I live in an expensive area and the numbers aren't working

Buying & Selling Real Estate

I live in an expensive area and the numbers aren't working

Parsippany, NJ · Member since 2017 · 16 posts · 2 votes

I've been researching REI'ing for the past 6 months and I have yet to purchase a property. I live in New Jersey where property values and property taxes are very high. I don't have any construction experience, so I figured I should avoid flipping. Instead, I've been focusing on rental properties, specifically vacation rentals at the Jersey shore. The numbers just don't add up. Even with a multi-family, the best ROI I can get is like 3%. I've been looking at properties between $500-600K and the monthly rents are only $2,000-$2,400 (roughly 4%).

I've also looked into properties that are not vacation rentals, but the numbers are roughly the same in this area. 4% is clearly not going to work.

Flipping seems to be the better choice in this area, but that makes me nervous since I don't have construction experience and I will have to sub out all of the construction work and I fear I could lose all of my profit that way.

I'm starting to get frustrated that I can't find a deal that works. I'm determined to buy a property this year, but I don't want to buy something unless I can make the numbers work.

Do any of you out there in the BP Community have a similar problem with living in a high-priced area? Does anyone have any suggestions for me? I'm very eager to start investing!

Thanks in advance for any advice you may have!

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Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

Hi Casey! I live in LA and the problem is the same out here. I've always just bought out-of-state properties. That way I have lower entry prices, higher cash flow, etc. So investing non-locally is one option. Flipping would be the other option, but my hunch is to say follow your hesitations about not having experience or feeling like that's what you should do. Flipping can of course be an option, but it's honestly a very different animal than just having a rental property. If it calls to you do it, but only do it if it really calls to you. Otherwise you could end up with a significant amount of stress to deal with...

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Casey Gocel
OP
Parsippany, NJ · Member since 2017 · 16 posts · 2 votes
9y
Originally posted by @David Weintraub:

Are any of you trying to find properties through foreclosure auctions?
I have not looked at foreclosures at all. My understanding is that you have to have 100% cash ready to go when you go to auction and I don't have that. I have the down payment but I plan to use a traditional mortgage for 75-80% of the purchase price.
0 Reply
David Weintraub
Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes
9y
That's not true. You can use lending to purchase foreclosed properties. @Casey Gocel
1 Reply
Casey Gocel
OP
Parsippany, NJ · Member since 2017 · 16 posts · 2 votes
9y
Originally posted by @David Weintraub:

That's not true. You can use lending to purchase foreclosed properties. @Casey Gocel
That is good to know. I will have to look into that. I appreciate the info.
0 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
I would network at REIA meetings, etc. to find an experienced local investor for whom the numbers are working (I guarantee you they are out there) and look over their shoulder to see if they are doing their math different than you are, or perhaps they are working on a completely different equation than you are.
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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Casey Gocel I think @David Faulkner is on the money when he says you have to look at an experienced investors math. That's not to say you have to agree with their assumptions. If they're buying because they think the market will continue to appreciate at 5% a year and you disagree then you'll end up with fundamentally different ROI scenarios. If you're more pessimistic that they are or your cost structure is higher (thinking about experienced vs. notice flippers) then you'll never see the value that they do in a property and perpetually be outbid unless, well, you get lucky. So your first step is to learn their "formula" and then decide if you agree with their assumptions.
As an aside, I would also submit that not every market is a "semi-passive income stream" market. Similarly, not every market is an "appreciation" market. Basically, you're the inverse-investor of someone sitting in Toledo and wondering where they invest locally for appreciation. That scenario would be just has hard as looking for great cash-flow for an SFR in coastal San Diego. There's the 1-in-a-____ chance you'll find it but it's not an easy, scalable model for someone seeking to skew passive on the investor spectrum.
2 Reply
David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
9y
Casey Gocel Why do you have to get into market right now? As a newbie, 2017 is not the best time to get started. The risk for a correction is always there. Most market around the country are approaching peak. Experienced REI may still find some opportunities. But not likely for new investors. If you really want to buy, wait for the end of the year, between thanksgiving and Christmas. That time period is the lowest season.
2 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Andrew Johnson:

