Buy/hold in Philly suburbs or Delaware-advice for a newbie?

Question

I am just starting out in REI and starting to practice looking and evaluating properties for sale on realtor.com. I know I won't find the best deals there, but without any experience doing this before, I think that is a good place to start looking?

Are there are any experienced buy/hold investors in this region who would be willing to offer some advice to the following two questions:

1. I live in West Chester PA and want to start local. I travel frequently to Newark, Delaware for work though, so my initial search area is the area west of I-476 in PA to Newark, DE. Southeast PA is much more expensive than Delaware. Am I better off concentrating on looking for my first purchase in Delaware due to affordability, or should I save more funds first to be able to afford a more expensive purchase in southeast PA?

2. I see that there is both a REIA in PA (DIG)  and also one in DE (DelREIA). Both require memberships to participate in their meetings. For those who have participated in these groups, is one (DelCo or Chester DIG subgroup or New Castle DelREI) better suited for or more welcoming to a buy/hold newbie? I assume I should start with the REIA associated with the area I choose to invest in, which goes back to question 1?

Thanks!

Tim Sharkey · Answer

Hi Steve,

I think it’s a mistake to think of “southeast Pa” or “DE” as singular markets that will provide singular results. Inside each of those areas are 50-500 micro-markets that are all going to provide different results, returns, types of tenant.

For example, A row house in Wilmington is an entirely different investment (acquisition cost, ROI, tenant quality,) than a SFH standalone home in suburban Newark. You will see the entire spectrum of properties and tenants in each of the “southeast pa” and “de” markets.  My advice is to get MUCH more specific. Pick a few neighborhoods within those areas and start tracking as much data as you can.

Use the 1% rule as a starting point to cut out all the “distraction” properties and get you honed in on the profitable properties and areas within those sub markets.

Then, when you have your financing together, find someone who has a great property and great tenants and great return, and buy the house next door.

Replication of someone else’s successful model is a great way to begin. Join those groups!

Tim

Rich O'Neill · Answer

Hi Steve,

Question 1: While this all depends on what your goal is, I would personally go with DE. Easier to get in, bigger cash flow numbers, lower taxes, but there is less expectation for appreciation and Newark is more of a B-C area than PA which is an A area in my opinion. I am a cash flow guy so that is why I lean that way. If you are looking for more appreciation, better quality tenant, and are ok with the thing just floating itself until you can pay down the mortgage and realize the appreciation, then I would go PA.

Question 2: Oddly enough, I have not yet done a REIA yet. I am going to join DIG in the next few months but I have never done it yet, so take this with a grain of salt. If you have no properties yet, I would either go with the one closer to home or both. For the relatively small fee they charge, joining both could help you decide which area to go with then once you decide you could drop the other one. There is a lot of crossover between PA and DE in terms of lenders, agents, contractors, etc so contacts you meet at DIG could still theoretically be useful to you in DE, and vice versa.

Hope this is helpful. The key to all of this is to not just talk about doing it and go do it!

Steve Babiak · Answer

There are a few different rules of thumb that people follow to some degree. And that some will disagree with as well.

"1% rule" = monthly rent should be at least 1% of acquisition costs; for some, acquisition costs include all purchase related costs PLUS any repairs / improvements needed immediately upon purchase.

"2% rule" = monthly rent should be at least 2% of acquisition costs; this rule applies more so for lower rent amounts, roughly $500 (and lower), and can be difficult to meet this rule at higher rent amounts. The lower the rent, the higher percentage of acquisition costs; if rent were $300, seeking 3% might not be a bad idea.

"50% rule": this is quite different from 1% and 2% rules. The "50% rule" states that one can expect expenses on a long term average to total to roughly 50% of fair market rent, where the expenses include property management fees and capital improvements also but exclude principal and interest payments; principal and interest payments come out of the other half of the rent, and whatever remains is the net cash flow (if any remains). There have been many published studies from managers of many rental units that give the data that supports this rule. Note that if one were to self manage, then lower expenses would be expected since no property management fees are paid out. And some will take this further by saying that if there are landlord paid utilities, one can expect expenses to be an even higher percentage of rent (60% is a figure that gets tossed into play).

Search the BP site to find threads that discuss those in greater detail.

Steve H. · Answer

Thanks to everyone who replied, especially @Tim Sharkey the point about focusing on a micro-market. What is the 1% rule - can someone direct me to where I can learn about that and other rule of thumb measurements I should be familiar with?

Rich O'Neill · Answer

@Tim Sharkey is spot on here @Steve H. Absolutely check out all of the different neighborhoods within there and see what works best for you. I think it all starts with becoming crystal clear on your goals and then you can build a strategy to get there.

Buy/hold in Philly suburbs or Delaware-advice for a newbie?

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