Newbie investor with questions

22 Replies

So as the topic states I have a couple of questions about beginning my first dip into real estate:

  1. I live in Jersey City in the heights. So I want to know if the heights is a good investment to make given the steep 300k-900k and more cost.
  2. I want to know my financing options. I would go for an FHA loan but given my situation I really can't move away from my current residence. I want to also pay off my student loans so I can get another property signed to me. So what would be the best loan to start out with?
  3. What type of house should I look for. Should it be 2,3, or 4 family houses or should I try to go for commercial rentals if they are in a good enough price?
  4. How do I calculate expenses? For example, what percentage of the cash flow goes toward future repairs the like?
  5. Once I get the nerve and make my first investment using loans how do I snowball that into owning more properties?
  6. If I do this how soon will I be able to pay off my student loans?

I think I have a few more questions but this should serve as a start. Thank you for your time.

Hey @Adiel Arvizu I will take a stab:

1. Re: Jersey City--my suggestion would be to (start) investing near where you know and/or live. Jersey City heights has gotten quite expensive in my opinion and, as a result, there may be fewer good deals, but you're surrounded by a lot of pretty attractive areas to start investing in: deeper into Jersey City, Union City, North Bergen, and basically the rest of Hudson County. Having said that, even in very expensive/pricey areas there still are good opportunities for investing (just that the barrier to entry is higher)... but you'd really have to be looking at a specific deal to be able to analyze it in the context of the market. I don't think there are any "good" or "bad" areas as a rule, just that it may be more or less challenging to find good deals in certain areas, and more or less difficult to purchase them.

2. If you're not planning to move into the house as your primary residence you're basically limited to conventional mortgages or to other creative financing options, like loans from friends/family or non-traditional funding sources. If you're planning to flip properties you may more easily have access to other types of funds (like hard money loans), but from the context of your question it seems like you're planning to buy and hold these properties. A mortgage broker or anyone at a bank could tell you what you might qualify for in the conventional mortgage sense given your income and debts.

3. This is entirely up to you. Obviously, 2 families properties will be cheaper on average than, say, 4 family properties in the same area, but this doesn't necessarily mean they are a better deal. At least in the Hudson County area, properties at the lower end of the market are very competitive, mostly because the barrier to entry is so low: as in, anyone who can afford even a small down payment (3.5% down, for example, for an FHA loan if they're moving in) can potentially purchase the house, and so can every other class of investor/fund/foreign buyer etc. if they're so interested. So for a 2 or 3 family home in the $300k range, you're competing with a ton of people who could potentially buy the house. More expensive properties eliminate people that don't have access to funding/FHA buyers, so the competition is likely less numerous, though likely more sophisticated in general.

On the flip side, depending on what sort of property you get, there is a lot of complexity in the entire process, including in renovating, renting out, and managing a property. I started out buying a 2 family that had been abandoned for several years, and just getting that up and "running" led me to learn a lot and I found it very challenging. I think it'd be harder, though not impossible by any stretch, to start with a, say, 4 family property. There are also rent control issues to consider with larger properties, but that's another story and depends a lot, at least in NJ, on the city you invest in. If you search rent control in New Jersey on BP (or in specific cities like Jersey City, Union City) you'll find a fair amount of information.

4. Again it's hard to calculate expense without knowing the specific property, but there are lots of resources on BP to guestimate this (search "50% rule" or "calculating rental expenses" for example). If you have a specific property you're considering in the northern NJ area, I'm sure I or others who invest here could give you a sense of what we'd expect.

5. Tons of options: broadly, you could use the money you generate with that property, and additional money you've saved up, to buy a second property. You might be able to (hopefully) encourage friends or family that see you've done well with your first property to invest with you and branch out from there. Additionally, once you've owned the property for some time, and/or if the property increases in value to do work you put in or the general market appreciating, you can take money out of your first property by refinancing your mortgage (as in, taking advantage of the equity you've built up or now have in your current property) to invest in additional properties. Again, there are tons of posts on BP on this if you search around.

6. Obviously depends on your student loans, haha. One thing to consider, though, is the interest rate of your loans: given that interest rates are generally so low (right now) it might be worthwhile to consider refinancing. If some or all of loans are or could be at very low interest rates (< 5%, for example), it might be less financially savvy to pay back those loans as fast as possible then, say, invest the extra money in other ways that might generate > 5% returns (stocks? real estate? etc.)... or it may not be, depending on your financial goals, on your current income or projected future income, and so on. Not really specific to real estate though but there are obviously tons of resources on this online. Having extra income generated from an investment property would certainly allow you to pay back loans faster, but you'd also have to consider the amount of money you'd need to save up to buy the property, fix it up, rent it out, and so on.

