Question about Owner Occupied Investing

[Rebecca LeBrun]

My husband and I are interested in purchasing a multi-family home to live in.  The idea would be to purchase a 3-4 unit home, live in one of the units for free, and rent out the other units to cover the mortgage and all other expenses for the home.  My dilemma is our location. It's no secret that New York and New Jersey's cost of living is ridiculously high.  To live in a decent middle class area in Essex County New Jersey, the price for houses usually start at around the higher end of $400K and up.  I found some multi family homes for way less than that, but they're usually in sketchy neighborhoods that we would't feel comfortable living in. 

My question to the more expereinced investors on here is, do you think it's worth us going into that kind of investment being that the cost of living is so high? Do you know of any strategies that we can try to make this work despite the high priced homes? 

[Llewelyn A.]

Hi @Rebecca LeBrun

No, I don't do wholesaling myself.

My goal is NOT TO WORK. I consider Wholesaling a lot more work during the whole process of finding a Seller, locking in the Contract, and then finding the Buyer, possibly setting up financing just in case you don't find that buyer, etc.

When I worked at a my Job, I made quite a bit of money as a System Analyst working for very big Financial Companies like Credit Suisse, Federal Reserve Bank, etc.

I calculated that I would make a LOT of money if I put in the over time to the equivalent of the time I spent doing a wholesale deal.

In other words, if you work at a particular job, and you have excelled at it, and you are at a salary where the Hourly Rate is equally rewarding, then you should calculate the amount of money you could make by just doing OVERTIME for the same amount of time you will spend on your WHOLESALING "Job."

If the answer is that OVERTIME is NOT going to pay you as much but not as bad as you thought, and you say to yourself, well... my job is a guarantee while Wholesaling is not as predictable, then this can justify doing overtime at your job than just trying wholesaling.

Investing in a Buy and Hold will be a bit of work in the beginning when you are educating yourself (the right education, that is), finding the right Investment Property, finding the right tenants by doing your DUE DILIGENCE (and please get this part right), may wind up being a very passive Investment which can pay you equally as well as your Overtime. But this time, you will get paid for the Risk you are taking as every Investment has a risk.

The rewards is a life time of almost passive income. I say almost passive because there will always be something to do no matter how well you allow a Property Manager to take over. For instance, you still need to put together the numbers for your Taxes, etc.

In regards to the Due Diligence for your Tenant Screening, let's say you have 2 kinds of areas to invest in. High Crime with good Cashflow and Low Crime with Break Even cashflow.

When I compare these two kinds of areas, we can see an interesting picture. I will use my friend Steve, who invested in a lower income, higher crime area in CT while I stayed in a good location in Brooklyn.

When Steve does his Due Diligence for prospective tenants, it is almost pointless to evaluate for high Credit Scores. Rarely would he get someone that has above average Credit. If you had above average credit, then you certainly wouldn't live in that area, in GENERAL (I'm not saying it doesn't happen).

The other problem with Steve is that many of his prospective tenants has a Rap Sheet or something in their background (OF COURSE I don't mean EVERY PROSPECTIVE Tenant but many) with some criminal activity. So his general clientele is Low Credit, Low Income, possible criminal history.

Contrast that with my area which is HIGH INCOME, LOW CASHFLOW.

In NYC, the vacancy rate is around 3%! So there are TONS of great qualifying tenants to choose from providing that your rents are reasonable.

I typically get 700 and some 800+ FICO credit score (know the difference between different Credit Scores is a MUST) applicants that I don't have to compromise to achieve the tenant that I'm looking for.

I RARELY get anyone with a ding on their Criminal History Check. There was one prospective tenant that had an arrest when he was a young adult 20 years ago for possession of Pot. Although he failed to meet the income requirements and I never rented to him, he told me how hard it is to get an apt in NYC with that kind of record. It's crazy how you would need to be qualified here.

A lot of my prospective tenants will have combined income of $150k+ and some over $200k+. I even put in some young tenants whose parents guaranteed the lease where the Parent's income exceeded $1 Million per year.

So, I will let the readers of this post decide.

If you were investing for your first Investment, how easy do you want to make it for your first time?

I also want to point out that there is a difference between an Investment and a Business.

A Business requires more operations (re-rental, collecting rents, evictions, maintenance, etc.) while an Investment is much less operations work.

When you have to do a lot of work, in Steve's case, he has to do at least 1 eviction per year and several re-rentals as well. That is much more like a business. He is constantly working.

In my case, I have good long term tenants and rarely have a turn over even when rents are raised at a significant level per year. This is much more like an Investment.

The question I want the readers of this post to think about is:

What I ask Students quite often is..... what are you really trying to do? Buy a Business or Buy an Investment?

Investor Llew