@Casey Gocel I think @David Faulkner is on the money when he says you have to look at an experienced investors math. That's not to say you have to agree with their assumptions. If they're buying because they think the market will continue to appreciate at 5% a year and you disagree then you'll end up with fundamentally different ROI scenarios. If you're more pessimistic that they are or your cost structure is higher (thinking about experienced vs. notice flippers) then you'll never see the value that they do in a property and perpetually be outbid unless, well, you get lucky. So your first step is to learn their "formula" and then decide if you agree with their assumptions.
As an aside, I would also submit that not every market is a "semi-passive income stream" market. Similarly, not every market is an "appreciation" market. Basically, you're the inverse-investor of someone sitting in Toledo and wondering where they invest locally for appreciation. That scenario would be just has hard as looking for great cash-flow for an SFR in coastal San Diego. There's the 1-in-a-____ chance you'll find it but it's not an easy, scalable model for someone seeking to skew passive on the investor spectrum.
Correct ... they may be running their math a bit different (eg: 3% vacancy rate built into their underwritting) OR they may be working off a completely different formula (eg: flips instead of holds), OR BOTH ... and it is up to you whether you agree or not or if that is a strategy you want to pursue or not, but even if you disagree and have no interest, I guarantee that you will still learn something that will be useful to you down the road even if it is on a different path.
I think (if I may Andrew, please correct me if I'm wrong) the main difference between our philosophies is Andrew would rather find a different market somewhere else that works for his preferred strategy, where as I am more strategy agnostic and say that an investor is likely better served by adapting their strategy to what makes sense for their local market. As with the running math differently analogy, many investors with many different views and philosophies on BP, but best IMO to consider them all (even the ones you don't agree with) and pick and choose the best parts of each to form a plan that works best for you.
1 Reply
Casey Gocel
OP
Parsippany, NJ · Member since 2017 · 16 posts · 2 votes
9y
Originally posted by @David Faulkner:

