A year of research and ready to invest

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A while back I posted my ideas about partnering up with my fathers company to create some equity by renting out units to the employees. Fast forward almost a year later and I took people advice and I'm not doing it. I am however purchasing my first multi-family 3 or 4 unit after a lot of
research, listening to the podcasts, and reading what has worked and what hasn't for most people.

I have decided that my area for now is going to be Newark, New Jersey. I grew up in the suburbs in northern NJ (Montclair, Essex fells area) but I was hesitant to invest in Newark knowing very little about it except for the negative misconceptions it had attached to it. To see how bad it actually was I decided to go and rent in Newark first in a 'not so great' area I was there for about 5 months. Place was actually fine it was more of the noise that made me want to move. Now I live in the downtown area in a great 34 fl high rise close to Rutgers University and Essex county community college. I feel like this helped me see the rents in different places ( I think I viewed around 10 apartments) in the general downtown area before I moved. I recently just quit my job so it's a sink or swim kind of situation right now. I went to school for finance but did not find myself working in that field so bear with me please on some of the questions :)


1. I will be living in a unit I know the other rents will cover the mortgage of the place but if need be how would I take money to pay myself let's say for groceries or something like that do I put myself in payroll? ( hopefully it won't get to that point I have enough savings that I should be fine for now)

2. When you get security deposits from tenants do you just leave those in the general operating account for your properties or do you put it in a separate account?

3. I know the 50/50 rule is a conservative way to look at the situation but let's say I have the property for a year and nothing went wrong and I have money sitting in my LLC/S corp whatever it may be. Can I/ should I reinvest that money for other properties or should I use it to pay down more of the mortgage?

4. I read a lot about people using private investors for an 8-12% profit, does this work for rental properties as well or only flips? Specially if I'm planning to buy and hold, how would an investor see that kind of return on his money.

5. I keep reading about the meet up in summit and I don't know if I'm using the search feature wrong but I can't seem to find any information on it. Would someone please let me know how or what thread I can find this information on?

I have learned an invaluable amount of information in this forum and I hope to keep learning more from all of you and hope to get to meet some of you in the future. Best of luck with all your endeavors!

1. If there is $100.00 leftover after paying all your expenses keep the $100.00. Talk to your account about what are the pros and cons of setting up payroll for yourself. 

2. In many States security deposits are supposed to be kept in a separate interest bearing account. It really should show up on your taxes as a liability. (many investors don’t do this)

3. I like to take the conservative route, but it depends and there are many variables. One of them is how you will be buying property long term; with cash or financing? Many financial institutions like to see some form of reserve for each property you own. If cash, what happens when you run out of cash? I would keep a rainy day fund no matter what and use whatever excess cash from that point on to continue to purchase property. 

4. What you pay investors will be based on your experience. Starting off you are just trying to build a track record of getting deals done. 

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On the conservative side you would set aside for maintenance and repair, and capitol reserve. 5% would be standard, 10% would be conservative to set aside from gross operating income. These are used mainly for multifamily housing. For a single family I would recommend $100 to $150 total to set aside (the cash flow is usually less to use a percentage). 

Many investors use the cash flow from their properties for living expenses so setting aside these amount of reserve are not practical. 

Sounds exciting. I wish you the best in your new venture. It's a bit scary to get into an investment where it's sink or swim. The reason being sometimes you will buy the property even if it's not a good investment because you feel it's your only choice.

If you don't mind me asking what purchase price are you buying the complex for and what are the monthly rents of the other 3 units? Also what are the expenses- taxes, insurance, water, sewer , garbage, etc. Can you perform maintenance yourself and manage the property yourself? If not what is the cost of property management?

You're asking the right questions and have done an amazing job of due diligence of the area( by actually moving there lol)

So i'm excited for you. I would assume by all the research that you've done that you're getting a good deal- just curious about the numbers.

Remember if the numbers are good finding private financing will be very possible.

@Michael Henry  said it perfectly, but I will add my own thoughts. 

1. The actual mechanics- payroll vs distributions is a question for an accountant, but make sure you are not depending on all the rents to live. What happens if you have a vacancy, or if you have to evict someone there will be a few months with out income from that unit. Now what happens if 2 of the 3 units are vacant, or if one of the former tenants destroys the apartments? Now you need to pay the mortgage, pay a lawyer to evict, and repair the unit to get it rent ready. 

2. They must be separated 

3. If your capital expenses were lower than anticipated one year there is a good chance they will be higher the next. For instance, if I take out 5% of gross collected rents for repairs, and I don't have any tenants move out and don't need to make any repairs for 1 year, odds are when they do move out I will need to do a bigger rehab or repaint the whole apartment. Also major systems have a useful life such as roofs, furnaces, ect, and may not need to be fixed every year but when they do its a couple thousand dollars which you should make sure you have set aside. 