Best of luck!

@John Errico Thank you for your reply.

Since I work as a substitute teacher I have been educating myself further in real estate. And as such I have more questions and as such I also have hopefully more ideas.

  1. The reason I said Jersey City heights is because that is where I live. I am aware of the gentrification that has been happening and the like. I also like the preference of being near places I can walk to or even bike to so I picked the heights as the place to invest if at all possible. So far the places I have looked at ranged from 440K to 980K. So I was wondering if those are good prices to begin my investment. One place I have been considering is one where it has a convenience store which is still on a lease and is still running and an apartment on top which could use some sprucing up it is valued at 450K. I don't mind also moving out into the ghetto but I also have my experiences having worked there for a very brief period of time. So I want to know if that would be a good investment.
  2. As for that thank you very much. I can only hope I need $0 from my pocket so I can start making a trickle of money.
  3. Yeah for me ideally a 3-family home would be ideal although I thought rent control only applied to 4 family units or more. I also saw properties with a business and an apartment on top. So I am wondering if rent control is exclusive depending on the property or is it only applicable to 4 or more units?
  4. Yeah I will make sure to allocate the cash flow into repairs and the like. But I want to know the recommended allocation so that way I can pay myself some much needed cash. Apparently the recommended amount is 50% of rent.
  5. Yeah the idea is to save up some money or use more loans to buy out properties and increase my cash flow. I have my real estate plans with me which I put up to download. And if that does not work then try this:
  6. Yeah as much as I agree with you about investing more into properties, I would really like to get that monkey off my back since it isn't good debt like owning real estate would be. Plus it would enable my parents to sign off their property to me so that way they can collect more money through me, all the while collecting social security. 
  7. So in terms of buying a property, would buying a foreclosed property or a property going into foreclosure be better for me or not?
  8. Also, when do I make an LLC? I would like to make it if I own two or more properties that way I can separate business and personal stuff but what would you recommend?

Whether its a good area to invest in or not depends on the numbers. Read "The Millionaire Real Estate Investor" by Gary Keller to get a step by step guide on analyzing properties.

Once you know the numbers, you'll you how much you will be cashflowing and how much of that you could put into your pocket.

@Rosston Smith I did look it up on Amazon and while reviews are generally great the one star review has me a tad on the skeptical side. It said that it is all about hyping you up to be a millionaire or so. I will download an ebook and see if that person is right or not. Also, I did buy the four BiggerPockets books and I read and notarized them. But thank you for the advice just the same. 

Originally posted by @Adiel Arvizu :

@Rosston Smith I did look it up on Amazon and while reviews are generally great the one star review has me a tad on the skeptical side. It said that it is all about hyping you up to be a millionaire or so. I will download an ebook and see if that person is right or not. Also, I did buy the four BiggerPockets books and I read and notarized them. But thank you for the advice just the same. 

 The one star reviews always get you! One of the bigger pockets books had many negative reviews like that, but once I read it I actually received a lot of value! So I would definitely go by majority rule. If you listen to the BP podcasts there are a lot of good book recommendations on there. 

@Rosston Smith Oh yeah no doubt. I saw some negative reviews for Biggerpockets but I knew it would give me a lot of value. Heck the Managing Rental Properties one is pretty helpful since it emphasizes treating ownership like a business. Also, any tips on how to approach buying my first multi-family property? I am even looking at a commercial property that is within walking distance from my place and I'm going to see an agent about it. So any tips for that? Otherwise, I will go buy that book and let's see how it all goes. Thank you for everything so far and it is great to see this community strive to help others.

That's great to hear! Definitely go by the book. Ask for a record of expenses for the past 12 months. Determine what type of maintenance it would need. See if it cash flows and by what margin. 

@Rosston Smith What would be the ideal starting cash flow to investment and expanse ratio? And I will add those to my list of questions that I need to jot down. Also, is a commercial property good to start out with?

On your first property if you can get $100 cash flow (after expenses) per door, you're doing great!

The property doesn't really matter. Its all about the numbers. I could own a 4 unit that're more profitable than a 100 unit. 

@Rosston Smith And that is after all the expenses are accounted for right? That includes mortgage, repair, and the bills.

Originally posted by @Adiel Arvizu :

@Rosston Smith And that is after all the expenses are accounted for right? That includes mortgage, repair, and the bills.

 Yes thats right! Cash flow is what you can put in your pocket after all expenses. 