Originally posted by @Andrew Johnson:
@Casey Gocel I think @David Faulkner is on the money when he says you have to look at an experienced investors math. That's not to say you have to agree with their assumptions. If they're buying because they think the market will continue to appreciate at 5% a year and you disagree then you'll end up with fundamentally different ROI scenarios. If you're more pessimistic that they are or your cost structure is higher (thinking about experienced vs. notice flippers) then you'll never see the value that they do in a property and perpetually be outbid unless, well, you get lucky. So your first step is to learn their "formula" and then decide if you agree with their assumptions.
As an aside, I would also submit that not every market is a "semi-passive income stream" market. Similarly, not every market is an "appreciation" market. Basically, you're the inverse-investor of someone sitting in Toledo and wondering where they invest locally for appreciation. That scenario would be just has hard as looking for great cash-flow for an SFR in coastal San Diego. There's the 1-in-a-____ chance you'll find it but it's not an easy, scalable model for someone seeking to skew passive on the investor spectrum.
Correct ... they may be running their math a bit different (eg: 3% vacancy rate built into their underwritting) OR they may be working off a completely different formula (eg: flips instead of holds), OR BOTH ... and it is up to you whether you agree or not or if that is a strategy you want to pursue or not, but even if you disagree and have no interest, I guarantee that you will still learn something that will be useful to you down the road even if it is on a different path.
I think (if I may Andrew, please correct me if I'm wrong) the main difference between our philosophies is Andrew would rather find a different market somewhere else that works for his preferred strategy, where as I am more strategy agnostic and say that an investor is likely better served by adapting their strategy to what makes sense for their local market. As with the running math differently analogy, many investors with many different views and philosophies on BP, but best IMO to consider them all (even the ones you don't agree with) and pick and choose the best parts of each to form a plan that works best for you.
All good ideas. Thank you both!
0 Reply
Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@David Faulkner Yup, you're right on the money. I would clarify that I did look initially to find a market that mapped to my desires, strategy, "math formula", etc. However, now that I'm in the market I'm not immune to adjusting my strategy for opportunities in that geographic market. Part of that does have to do with trying to be opportunistic and some of it boils down to differences in unit economics and risk adjustment. The math changes from me when it comes to marginal costs to visit those properties. The risk adjustment goes down due to a solid relationship with a property management company. Having an established relationship with a local/community bank also makes things a little easier. Grouping properties for insurance/umbrella coverage can factor in. And this is just for me being a boring buy-and-hold investor. Things really start changing if you're flipping, rehabbing, where the value of a contractor/supplier network can have massive benefits.
All of that, @Casey Gocel, is to help underscore how the market dynamics are different for me that for someone else just entering the market where I invest. When it comes to your high-cost market, one of the reasons to understand their math (and potentially cost structure) is so that you can see how it applies to you and your goals. It might not be "fun" but taking a 4% return on Property #1 knowing that it will enable you to raise a blended average return over time it's exactly bad! It's just a long-term strategy and involves some delayed gratification if you pair against the insta-projected-cash-return of a turnkey property.
0 Reply
Vincent Priore
Investor · Wyckoff, NJ · Member since 2015 · 100 posts · 35 votes
9y
@Casey Gocel
I grew up in Essex County and live in Bergen County currently. Completely understand your frustration, this is not an easy place to invest in real estate. But deals are out there, you need to be diligent in your search and criteria.
I would suggest defining an geographic territory that you're interested in and really getting to know the numbers cold. What prices are folks getting (sales and rentals) what parts of town are more desirable, etc. Then start mailing that area, driving for dollars, make your presence known. Don't get deterred by short-term set backs.
1 Reply
Julia Ann
Brookline, MA · Member since 2017 · 49 posts · 22 votes
9y
I agree with @Hank Keller - have you thought about Airbnb instead of monthly vacation rentals?
I am in the exact same boat. A newbie in Boston, where there certainly isn't much to choose from at all. Have found nothing that passes the 1% rule and therefore am considering out of state opportunities.
1 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Andrew Johnson:
@David Faulkner Yup, you're right on the money. I would clarify that I did look initially to find a market that mapped to my desires, strategy, "math formula", etc. However, now that I'm in the market I'm not immune to adjusting my strategy for opportunities in that geographic market. Part of that does have to do with trying to be opportunistic and some of it boils down to differences in unit economics and risk adjustment. The math changes from me when it comes to marginal costs to visit those properties. The risk adjustment goes down due to a solid relationship with a property management company. Having an established relationship with a local/community bank also makes things a little easier. Grouping properties for insurance/umbrella coverage can factor in. And this is just for me being a boring buy-and-hold investor. Things really start changing if you're flipping, rehabbing, where the value of a contractor/supplier network can have massive benefits.
All of that, @Casey Gocel, is to help underscore how the market dynamics are different for me that for someone else just entering the market where I invest. When it comes to your high-cost market, one of the reasons to understand their math (and potentially cost structure) is so that you can see how it applies to you and your goals. It might not be "fun" but taking a 4% return on Property #1 knowing that it will enable you to raise a blended average return over time it's exactly bad! It's just a long-term strategy and involves some delayed gratification if you pair against the insta-projected-cash-return of a turnkey property.
Yup, and that "different math" may not necessarily be ALL in their favor ... some of the math may work better for you than it does for them (though honestly it mostly works in favor of experience with scale) ... you can seek out deals that require more legwork than they are willing or able to put in, or are too small dollar wise to attract the big investors. You can add "sweat equity" to keep labor costs down. You can house hack it with 3.5% down FHA financing, which the experienced folks would not be interested in doing, not because it is a bad strategy but because they've outgrown it. You may have a special skill or knowledge or network of contacts that you can leverage that they don't have. It is thinking about these sort of things and how you can best utilize those unique things that you have to work with that can lead you to a profitable niche and uncover opportunities.
0 Reply
Diogo Marques
Financial Advisor · Cascais, Lisboa · Member since 2015 · 199 posts · 83 votes
9y
Try living in Portugal... I have the same issue, so you can look at the Midwest region for better ratios. Good luck
0 Reply
Eric Burgh
Real Estate Professional · Hoboken, NJ · Member since 2017 · 46 posts · 26 votes
9y
I think your numbers are a bit off or you're looking in the wrong area. I can certainly find a 3-400k place and rent for over $2k monthly, but I still wouldn't go that route. are you looking in Parsippany area ?
0 Reply
Billie Miller
Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
9y
We are running into the same problem in Denver. High price to rent ratios are so tough!
We are looking into southeastern WY or turn-keys right now. Is there a community close to you where the numbers make sense? That could be an option too. Not so far as turn-key but maybe the numbers would make better sense.
0 Reply
Casey Gocel
OP
Parsippany, NJ · Member since 2017 · 16 posts · 2 votes
9y
Originally posted by @Eric Burgh:
I think your numbers are a bit off or you're looking in the wrong area. I can certainly find a 3-400k place and rent for over $2k monthly, but I still wouldn't go that route.
are you looking in Parsippany area ?
I live in Parsippany, but I have not looked at rental properties in my town at all. I'm not sure if there is a market for rentals in this town, but I will discuss that with my realtor.
0 Reply
Michael Gansberg
Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
9y
Interesting question, @Casey Gocel. Many investors are in your shoes. If you look at the large vibrant cities, this is a common problem- Manhattan's median apartment price is about $1,200,000, and the median rental rate is about $50k/yr(culled from various sources.) That's about a 4.2% yield if you purchased in cash, and had no expenses(an impossibility.)
I think you can turn this problem into an opportunity. My first purchase was two hours away from where I lived(Hudson NY from NYC.) The cap rates were compelling, but illusory- managing in Hudson from 2 hours away turned out to be too difficult for me. It forced me to obtain competent management. This step is essential in any investor's career- managing your own properties ceases to be scalable at some point. If you start with good management, you've already removed one scalability hurdle(capital will likely be your next hurdle.)
Why not follow that plan? Stay within two hours in case you need to be there for some reason. That will give you the ability to meet with management on a semi-regular basis, and to drop in now and then. A two hour(by car or train) radius should allow you to find properties that meet your cap rate requirements. You can reach into fertile areas of NY, Pennsylvania, and your home state as well.
0 Reply
Casey Gocel
OP
Parsippany, NJ · Member since 2017 · 16 posts · 2 votes
9y
Originally posted by @Michael Gansberg:

