Still time to buy multi family in JC ?

Question

Hi,

I am a first time home buyer . Have been renting in JC and have seen both rents and house prices in last few years go up like crazy. I have been looking to buy a Multi family in JC with easy access to NY transportation for the last year and half but no luck as I have been overbid . Prices keep going up and I have had to increase my budget in order to fulfil my dream of buying a 2 family - where I can live in one unit and rent out the other.

I don't have much experience in RE . I recently found a brand new 2 family construction close to Rt 139 which meets my criteria of being close to NY access. Problem is it is priced close to 800K.

At that price point , does it still make sense to get into this market while the rates are still low ?

I am putting close to 25% down so that my monthly mortgage is within reach and does not increase my monthly cost of living . I am currently renting paying close to 2200 for a 3 bedroom

Experts - can you please suggest if this is a wise decision.  Or is it better to wait for an opportunity when the prices dip , even though interest rates might have risen ? ( something I have been hoping for last 2 years with no luck )

Thank you for reading and sharing your thoughts!

Jordan Gregg · Answer

Hi @Vik Nirwal I am in a similar situation, renting in the heights and looking for my first multi to house hack.  I am certainly not the most experienced one on here (I haven't bought my first property yet) but I think you have to dig into the numbers.  At 800k, you need a rent roll of 8k/month to even meet 1% rent:price.  What are the expected rents of the place you are looking at?  How about the taxes?  Will it cash flow (considering yourself as a renter)?  Rates are low yes.. but from an investment standpoint, it needs to cash flow.  I have a hard time thinking you'll find a "great deal" on new construction in this area.  If you are comfortable making the payments and subsidizing with payments from another renter, it's a matter of quality of life.  But if you were to leave and rent out both units, you wouldn't want to be stuck in the negative.

Jordan Gregg · Answer

@Vik Nirwal

Just to preface again... I am a newbie :) and all I know is from what I've read, listened to, or talked to people about.  There are definitely experts on here who would be better suited to answer your questions, but I am happy to provide my perspective to try and keep the conversation going (for my own practice too).  Also, I may be stuck in "analysis paralysis" right now, and too conservative in my underwriting, which can be a bad thing if it leads to inaction.  That being said...

I didn't crunch the numbers myself but I follow your math/approach.  One thing I don't see accounted for is vacancy.   Vacancy rates are very low in the nicer parts of JC, but I would still plug in an estimate - is this in Journal Sq?  You are also not adding property management into the calculation.  If you manage your own property (I'm assuming you would), you can drive a higher return, but most info I've come across recommends that you factor it in as an expense to really judge the deal strictly as an investor.  If for some reason you needed to move (job relocation, etc) and you were no longer local, would you still be able to self-manage?  If not, would adding the 7-10% cost into your calculation drive you in the negative?  This could put you in a vulnerable position where you are negative cash flow and potentially forced to sell.  10% on 5k a month is an extra 500/month.  You are also doing the numbers based on the top end of the rents (2400 and 2600).  If you are confident you can get those rents, great.  But if you're really treating it as a range, I would calculate as the lower number.  This shaves off $400 and puts you at only 200/month cashflow based on your math (without considering the vacancy and property management).

A couple other thoughts.. Since it's new construction, I assume your incidentals (repairs/maintenance) will be very low the first few years.  You would likely not need any capex for quite a few years as well (new roof, replace HVAC, etc).  Still, if your plan is to buy and hold for a long time, they will eventually come into the picture.   I'm not too sure how/when most people factor in these expenses for new construction, but I would come up with an expectation of how long you plan to hold the property.  Obviously, it could change.. but this information has to be there in order to build a complete model, or you should at least understand how your IRR changes depending on the length of time you hold for.  If you only plan to hold the property for 5 years, your total repairs/maintenance and capex would likely be very low.  Spread this over 5 years and your per month cost would be very low, hopefully less than 200/month, increasing your IRR.  On the other side of the equation, your principal paydown will also be very low, potentially yielding less IRR vs holding longer (without considering changes in value).  If you plan to hold the property for 15 years, things may need to be replaced and the per month cost will be higher.  But you would have more equity when you sell.

Would love someone to proofread and call me out if I've misstated anything here so we can both learn.  I think your margins seem pretty tight on this one.

Ryan Goldfarb · Answer

@Vik Nirwal -- @Jordan G. and Account Closed are right; the numbers are pretty tight on this one. A few observations:

