letter.

I have a client who owns three Trenton duplexes. Same thing...buy low, fix it up for $10K, and get a tenant or three, Some are HUD some are not. HUD is like anything else - you cant make a blanket statement. We;ve had HUD tenants who were friendly rspectful, and paid their part on time for years. I also inherited a HUD tenant who had nothing better to do all day than to study the LL/Tenant rules online and tell me what I was gonna hafta do so much and so often that I often regret buying that house sometimes. The point here is that HUD means nothing about a good tenant or a bad tenant. HUD means the most/all the check is direct deposited every month. Everything else is up to me (or in your case, you!)

We train our tenants right from the get-go - tell them to allow 45 minutes to review the lease, and we both initial every page of the 15 page lease and we discuss every item on every page. That way when there's a problem, you sent the letter that says "According to page 4 item 3 (copy attached) of the lease with your initials at the bottom"...and you enforce the lease.

Investing in economically challenged areas is actually just like being a CPA - some people love it, and others cant run away far enough from it!

Jim Kennedy, CPA

JD Martin · Answer

I grew up in Orange - yeah, the ghetto part of Orange proper, not Thomas Edison's West Orange - and have lived everywhere in NJ. I can see that area coming back for several reasons:

1. They are the original suburbs, and a lot of the housing stock is historic 1800's buildings and homes. I lived on Park Avenue in a 4 story walkup that was a slum when I was a kid but in its day in the late 1800's was a swank place - it had an elevator, a grand lobby, a massive grand staircase, all stone building, etc. Lots of these places were super-high end suburbs before the huge immigration wave in the late 1800s-early 1900s.

2. Newark, Patterson, Orange, JC, Union, are all ridiculously close to Manhattan. Prices are a bargain compared to the city.

3. Everything is walkable in these places, and that attracts younger buyers who care less about having cars and more about quality of life.

I think the key to these areas is having the patience to wait out the gentrification, and trying to pick up on the fringes of what's already been gentrified. And have a strong stomach.

Jessica Zolotorofe · Answer

Have you tried the towns that are not as "ghetto", but not the top areas? Maybe Neptune, Garfield, Lodi, the part of Montclair closest to the good side, but not quite there? Try the towns along the railroad line. The numbers are typically a little easier to work with. You may have to go out a little further to maybe Sussex County. There's some development happening there, but it's not quite as populated yet. Be creative, try to find oversized lots and see if you can buy a piece and get subdivision approvals or wholesale that type of concept for a profit. Only other option may be looking in another state with more inventory for flippers/wholesalers.

Allan Szlafrok · Answer

I buy all over Newark, JC, Orange, and the areas you are referring to. I dont think its wise to buy and hope for gentrification. The deal has to make sense TODAY and if prices rise because the area gets better then thats just gravy.

Jason Timmerman · Answer

I understand all of your points.  It's hard for me to purchase properties and sit on them to wait for gentrification because I simply do not have the capital right now.  I'm more interested in wholesaling and flipping and selling rather then buy and holds.

I just found it strange because I work in Trenton and there isn't a single good area of this city.  There are some places where you can walk a few blocks and live to tell about it but that's a far cry from wanting to invest there.  And there are other areas that we are warned to never approach.  I've heard so many horror stories from my co-workers that I cant' imagine an area of this city that is conducive to making some money.  Maybe I'm just a coward.

Dan Schoenbaechler · Answer

@Jason Timmerman  Investors are flocking to the lower-income areas for the reasons @Johnathan Boyle mentioned... cash flow vs. purchase price.

Most of these properties are being purchased for Buy-and-Hold purposes and the returns are shown as being higher than most areas.  The reason is because you need to think of Cap Rates as "risk".  The higher the risk, the higher the reward.

Manhattan and surrounding high-income areas have ridiculously low cash-flow compared to their purchase prices because investors have lower vacancy rates and gain appreciation faster.  In the lower-income areas of NJ (advertising 9%+ Cap Rates), you can likely expect higher vacancy, poor maintenance and slower appreciation.  If you can operate the property with minimal vacancy and great tenants.... then you can walk away with a home run.  If gentrification increases and newer amenities come to the area (restaurants, coffee shops, etc) then you will gain the appreciation as well.

Many of these investors are betting on the fact that these areas will continue to gentrify due to being priced out of the higher-income areas.  That's why Sellers are listing their properties and trying to capitalize on investors.

Jessica Zolotorofe · Answer

@Ray Konboz It's residential :) Condos are almost all done and sold, apartments are still underway.

Ray Konboz · Answer

@Jessica Zolotorofe Hardyston is actually pretty big. Most of it is rural. Good location for homeowners. I guess it depends on what kind of project you have going on.  Town homes might be a good addition. Casinos maybe not haha

Darren Sager · Answer

@Jessica Zolotorofe people are leaving Sussex in droves according to Jeff Otteau.  NJ's leading real estate economist, when I saw him last.

Why so much action in Ghetto, NJ?

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