What's your strategy?

Question

I am interested as a newbie in investing in buy and hold rental properties in NNJ or CNJ. I was wondering what others' strategies are in this regard. I ask because I find this to be a landscape that is filled with risks and potential pitfalls. On the one hand, I can put money into the stock market, and while there are risks, if I do earn money, it is very simple - you just invest and sit back and collect the profit and dividend.

On the other hand, with real estate in NJ, it seems like the prices are so high on the MLS that you simply cannot make money--certainly not by putting 20% down and getting a mortgage. The high prices, high R.E. taxes, insurance, repairs etc. eliminate your profit. You can make an all cash purchase, but then it does not seem worth the investment - after your fixed costs, you make a profit that is probably not much better than investing in stocks.

People advocate buying wholesale properties, rehabilitating them, and then renting them. But that seems risky because the $ you pay a contractor is a wildcard. You do not know if you will get screwed, or if there will be price overruns. And many wholesale properties are in a mess AND do not seem like good deals... and THEN you have to invest thousands in capital in them. And we are talking about properties in distressed areas, AND you are using capital that could be put in the stock market.

What is your strategy? It seems to me that investing in rental property may work in the midwest, where you can buy a decent house for 100k, but in most areas of NJ it does not work. Thoughts?

Brian Dalton · Answer

Hi @Eric D., as a fellow Maplewood investor, I thought I'd throw in my two cents. Before I get into what our strategy is, I think you need to start with an area, more specific than NNJ/CNJ. You need to know which counties, towns, and specific areas of the town you want to invest in. As an example, my wife and I invest in Hudson County, Jersey City, Journal Square/McGinley Square. We also invest here in Essex County, looking in Maplewood, South Orange, and West Orange. Once you know where you want to invest, you need to find yourself an agent that works with investors and can help guide you. We have two agents, one for Essex and one for Hudson. Also know you're price point and what you can afford. You don't want to buy a house and be existing on the Dollar Menu. When we find a potential rental opportunity, I do a lot of modelling in Excel to do analytics regarding rental price, cash flow, equity buildup, etc. I know that I can, if need be, drop our JC rental to $965/month in a worst case scenario and still break even.

Now, on to strategy, we look to do one to two flips a year (one is currently underway, it's our first) to help us fund purchases of rental properties. Ideally, we're looking to buy multi families as rentals (following the @Darren Sager strategy. I highly suggest you listen to his podcast, #48 I believe. I also had the opportunity to sit down with him for a few hours last week to talk through a range of issues. He's been investing here for almost 20 years, and is quite knowledgeable. It's also a reaffirmation that RE investing can be done in this area.) but if we can get a predetermined amount of cash flow, we're interested. The last property we bought was just south of JSQ, good building, $300/month in cash flow, and given the building going on in JSQ, we also see it as a long term appreciation play.

I can't speak to wholesaling, but I agree, it is expensive to invest here, and IMHO, I don't think the stock market is the way to go. I used to, but given the way the Fed has manipulated rates and asset valuations, and the frontrunning HFT algos, I think what many would consider "normal" stock valuation (Gordon Growth model, DCF, P/E ratio and such) holds no water anymore. A lot of people on here will talk about scaling. Find an area you can invest in, and either through appreciation, cash flow, or some combination of both, scale up. As an example, go invest in the Hillsborough area, maybe you flip, maybe you hold. In a few years, if you held, see how much the property is worth, maybe you sell and move to a more expensive area. maybe you stay where you are and just trade up.

You need to put together a good team: agent, contractor, lawyer, accountant. We have put together what we feel is a really great team of professionals. Since we're also financing through traditional methods for now (depending on the price), we also have a banker. Call around, talk to the banks, lay out your strategy, see what they're willing to do. Definitely be able to articulate your strategy in about 30 seconds. I called 4 different bankers before I got to someone who would do business with me. We've been through 3 different lawyers and finally have someone we're satisfied with and trust. We got lucky with our agent and contractor.

Lastly, be smart. Be smart in who you bring on board. You need to be able to trust them. Be choosy. Be choosy about what projects you take on. Our first flip "spoke" to us. As crazy as it sounds, we just had a good feeling about the house. It had good character, is in a good area, and was at the right price. Run numbers, over and over and over again. As an investor, there's no emotional attachment. If the numbers work, they work, if they don't, you walk away and find another property. Make offers. Most of the time, you're going to get outbid. We're going to make a cash offer on a house here in town. The offer will be $140k below ask, but you never know what motivates a seller. Offers fall through all the time for one reason or another. Twice we've had sellers come back to us because the initial offer fell through.

Good luck on your venture.

Tim Pagano · Answer

Eric D.   At the basis of your argument are some shaky assumptions.  First, your description of the stock market is suspect at best.  As a former Stock Broker I can see you've never been through a real down market.  I also know that you're not too familiar with how the market really works behind the scenes.  If you were, you would see that the average investor today just rides with the tide and unless you have founder's stock, insider information or have a subject matter expertise that no one else has you as an investor have no advantage against computer based algorithms that drive buying and selling.  Those computers capitalize on arbitrage opportunities trading in 100 thousand's of a second 24 hours a day 7 days a week 365 days a year.  I have personal experience with this high speed trading and I can say with confidence as a retail consumer your investments are riding with the tide.

