Is this a good deal for a 3-family in Northern New Jersey?

Question

Offer Price: $200K

Financing: FHA loan, 3.5% down payment (already pre approved for this home); 3.875% rate, 30 year fixed

Rents according to MLS posting: Unit 1 - $1310, Unit 2 - $1100, Unit 3 - $720; Total = $3,130

Expenses: I'm forecasting 57% in expenses (more conservative than 50% rule) -->

• Property taxes - 4.6%
• Insurance - $1000 policy
• Repairs/maintenance - 5% of gross monthly rent
• Utilities - 1% of gross monthly rent
• Cap Ex - 2% of gross monthly rent
• Vacancy - 10% of gross monthly rent
• Property management - 12% of gross monthly rent

Mortgage + PMI = approx $1,043 monthly

Cash Flow (monthly): $163

Cap Rate: 18.8% (gross annual rents divided by purchase price, correct?)

Other details: The home is less than a 5 minute walking distance from the train station (<40 min to NYC); the neighborhood is what I'd estimate a Class B+; the home (from pictures) seems to be in OK condition but may require some touchup

I understand this is an owner occupant deal since I'm using an FHA loan, however I just want to run the numbers assuming it is fully rented out so I can judge based on its cash flow merits.

Finally, if this is a good deal and I should pursue it, how exactly do I get it? I've found it on realtor.com website and I've tried to contact the agent in the "contact us" feature but I haven't heard a reply yet.  I've tried going on google and searching for realtors in that neighborhood but I haven't gotten a single name.  Can anybody point me in the direction of someone who can show this house to me (it's in Essex County, NJ) today?

Erik Pedersen · Answer

Call any realty company in the area by the house and ask to go see that house.  Theyll take you.

Ian Hoover · Answer

@Parag Shah

I recommend you do some research and find a Realtor in your area that focuses on investing in real estate, you should have that lined up before you start trying to buy a property.

A good Realtor will know how to negotiate and save you time and money.

Kenneth B. · Answer

Type the @ (whatever that is called), and begin to type the first name. After a few letters some names will appear on the bottom of the box you are typing in. Just click on the name you want and it's inserted.

It took me a while to figure it out. If I can figure it out, most anyone can!

Parag Shah · Answer

Ibrahim - it's in the town of Orange, and yes property taxes are definitely a killer in this deal! Thanks for that revision to my insurance, I just revised it up in my model, I was keeping it at a constant $1K figure for all the properties I was analyzing and had talked to a lender who agreed with that number, but I think you're more correct than he is.  The MLS listing indicates it is a legal 3 family, but yes I'll be sure to make sure I ask for that certificate. The listing indicates tenant pays heat so I'm assuming everything is separated.  The only thing owner pays for is water.  The condition seems fine, but might require some cosmetic touchup.  Thanks for the article I am definitely going to take a look at that.

Bram - you're killing me man! In all seriousness, thanks for those numbers and giving me a reality check.  I'm curious to know why you assume 10% for repairs/capex when you're also assuming a $5K rehab initially? Wouldn't it make sense to count for one but not the other? Also, your expenses would add up to 84% of rent, assuming the following:

• property taxes (4.6%) = $767
• insurance ($2400 policy) = $200
• repairs/maintenance (10% of gross monthly rent) = $313
• utilities (2% of home value) = $333
• cap ex (10% of gross monthly rent) = $313 
• vacancy (12% of gross monthly rent) = $376
• property mangement (10% of gross monthly rent) = $313

so all that adds up $2,615 on $3,130 of rent --> 84%

isn't that extremely conservative to the point of unreal? i've heard 50% being thrown around BP as a conservative rule of thumb, and I had close to 60% since I thought I was being paranoid.  I don't think there's any investment out there (other than all cash deals) that could survive an 84% expense rate, correct?

The deal clearly passes the 1% rule, it's actually a bit above 1.5% which I believe to be incredible in NJ.  2% is basically unreachable unless you find an absolutely killer deal.  Your numbers would require a 2.1% rule in order for me to cash flow approx $100 a month (albeit, with my levels of financing at 3.5% down payment resulting in a higher monthly mortgage payment + PMI).

On an unrelated note, how do you get the @ symbol to display a user? I've been trying to figure that one out for weeks now.

Bram Spiero · Answer

Hi @Parag Shah, welcome to BP!

Let's take this from the bottom up.

Using most of your numbers I'm getting a cap rate of 5% which I calculated by dividing the NOI by the total costs. For total costs I got to 209,000 by adding 4,000 closing costs and 5,000 rehab.

With the same numbers, your cashflow comes to $3585 a year.

Now, let's look at some of your assumptions and adjust them.

I figure 10% for expenses and 10% for Capex until I have 5k for each saved up.

I'd really figure 12% vacancy a year, but let's just leave that alone for now.

if you're paying utilies, there is no way it comes out to $31, more like 300.

You now have a cashflow of -$4,526.

Even if you're less conservative and just hold back 5% for capex and repairs, your cashflow is -$770.

Now take into account that you have to live in one of the apartments and you are left with less rental income (as well as the fact that you should never believe what a RE agent tells you about rent unless you can see the actual rent roll)

You are left with a annual cashflow of -$9,537

Sorry to rain on your parade. Learning to run your numbers is a very important first step.

Good Luck!

Ibrahim Hughes · Answer

@Parag Shah - sounds like you are in east orange. I can tell by the high property taxes.

Your insurance looks pretty low for a 3 family. I would estimate closer to $2400/yr.

I would also confirm that it's a legal 3 family. Get a letter from the zoning board/dept. stating that the property is a legal 3 family.

Is the heat separated? What's the condition of the house?

Also confirm the rents with a tenant estoppel letter.  Look up 'Due Dilligence commercial property Ray Alcorn'.  He wrote an EXCELLENT and classic article years ago on performing due dilligence on all real estate. You will thank me later.

Parag Shah · Answer

Thanks @EricPedersen, I just went on google maps, typed in my target home address and then typed realtor to search for the local offices.

@JayakrishnaBommasamudram thanks for the advice - the house I'm targeting is in the town next to Newark, and I'm definitely aware of the no-go zones in Newark.

Jayakrishna Bommasamudram · Answer

If you are looking at Newark stay with Upper Roseville and the others side of the park.

Stay above rte 280

take this as an example of after ARV

http://www.zillow.com/homedetails/51-Wakeman-Ave-Newark-NJ-07104/38692727_zpid/

Is this a good deal for a 3-family in Northern New Jersey?

Most Popular Reply