Bought my first multifamily in Jersey City. What do I do now?

Question

I was fortunate enough to purchase a multifamily using a FHA loan. It was a short sale in 2015.

Purchase Price: $600k

Mortgage balance: $540k @ 3%

Net income: $1600/month

Thanks to nice growth in this neighborhood, which is in close proximity to Hoboken and Manhattan, I believe it can appraise for at least $950k.

My next purchase will not be an FHA.

Regarding my current loan:

Should I cash out refinance?

Should I refinance into a conventional loan?

Regarding my next investment:

Should I seek to invest in cheaper areas (Bayonne, Newark, out of state)?

Should I do nothing until the recession hits?

It seems very difficult to find a deal that makes sense in this area.

Ronald Bowser · Answer

Generally, we average the vacancy rate at 10% when underwriting (conservative approach), but I believe the actual vacancy rate is below 5% for the area.  There has been a large population influx for a number of years as we have a central location between NY, NJ, & Philadelphia.  In Bethlehem, where I live, we had a casino built in recent years (Sands), there are universities close by (Lehigh, Lafayette, Muhlenburg), good hospitals, and job growth as well.  Fedex is currently building a large distribution facility in the area.

All of the above is good for Appreciation as the population grows and the densely populated areas can't be developed, so in general I would have to say the appreciation is good in the area, but admittedly, I invest for cash flow and look for properties I can inject some equity in to, so do not do too much delving in to appreciation rates... I look at it more as icing on the cake when the time comes for me to divest.  Hopefully that will be when the tenants have paid down my mortgage and I can cash out to send the kids to college or with any luck quit rat race.

Ronald Bowser · Answer

@John Kim That covers basically everything involved with managing and maintaining the property. Rent and late fee collections, tenant relations, bill paying, maintenance requests, court filing for evictions, quarterly inspections, etc.  Repairs and maintenance do get charged back to the owner.  At our place we have a maintenance crew that we charge $35 an hour plus materials for the service, which is a good rate compared to contractors in the area.  They will handle the basics like painting and lock changes when there are turnovers, fixing faucets and other routine maintenance.  When it comes to plumbing or electric, where a permit is required, we have a network of contractors/vendors we work with, so we will get estimates on everything and get the landlords approval before completing the work.

The system we use is Appfolio, so owners get their own online portal to check the status of their ledger, review the inspection reports of their property, and have a bunch of built in reporting.  The tenants get a portal as well so they can go online and pay their rent or make maintenance requests for any issues they might be having.  We of course have a 24 hour phone line as well for any emergencies.

I hope that provides a decent overview, but if you have any specific questions or anything, please don't hesitate to let me know.

John Kim · Answer

What exactly does a 10% property management fee cover?

I assume any actual maintenance work is extra out of pocket? (Plumbing, snow)

Michinori Kaneko · Answer

@John Kim nice job! I used to live in Jersey City, now i'm in queens. I bought my coop around end of 2014 (around same time you purchased!) and the property has nicely appreciated too, so I actually was thinking of similar line but here were things I considered:

1. your current interest rate is probably much lower than what you can refi for.

2. Can the cashflow from your new investments outpace the reduction in your cashflow from your current property (not sure how much you are trying to refi out, but if you got 75% refi your interest payment every year more than doubles, would you still positively cashflow on that property? even then, with that kind of equity you can probably easily beat the decline in cashflow from your first property with new cashflow from your new investments).

3. I would invest out of state.  you and I enjoyed a great appreciation in our property, but that means all the properties in the area also appreciated.  In other words, all the properties in NJ/NY areas are expensive.

4. if you are going to take the HELOC route, make sure you get a fixed rate one.  rates are about to go up more.

5. be ware though if you leverage too much on your primary resident and IF the housing crashes in the area then you may get into trouble...

Hope that helps!

John Kim · Answer

@Ronald Bowser

How is the long term appreciation in this area? What about vacancy rates?

Ronald Bowser · Answer

Hello, @John Kim & @Jaysen Medhurst

I received an alert for this thread as I live and work in the Lehigh Valley.  I invest here as well.  $150k can get you a decent multi-family (2-4 unit depending on class) in one of the three major cities that encompass the Lehigh Valley; Allentown, Bethlehem, & Easton.  We see cap rates at 10+% and with no mortgage payment, you should cash flow nicely.

For comparison, I bought a 2 unit in 2014 ($120k) that cash flows a little above $700 and picked up another 2 unit a couple months ago ($160k) with a commercial front, residential up top, and rent-able garage that should produce slightly better once I get it fully occupied.  Both of those are leveraged, so the mortgages are impacting my cash flow, but if I can get those paid off they'll break 1k per month.  Since you'd be remote, I assume you'd need Property Management, so you'd want to factor in 10% gross rent collected and first month's rent whenever there is a turnover,

Hope that provides some useful info for you.  I'm always happy to talk about the area, so please don't hesitate if I can try and answer anything else.

Jaysen Medhurst · Answer

@John Kim, here's something in Carlisle, right off the MLS. Carlisle is a college town, some "rough" areas. Won't see the kind of appreciate you've had in JC, but worth considering.

John Kim · Answer

@Jaysen Medhurst

Greetings,

I don't rely on the cash flow for income.  I am content with breakeven, as my main objective for this specific property is to pay down the mortgage and hope for appreciation.

I will look into HELOC, which seems more suitable for short term loans.

I haven't looked into Pennsylvania yet.  What do the numbers look like in PA?  Assuming I took out a $150k HELOC, what type of property and cash flow would you expect to see in this area?

Jaysen Medhurst · Answer

@John Kim, if you refinance, you'll probably cut your cashflow in half. How do you feel about that? You can also look at a HELOC. Great way to tap into your equity without going through the hassle of a refi. Some products will even let you go 100% LTV. Use the cash to BRRRR a new property and then pay back the HELOC after you refi the new property.

I don't think you're going to find deals that cashflow in the NY Metro area. Have you checked out PA at all? Harrisburg area or Lehigh Valley?

Bought my first multifamily in Jersey City. What do I do now?

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