Which area is a better investment? Pls give me your thoughts

Question

I am looking to buy 2-4 family buildings in 2 areas close to NYC.
I'm looking for an "intelligent" thought process as to which area is a better investment.
I'm usually a long term investor who buys and holds unless there is a crazy market like before but I don't expect that anytime soon.

Area 1

2 Family is 200k.
Taxes 3k
Rent $1900 (950x2)
Travel time to NYC is 35 minutes and you need to take 2 trains. ($4.00 each way)
This area is a rough area that was getting better and now is quiet.
I had a few buildings here and sold all but one in 2008 because prices went up so much so fast so I took the profit.
I can get good tenants but I have to show the unit 10-15x.
(I don't mind since this is my job)

Area 2

2 Family $350k
Taxes 6k
Rent $ 2300 (1150x2)
Travel time to NYC is 12 minutes and its one train or 3 stops to the City. Very good!
People rent here because of the fast comute.
There area is not as rough as area 1 but it has not reached its potential yet.
Its safe to say that this area will get better before area 1.

My "logical" thinking was to buy in area 2 since it is a much better comute to NYC and it will get better quicker than area 1.
But after looking at the numbers, area 2 is more expensive, taxes are a lot higher yet the rents are not significantly more.
A 3 family in area 2 can have taxes as high as 8-9k.

I'm leaning towards area 1 but are there other issues I should consider?
I don't mind owning properties in either area, just want the best investment.

Thanks for your input!

Joel Owens · Answer

When the economy cycles urban core usually recovers first and then sprawls out into suburban and then to rural areas last. With gas prices where they are at people are focused more on cutting commuting cost and also time away from their loved ones.80% of people dislike their jobs so they want to be finished for the day as soon as possible. In town living where everything is a walk or bike ride away is becoming popular again. In area 2 have you looked at the tax assessors site for the last 3 years or so to see at what percentage the taxes how gone up,stayed flat,or declined?? If you sold and made a bunch of money before then you want to preserve that money and invest in less risky investments or only allocate a small portion of your portfolio to high risk growth properties. The taxes of 6k wouldn't bother me as much if that was a constant.Meaning 3 years ago they weren't charging 10,000 in taxes before the market took a dip.

Sharon Rolel · Answer

It depends on the numbers for each property, but generally speaking 10% cash flow every year is better than having 10% appreciation (even if it's compounding) as per the "time value of money", which means money you get today is worth more than money you get when you sell the property.

Steve R. · Answer

Thanks for the replies....even Dale's insight. Yes I totally agree the cash flow is just not there and I would not invest in a property that did not have positive cash flow. That is why I stopped buying in 2004. The purpose of my post was to hear different ideas as to which area would be a better investment based on their strengths and weaknesses. I was a bonehead and used a 2 family example when realistically only a 3 family in either area would be a consideration. (I was tired and not thinking) My question: Is it better to have very good cash flow in a worse area that will take longer to change or slightly positive cash flow in an area that has better transportation that will change sooner. FYI If I asked this question in 2000 or 2004, the worse area had more cash flow and appreciation. Thanks

Michael Lauther · Answer

In the past buying to hold for appreciation worked well as the market relentlessly went up . In the environment we see today investors seem to be more fluid finding places for their money outside of their comfort zone. If this was a cash flow play I would go with the lower cost lower tax alternative but neither appears to have a good cash flow and may even turn slightly negative if deferred maintenance becomes an issue. what is your exit strategy. I only see this working well if you intend to sell to a retail buyer when the market rebounds. the poor cash flow would prevent many investors from looking at these properties.

Brian Levredge · Answer

Is there a third option, because neither of those looks appealing. You are looking at a minimal return on either one (if that) from a cash flow perspective. So it seems that your best option if you are going to buy either one is to hope that someone foolish comes along to take it off your hands.

Sharon Rolel · Answer

Dale, not sure where you are coming, the guy is asking for thoughts on the properties like many have done before him and is what the forum is for. As to the properties, I can't do much more than recite the what the common sense of BP says (which I agree with) - "read about the 50%/2% rule. These properties will bleed money."

Dale Osborn · Answer

You cannot expect others to make a decision for you - you have to evaluate the numbers and based on the outcome make a choice to follow. If you make a decision - you can't blame others if it does not turn out as well as you expect it to.