• Regarding vacancy, no matter how desirable your property and location are, you'll always experience some degree of vacancy. Even if you're going to be very aggressive in your underwriting, consider something like a 4% economic vacancy factor. Tenants will inevitably move out due to varying circumstances that are often out of your control. If your tenant's lease expires on Jan. 31st, there will be a period of time during which you will not be collecting rent due to cleaning up the apt., painting/touch-ups, and finding a new tenant. 4% vacancy equates to about 15 days, so if you do everything right and find a tenant ready to move in Feb. 15th, that eats up your vacancy allowance right there. Keep in mind, things can still go in either direction -- your tenant may elect to renew his/her lease, in which case your vacancy amounts to 0% that year. Or, there's a delay in bringing in a new tenant, and a new tenant doesn't move in until March 1st, which amounts to just above an 8% economic vacancy. (Keep in mind, there are also expenses associated with turning over the unit to a new tenant, like cleaning, painting, replacing toilet seats, patching holes, etc.)
• Rent growth - consider this the cherry on top of your projected cash flow, but history suggests, especially around here, that you'll realize some degree of rent growth. Even at 2-3% per year, that will add up once you reach Year 5 or Year 10.
• Down Payment - As a baseline, you should always analyze a deal exclusive of your own financing, as that's how [most] other investors will analyze the deal. A deal shouldn't look "better" to you because you're putting 20-25% down. Remember that this is $200k you won't have to invest in the "next" deal. Opportunity cost.
• Quality of Life/Renting vs. Owning - On the flip side, there's definitely something to be said for owning a property and paying into a mortgage vs. rent. There's the quality of life associated with owning (both positive and negative) in addition to the financial ramifications. Consult your account to see how owning your home will impact your tax position based on the mortgage interest tax deduction, depreciation, and your ability to write-off certain expenses. Along those same lines, consider the value of eliminating your rent payment every month. While these factors shouldn't inform your decision on whether or not a deal is a good deal, it's certainly worth evaluating in determining whether to buy or to continue renting.
• Capex - Jordan is spot on with this. Even with a brand new building, capex is inevitable at some point. Every component as an "estimated useful life". Based on projected costs, you may find this article helpful in gauging how much to set aside over the long haul.

I acknowledge that it's tempting to lock in debt at today's favorable terms. I've even heard investors on the BP Podcast state that their goal is specifically to obtain $x,xxx,xxx in new debt. But that only makes sense if the deal can support it. It's okay to get excited about the upside, but only once you understand the downside.

Account Closed · Answer

Hi Vik, according to your math, not a good buy.  Difficult to get the 1% rule with MLS listing.  That 600/month will quickly evaporate with your first pest control and plumbing call.  I've been looking at neighboring towns such as Union city and Bayonne.

Vik Nirwal · Answer

Thanks again for your response, @Jordan G.

I totally understand what you mean by "analysis paralysis" which is something I find myself guilty of at times. All the more reason, I feel it maybe time now to act before it is too late ( by means of interest rates rising towards 5-6 % next year - when it would make very little sense, if at all, to buy a newer multi family )

1. You are right that I did not account for vacancy but that's partly because this property is located at a 7 minute walking distance to JSQ Path trains and 2 minutes to all buses on Palisade avenue on one side and Central avenue on other, so I think this would be a commuters dream. I would be happy to price the rent slightly lower than marker rents - if it ever came to that - just to avoid a vacancy. Do you still think this is an issue ?

2. I would manage the property on my own as I am looking to occupy one of the units for the next 2-5 years.  If I needed to move out of NJ, I don't know if I could self manage at that time. Probably not.  Is the 7-10% estimated cost of managing the property reasonable ? Isn't it more like 5% which would mean around $250 per month in this case (assuming 5000 rent roll ). This is brand new construction so I would figure less things to fix / manage. I could be wrong and 5% maybe less but if it turned out to be more than that, I would probably have to self manage.

3. As for the rents, I think I am being conservative . For a new construction 3, bedroom 2 bath in JSQ area, I can get 2400-2500 at least in todays market - Obviously things could change if the economy tanks in which case I would expect around 2100; which means no cashflow but still paying towards principle and building equity.  Isn't it still better than continuing to pay rent ?

I plan to hold the property for around 10 years. I expect ( or rather hope ) that within next 10 years I would get a chance to sell and break even if not make any money on this.  If I can sell for 850K or more at any time after first 5 years, I will do that - I suffer no loss, enjoy my own home and build whatever little equity I could.

I understand the margins are rather tight but if I miss this opportunity- I don't know if these margins are only going to get tighter. I don't have any experience to buy , rehab and sell older homes so I really need something newer and as long as my cashflow remains positive and I can sell for more than I paid - I am good. If I let this pass due to inaction, I might have to remain a renter for another couple of years - specially with the ever increasing prices in Jersey City and anticipated higher mortgage rates.  I feel I would have truly missed the bus then.

Vik Nirwal · Answer

Hi @Jordan G. , thank you for the reply.

I appreciate inputs from folks like you to help me steer in the right direction.

So here is my calculation.  As I mentioned in last post,  I am a first time investor so I maybe making some assumptions:

Purchase Price = 800K,  Down Payment =180K , Mortgage = 620K @ 4% interest rate, Property taxes = around 16K but you get 5 year abatement on new construction so we can figure 12K for first 5 years. I would budget about 200 per month for home owners insurance and water bill + 200 for incidental expenses/ regular upkeep.

So with that, my monthly payment comes to about 4400 per month.

This is a 2 family with one unit being a 4 bedroom duplex and other is a 3 bedroom .

If I am not living in the house and rent both - I think I can get 2200-2400 for 3 bedroom and 2400-2600 for the 4 bedroom ( I could be wrong but this is what  the going rent in JC these days looking at craigslist ) , so net rental income = 5000

Monthly cashflow = 5000 - 4400 = 600 per month or 7.2K per year which is a return of about 4% . Not great  but when you consider that your are paying off your mortgage and building equity - its not that bad either ?

After 5 years , when the taxes go back to full 16K, profit will be halved but still positive assuming I can keep it rented.

I am looking to buy and hold as I think the market is at an all time high at the moment and I do not expect more appreciation specially with rising interest rates .

Thoughts ? Do you agree with the above math ?

Still time to buy multi family in JC ?

Most Popular Reply