@Rosston Smith What software do you use to calculate your expenses? Also, what is your opinion on investing in a property which has a commercial business and an apartment unit as a first property? I mainly ask because at least in my area it looks promising since the rent from the commercial place alone can pay the mortgage. Otherwise, the thought of real estate is surging me with some excitement.

Originally posted by @Adiel Arvizu :

@Rosston Smith What software do you use to calculate your expenses? Also, what is your opinion on investing in a property which has a commercial business and an apartment unit as a first property? I mainly ask because at least in my area it looks promising since the rent from the commercial place alone can pay the mortgage. Otherwise, the thought of real estate is surging me with some excitement.

 I only use excel spreadsheets to run my numbers. That sounds like a great investment! As long as the numbers work, and you know how to advertise commercial space, that could work out great. The tenant/business relations would have to work out depending on how the unit is set up. 

@Rosston Smith Actually the beauty of this space is that there is already a business running. Plus it is within walking distance from my place. And I'll see about using excel spreadsheets to run numbers. Otherwise, thank you for everything and if there is more advice about this business let me know. I want to fund the down payment of this whole thing without any money out of pocket so I know I will need to be creative. 

@Adiel Arvizu  Welcome to BP!  A few thoughts on your post:

- Buying multi unit (SFR or commercial) and living in one unit and rent out others is a great strategy. I've seen many people do it successfully.

- Keep in mind forming an LLC will knock you out from all conventional lenders, as they do not lend to LLC's. You'll have to get a commercial loan which carries higher rates and shorter terms. They'll still require a Personal Guarantee which means they'll still go through your personal financials.

- Any lender will ask where the downpayment is coming from.

- A quick start would be to talk to some banks to see what you may qualify for.  That can point you in the right direction.

Good luck!

- Tom

@Tom S. So if I do not form an LLC can I still get conventional loans for commercial real estate? Also, since you also know about this where would be the best place to get private loans from barring friends and family? I want to be able to get a long term loan for the 20% down payment. Also, when would be the best time to form an LLC? Thank you for answering and if you also have any tips please let me know.

@Adiel Arvizu personally, I'll never formed an LLC and just use a good $2M umbrella policy for my properties. There are many pros and cons of this, plenty to read about here on BP. My attorney said the LLC just creates a lot of unnecessary and expensive paperwork, and again, any conventional lenders (typically ones that resell the loans to the government) do not lend to LLC's.

You can still get a commercial loan in either your name or an LLC, but even with a commercial loan there will require a personal guarantee, so they will require your personal financials.

Regarding the private lenders question, I've never used it beyond friends and family (private money generally is friends and family).  Remember lenders do not like the downpayment to be borrowed in any way.  In fact on the mortgage application it will directly ask if any part of the down payment is borrowed.

Hope that helps!

- Tom

@Tom S. Alright because my parents who are landlords formed an LLC and my mother claimed it was so when they get sued they won't lose the building or something like that. Also, would not forming an LLC affect the amount of taxes I can collect or could I collect the same amount of taxes. Could I also employ people formally when not under an LLC?

@Adiel Arvizu  An umbrella insurance policy does the same thing, helps protect you if you get sued. I've had rental properties for over 15 years and probably 200 tenants, and I've never even been threatened to be sued.  Run it as a good business, don't neglect the property, and I don't think you'll have any issues.

Again, there are a lot of opinions on BP about the umbrellas policy vs LLC subject. It's a personal choice.

Regarding the tax question, it's the same regardless of LLC versus holding property in your personal name.

- Tom

@Tom S. Well I have no problem treating my first property as a business. I prepped all the forms and the like for almost every instance. But what about employment? Would employment be better under an LLC or would my personal name be enough?

Although, rent control makes things a problem since for the building I reside it is hard to make the necessary repairs because we don't have enough income flowing in. I mean two days ago I had to tarp the roof to fix a leak but the roof is in need of repairs.

Basically my overall plan is to own some nearby properties, make some cash flow, pay off student loans, and get my parents to sign off their property to me. After that I can collect some extra money from doing taxes and make the necessary repairs. My parents can still collect the rent and put it into their bank account. Once that is complete I expand and hopefully I can own and operate key properties in my area.

That is why I got into this. Also, for the first time in a long time my blood is boiling over owning something and doing the best I can. And it looks like if I continue this thread new people can come in there and learn. In any case, I will continue the questions I have since I would like to go into commercial since at first glance it looks like it will generate a nice amount of cash flow.

So in that case, for someone who is broke what are creative ways to finance that others haven't mentioned?

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