Interesting question, @Casey Gocel. Many investors are in your shoes. If you look at the large vibrant cities, this is a common problem- Manhattan's median apartment price is about $1,200,000, and the median rental rate is about $50k/yr(culled from various sources.) That's about a 4.2% yield if you purchased in cash, and had no expenses(an impossibility.)
I think you can turn this problem into an opportunity. My first purchase was two hours away from where I lived(Hudson NY from NYC.) The cap rates were compelling, but illusory- managing in Hudson from 2 hours away turned out to be too difficult for me. It forced me to obtain competent management. This step is essential in any investor's career- managing your own properties ceases to be scalable at some point. If you start with good management, you've already removed one scalability hurdle(capital will likely be your next hurdle.)
Why not follow that plan? Stay within two hours in case you need to be there for some reason. That will give you the ability to meet with management on a semi-regular basis, and to drop in now and then. A two hour(by car or train) radius should allow you to find properties that meet your cap rate requirements. You can reach into fertile areas of NY, Pennsylvania, and your home state as well.
This is actually what I was trying to do. The shore properties I was looking into were 1.5-2 hours from my house. But it appears that this area is not going to work, so I will have to look elsewhere. Do you still invest in Hudson NY? Or have you moved to other areas?
0 Reply
Michael Gansberg
Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
9y
I still have my original Hudson investment, but my focus has shifted to the Capital District. If you can hit your targets in your local market, that could be a great option. I think vacation rentals are more challenging than year-round- more management, more vacancy(between tenants and in the off-season.) I'd suggest working your way outwards from where you live.
0 Reply
Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
All of the gateway cities have the same challenge. It is tough to cashflow. Central Jersey would be included in as a gateway city. The jersey shore has gone crazy since recovery from Sandy I recommend looking at second tier cities. Institutional money is typically not present, which creates less competition and the numbers work.
0 Reply
Larry Fried
Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
9y
@Casey Gocel Yes many of us, myself included, who live in expensive markets on the coasts, have focused on out of state investing. I started out with turnkey investments, and have grown into other "passive" investments. My BP blog article discusses Three Key Routes for Passive Real Estate Investing
All best in your REI!
0 Reply
Account Closed
Rental Property Investor · NV · Member since 2017 · 63 posts · 26 votes
9y
Originally posted by @Casey Gocel:

I've been researching REI'ing for the past 6 months and I have yet to purchase a property. I live in New Jersey where property values and property taxes are very high. I don't have any construction experience, so I figured I should avoid flipping. Instead, I've been focusing on rental properties, specifically vacation rentals at the Jersey shore. The numbers just don't add up. Even with a multi-family, the best ROI I can get is like 3%. I've been looking at properties between $500-600K and the monthly rents are only $2,000-$2,400 (roughly 4%).
I've also looked into properties that are not vacation rentals, but the numbers are roughly the same in this area. 4% is clearly not going to work.
Flipping seems to be the better choice in this area, but that makes me nervous since I don't have construction experience and I will have to sub out all of the construction work and I fear I could lose all of my profit that way.
I'm starting to get frustrated that I can't find a deal that works. I'm determined to buy a property this year, but I don't want to buy something unless I can make the numbers work.
Do any of you out there in the BP Community have a similar problem with living in a high-priced area? Does anyone have any suggestions for me? I'm very eager to start investing!
Thanks in advance for any advice you may have!
I'm in a similar situation as you when it comes to living in an expensive area. here in Southern California the prices are outrageous. Luckily for me I moved to an area an hour away from a major city and the property prices are much better. So maybe in your case try to look a bit farther away from your current horizon,not to far to were you do not know the area well, but far enough to were the prices may be a little better. hope that helps.
0 Reply
Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
9y
@Casey Gocel
I feel your pain .....and here's what I am doing.
I'm looking out of state in the Midwest. I live in the San Francisco Bay Area and although I have rentals here in the Bay Area my next purchase will be in the Midwest .... most likely in the next couple of months.
Through much Persistence I've been able to find agents and property managers in 2 markets that considering and will be flying to both places next month before making a decision on which one.
I used to be completely adverse to investing out of state because I wanted to be able to drive to my rentals and be able to "check in on them" with my own eyes.....until I started listening to the podcasts of people on bp here and how they did it as well as why (cheaper to buy and better cash flow). I also spoke to Simone who gave a podcast here recently and it was a learning experience.
If you want to pm me I can tell you how I found the lenders for these "under 100k" properties as well as agents and prop managers that work in those markets because not all agents will.
1 Reply
Brian Ploszay
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
9y
Certain cities on the coasts, cash flow is slender. Lots of reasons why. But the conclusion is that real estate investments are highly competitive. There is strong demand.
Some of these markets have created great returns over time through appreciation over cash flow.
Be careful not to buy a building that you will have to feed. Any investment should support itself.
0 Reply
Diane S.
philadelphia, PA · Member since 2017 · 52 posts · 12 votes
9y
look in south jersey across from Philly and del ,and way north, lots of fix and rent, taxes reasonable, more train lines coming in so market to commuters, and in a tough area always take section 8, you will be able to refill so fast
1 Reply

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