4. Odds are if you have no track record you will have a hard time getting any money from investors other than family and friends. If you have no experience be careful taking others money for your deals, if you loose their money your reputation will be severely tarnished, and you could damage relationships with family and friends who could have been long term investors. Its not a good idea to learn the ropes on someone else dime. Build a track record, do some deals, get some experience, then start raising money to scale your business once you have a proven business model and the ability to execute. 

Some other things to keep in mind are- if you have no W2 income how do you plan to qualify for the mortgage for your property?

Thanks for all the information, a lot to take in but I'm thankful for all the input.

@Steve Wilcox  I quit my 9-5 job, I am still making money as a consultant for a company so I still have W-2 income. I thought of that as well and definitely wouldn't want to be in that situation and trying to start this project.

@Dustin Rose Thank you for the words of encouragement. I see it as a sink or swim situation because I quit my primary job and won't be making as much money as before but still have enough income to fund this project. The places I'm looking at range from 270k-320k, most of the units I am looking at have 100% occupancy and are generating anywhere from 40-60k NOI (before I factor in what my est. mortgage payment would be). I know by taking an FHA loan, if understand it correctly I have to live in one of the units and it cannot be more than a fourplex. It seems like the deals that generate more cash flow in this area are 5+ units so I don't know if it's a good idea to go with a traditional loan or not. So I started getting confused and hesitant again.

@Michael Henry    Thanks Michael for that insightful information it definitely helps clarify some points that I was very unsure about.

Hey @James Lucero what areas of Newark are you looking in? For FHA loans you have to occupy the property for at least one year, and generally you will have to pay mortgage insurance (PMI) which will increase the monthly cost. You can not get an FHA loan on a 5 unit, however in Newark they are generally less desirable than 2-4 unit properties anyway.

I would recommend talking to your bank, a mortgage broker and some other lenders to see what you qualify for. If you are going to have them pull your credit to get an actual pre-approval and you plan to see what more then one lender can offer do it all in less then 14 days as it will have the lowest impact on your credit score from multiple pulls. 

Once you have that get out there and start looking at properties, you will want to find buildings where most of the units are 3 bedrooms, I generally like at least 2 of my units to be 3 beds per building. 

Also have a plan to manage your units, it is not for everyone, and Newark has its own unique set of challenges, as does any market. Make sure you are prepared to deal with the challenges you may face


1. I haven't been doing any type of payroll/draw but rather just making a withdrawal from my business account one or two times a year since the income from my properties isn't my sole income. But for someone who wants/needs something from their business as a paycheck type of thing you may want to discuss what I mentioned above, which is a draw, with an accountant. A draw is what a business owner would take from the business as sort of their paycheck, but it isn't a formal paycheck. I don't know the ins and outs (since I haven't yet looked into it myself).

2. I used to put the deposits for my first 2 units in to my operating account but when I purchased a 9 unit apt building a month ago I had a plan in place to create a better system. I'm in WV so this wasn't necessary but I have a separate account for security deposits now where they just sit until a tenant moves out. That way I know I have them if needed, plus it helps with tracking them for various other reasons (e.g. IRS). I then have separate checking accounts for each of my physical properties for inbound rent. Then I have a 4th as my primary spending account against which I write checks. I'm considering adding another account for the 10% of gross rent for repairs I try to save each month per property.

Other states may have specific laws regarding separate accounts. I know in some states you have to track interest and pay tenants interest that accrued while you held their security deposit so having separate accounts are almost a necessity I think for things like that.

3. Build up a cushion not only for yourself, because you never know what may happen, but also for the bank so that you can show you have reserves. In the beginning your personal reserves will be what your lender looks at but eventually they may only look at your LLC's reserves, especially if you have no W-2 income like many RE investors. After you have a large enough cushion then you can start adding on to that for reinvesting. I wouldn't worry about paying down the mortgage, at least not initially. You have tenants to pay rent to pay down your mortgage so you aren't in any danger. You can always save money down the road to make lump sum payments to speed up the mortgage pay off. I know that having that mortgage hanging around can make one paranoid but as long as you have tenants' rent covering it I wouldn't worry about it.

4. I can't speak to this one.

5.  Or this one.

Hi, my name is Danielle, from Queens NY. I've been a long time lurker, so this is my very first post. I'm a super newbie, currently working on purchasing my first investment property in Essex county, NJ...specifically triplexes or fourplexes in East Orange, Irvington and Newark. I recently found out that Essex county offers a grant for down payment assistance and closing cost assistance for first time home buyers, which i am. Does anyone have any experience with this? Has anyone on the forum ever received such grants or program assistance?

Thanks in advance!

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