Where to buy an investment property?

Question

I am a newbie interested in buying a two-family home to "buy and hold" and use as a rental property. I live in North Jersey and would want to stay in that general area. But this is a very tough area to make it work, right outside of Manhattan, with high prices and high taxes. Even properties in bad shape make it onto the MLS and are asking for a lot of money - and get it.

Question:

Where should I look to buy? The MLS, short sales, foreclosures, wholesalers?

I have looked at MLS properties but there are no good deals. I know nothing about buying foreclosures or short sales and have not come across wholesale ads. I am kind of at a loss at what to do.

Any help would be appreciated!

Joe White · Answer

@Eric D. Investor are always looking for "off market deals" and yes, we should all do that; but they sometimes do that at a loss. The time, energy and money investors spend looking can out weigh any discount. Plus, they might not buy the wrong properties; but they almost always never get to buy the right properties - meaning, you can choose the best out of 10 properties listed on the MLS or choose the one and only you worked hard to find that is discounted.  Remember, that the asking price is rarely the price a property sells for. I've seen huge discounts merely because they were asked for.

Joseph Scorese · Answer

Hi @Eric D.,

Welcome to BP!

First thought is follow the train stops. NJ Transit North South West and evaluate multi family 1 mile from the trains.

Then I would evaluate Philadelphia and DC since the trains tie into NYC and have built excellent infrastructure between new industry and colleges.

High retainage in both for graduates in both Cities when they graduate.

Let me know if I assist with any questions.

Regards,

Joe Scorese

Frank Chin · Answer

I was where you are now back in 1983 when I started real estate investing. There's two issues you should consider.

First is the real estate cycle. A good friend of mine lives in Maplewood NJ, and it is in the Metro NY real estate region. Since I started, the market in this region peaked in 1986, and 2007. It bottom out in 1993, and 2008-2009.

Second is the market beyond the large metro areas. In 1983, I thought I couldn't afford NYC, where 2 family houses go for 200K plus, and going up fast. They were 110K in 1980 when my mother in law bought hers. As my wife went to college in Philadelphia, knew lots of friends there, we decided to check the area out. A friend of hers from college bought a 2 family there for 50K in 1982. She had 20K to put down at the time, saved it from summer jobs at college, couldn't get a mortgage, so she got a private loan for 30K. She rented the 2nd apartment in her unit for over $400.00 at the time, and in about 5 years time, was able to pay off the private loan and had a mortgage free house at around 28 years of age. Then she bought a SFH, and rented out the entire 2 family rental by the age of 30, becoming a real estate investor.

This compares to NYC where comparable apartments go for $600/month at the time and up and legal 2 families sell for $200K and up, where I cannot cash flow. Now, if I bought it in 1980, at $100K for a comparable property, it will cash flow. See how the real estate cycle and geographic area affect prices, rents and cash flow??

Now you'll notice rentals vary between NY and Philly is only $200 or less, but comparable property values varies by $100K. So one area is doable the other not, and it's a 2 hour drive in between.

Going forward to 1992-1993. The real estate market peaked in 1986, where legal 2 families went for 350K. It started going down in 1987, and scrapped bottom in 1992-1993. During that period there were pages and pages of real estate auctions every week, and I attended several a month. The home I currently lived in i picked up at auction for 200K plus auction fees, with the foreclosing bank selling it free and clear ( they pay liens ) and provide a 90% mortgage if you bring satisfactory tax returns to the auction. Bought 2 other condos at auction during that period. My home currently has a market value exceeding $1,000,000.

So I studied what the high value area are, and how or why they differ than low value areas. One low value area based on census data at the time was Hamilton county NY They only have one major employer, and more housing units in the county than family units. So you have to study the demographics. Back then Philadelphia suffered from the lack of major employers, but has improved considerably since. Believe it or not, my wife and I both lived in NYC, and had co-workers commuting to work in NYC from Philly every morning by bus.

If you're wondering, we didn't invest in Philly, but instead did it in NYC.