Is this a good deal for a duplex in NJ?

Question

I'm looking at a duplex property built in the 1940s that's about $200K in NJ, and thinking to put in 20% down.  I even put in a lower ARV of $175K to see if the numbers would still work -- they did.

Here are my numbers:

• Low rental estimate of $2400/mth.
• Expenses estimate of $2226/mth (see assumptions below)
• Monthly Cash Flow = $174; using 50% rule = $425
• Income / Expense Ratio (2% rule) = 1.14%

My question is, why does this deal seem so favorable?  Am I doing it right?

I felt I used very conservative assumptions:

Repairs estimate $10K.

Mortgage interest 4.2%, so P&I = $775 / mth.

Taxes = $404 / mth

Vacancy Rate 10% = $240 / mth

Ongoing Repairs 5% = $120 / mth

Capex 5% = $120 / mth

Misc Expenses = $567 / mth (I just made up this number).

Thanks for all of your help, BP members!!

John Errico · Answer

Seems not bad: taxes are super low, so I would double check that (never really used numbers from Zillow, but PropertyShark or county tax records will tell you what they are actually paying). Realize that, if they are low, they're not going to stay low forever. I think that's what's making this property so attractive at this point. I would expect about 1.75-2x the taxes from what you quoted for a ~$200k (presumably multi-family if you are getting that type of rent) in Hudson County.

I own a few multi-families in Hudson County, and I also usually budget more than what you are budgeting for ongoing repairs and capex. Unless you are planning to gut renovate or the like, properties in Hudson County are, by and large, poorly maintained. I've budgeted ~$2,500 for ongoing repairs for properties in the $200-$300k range and, so far (2 years in) that's about what I've spent (I guess some of the things that I've done blur the line between repairs and capex, but...). Hopefully this number will go down for me as I spend more on preventative maintenance.

You may also want to check if you have separate electrical/water/hot water/heating if this is a multi-family. If not, you'll have to pay for that (and in my experience, tenants in the area rarely do apples-to-apples comparisons when considering utilities, so I'm not confident you can get the equivalent more $/month in rent just because you provide utilities). Obviously you can switch everything separate but it may cost a fair amount of money.

Also would be curious to know where in Jersey City this is. In some of the less safe areas of JC (Greenville, etc.) you might anticipate more difficulty collecting rent or getting good tenants which can obviously hugely impact your numbers.

Tim Booz · Answer

@Henry L. I personally avoid the area when it comes to management properties for the same reasons @John Errico mentioned. It's tough finding good tenants there ( but not impossible. If using an agent  you'll probably need to plan on paying the Realtors their one month fee, as tenants in Greenville will likely not pay it as they will in other parts of Hudson County / JC. If you're selecting your own tenants here you'll be devoting a lot of your time to tenant screening/selection/showing process. Make sure you do an eviction check in addition to a regular credit and background check, there are "professional tenants" around, and they can be a huge roi killer.

Are you shooting for property in the Greenville area, or did you just end up there based on the numbers of this place?

Alex W. · Answer

If you aren't planning on living there, typically it's 25% down for non-owner occupied mortgage.  Also, the interest rate would be higher (if it's 30 yr fixed).

You left out the purchase price.   If it's listed for 200k and you are putting in 10k repairs, then the ARV would not be 175k unless you are purchasing it for way less than that.

Taxes seem very low for a duplex in NJ unless it's in a far/remote area.  Which town is this?

Some investors typically add in 10% property management as an expense when calculating in case they decide to stop self-managing.

Also, it seems you don't have insurance listed as an expense there.   Water is often paid by landlord as well.

Henry L. · Answer

Thank you, John!  I think you're right -- it probably looks like a good deal bc the tax estimate is low.  I got it from the MLS.  Thank you for your assumptions.  I will use those in my analyses.  The property was 9 Van Cleef in JC - what do you think of that area?  Found out from my realtor it was already purchased, but the listing agent forgot to change the status on the property.  If you want the MLS listing, I can send it to you separately -- not sure how to add attachments to this.

Henry L. · Answer

Hi Alex,

Thanks for your review!  I've changed it to 25% down, and a 5% interest rate, rather than 4.2%

As for purchase price, I tried changing it to $205K. I had set it at $175K bc that's what I saw in zillow comps (I know that's not a good idea), as I thought that would be a worst-case scenario, meaning that I paid too much for the property ($200K), and even with repairs, my ARV is only at $175K.  However, it didn't affect the deal analysis -- something I'll bring up to BP.

The taxes came from the MLS sheet - this is in Jersey City. Do you usually increase that based on when the property was last sold?

Thanks, I've added in the 10% property management fee, and insurance at 0.05% of the purchase price, and an overestimate of water for $125/month.  I then reduced my Misc Monthly Expenses from $417 to $100/month (bc I figured I was being more specific on my monthly expenses, so I didn't want to double-count that).

Now here are my numbers:

*Net monthly cashflow = $135*Purchase Cap Rate = 5.6% *Cash on Cash ROI = 2.62%.*Income-Expense Ratio = 1.13%, Gross Rent Multiplier 6.94%*Debt Coverage Ratio = 1.17%

Seems not bad -- the only disturbing thing is the cash needed is $61K.

Any additional thoughts?

Is this a good deal for a duplex in NJ?

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