The US RE market is a fractured system with many opportunities for arbitrage plays. You can calculate them in human time frames and know with a high degree of certainty both entry and exit values.  You mention the "Contractor Wildcard" as a gamble.  If you spend time on this site, educating yourself you will find that the folks that "make it" manage the process intentionally.  They get good at walking a property and knowing what rehab costs are, vs. marketing opportunities.  Those investors have taken the time to source  and acquire contractor and other vendor relationships that avoid cost over runs etc. They also plan and execute to the plan.  In short they have learned the market and know what they are doing.  It takes discipline and time to acquire the skills necessary to be good at the game.

I'm glad you're on the site, but you won't be a real estate investor for long if you don't realize that it takes a great deal of hard work and thought.  What are your goals for 2017? I know mine.  How many deals will it take to reach that goal, and how many contacts/offers will that take to make it a reality?  If you cannot answer those two questions then the problem is not the NJ RE market but your knowledge of it.

You mention higher home prices in the area, but yet you forget that there are higher rents in this area as well.  You asked about various strategies, well my strategy is different for each town that I work in and that's based on the RE mix between SFR's and rental properties.  The one thing that does not change from town to town for me is that I do not invest unless it's a deal. That means crunching the numbers on every property. You just haven't found a deal yet.  Keep looking and change your tactics.  They are out there, I've found several in the past few months.  Good luck and remember there is no magic bullet.  You're competing against a lot of very smart and intentional people.

Eric D. · Answer

I appreciate the responses. I take from them that one has to actually enter into the real estate biz in order to understand how it works and to profit from it. However, they also seem to reinforce my original post that the dynamics for real estate investing are very difficult in NNJ and CNJ. There were no replies that said, this is what I do: I have to buy multi-families to make money, and they have to be in disrepair for me to get a good deal, and I buy them with ___% down and then I fix them up and rent them out. Or I buy single family homes in this type of area, I never do more than $$$ work, and I rent them out....

It seems that I was correct that the dynamics in NNJ and CNJ make this too difficult, unless you buy in a really distressed area and then take the chance that renters will not harm the property and will pay rent. Yeah, the rents are higher here, but I do not think it translates into a better price-rent dynamic, because taxes and prices are so damn high.

Am I wrong here?

What is your strategy? How do YOU make this work?

I think there are formulas to use in other parts of the country, but I am not sure that is the case here.

I may not always make $ on the stock market, as someone pointed out, but annual returns are on average about 8% or so over the long term, and I do not have to hire lawyers and contractors and go to court for nonpayment of rent and get 3 a.m. calls that a plumber is needed.

Sam LLoyd · Answer

Oh yes, lots of thoughts... First thing, I have no ida about your market.  Average homes where I live go for 250k, a decent multi unit will run 60-100k/unit... So I paid 370 for a 4plex last year.

The first thing you need to realize is where you are at in your schooling.  You don't have to pay someone for this... you can throw money at real estate to learn the hard way and read books from the library like I did, but most of your questions can be answered by hard learning, and then on the job training.  Yes, buying a fixer from a wholesaler has tons of risk, and will likely lead to trouble, since you don't have experience doing this.  To someone who does this every day, it's just a job that they understand.  For example, ask me to start a website, a car lot, or a coffee shop, and it would be daunting... ask to estimate repair costs on a run down duplex, and it's something I do every day.  So... if you want into this field, educate yourself.  Of course, the best education is experience, so at some point you have to jump in.

The next thing is if real estate can actually make money in your area.  It may not.  If you're looking at a SFR that cost $250k, and the rent would be in the $1,800/month range, this is a bad investment.  There will be almost no cash flow if you have it leveraged, and that's if you manage it yourself.  If you put more down, you'll have cash flow, but your returns would be lower than if you put it into an index fund in the market.... bad deal for right now.  However, I think there are not that many markets where  you can just buy a house and sit back to cash the fatty checks.  Most of the time, you have to bring value to the deal by either finding a great deal, being able to rehab the property, or taking on something bigger like a 4plex.  so, to make money in Real estate, you'll probably have to learn one of these approaches.  Myself, I'm shooting for the multi-unit advantage.

Lastly, is the big picture.  Are you trying to quit your job next year?  Do you want to keep your career and have real estate as a buffer against inflation?  Do you want to live the rest of your life on a yacht in the Caribbean?  These all influence what you're going to do.  If you just want a retirement buffer, putting all cash down and hiring a manager is a simple way, but so are stocks.  If you want to replace your income over the next ten years, you're going to have to hustle, and probably learn about rehabbing and/or multis... and do well at it.  If you want to be the next Trump.... get advice from him, not me.

What's your strategy?

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