Analyzing a MultiFamily Property to Househack in NJ

11 Replies

Hello -  I would like to ask investors in New Jersey (or anywhere) about expenses to consider when you are analyzing a multifamily property to househack- snow removal, lawn maintenance, etc.  I just want to make sure I am including every expenses to get an accurate cash flow number. Thank you!

You will always have things come up from time to time. Leaks, repairs Etc... I sometime allocate 75 to 100 per month for unexpected expenses depending on age and overall condition of property.

Large capital expenses will need to be considered as well depending on the age of the mechanicals, IE. roof, HVAC, water heater, appliances Etc...

Occupying a multi family is a great way to get started and get your feet wet.

good luck!

Chris

Hello @Criselda Ilao

Here's a basic list you can use:

5 -10% Vacancy (depends on the area and property condition.

Operating Expenses 

10% Property Management (Rates vary.  Always include even if self managing) plus 1% for turnovers.

5% Credit Losses (Uncollected Rent and Skips)

5 - 10% Maintenance/Repair (depends on Age and Condition of property)

5% Taxes and Insurance (Varies)

5% Utilities paid by owner (Electric, Gas, Water, Sewer, Garbage)

5% Landscape Maintenance/Snow Removal 

5% Misc (HOA fees, Pest Control, Legal, Accounting, Advertising, etc.)

5 - 15% CapEx. Capitol Expense reserves (depends on Age and Condition of property)

Obviously these percentages are not hard and fast.  I always go in very conservative expecting 55% expenses  until proven otherwise.  This list will give you at lest something to whittle down.

Hope this helps.  Have any more questions just ask.  :)

@Criselda Ilao based on my limited experience running number in northern NJ, you will never buy anything if you run the numbers that John recommends.  I'm not saying he's wrong in the slightest.  I think this local market just does not support it.  High prices, high property taxes and high rents will make it nearly impossible.  I've actually thought about trying to hammer out the numbers from different markets to show how a similar/different returns might be if you're buying in an expensive market vs a cheaper one and writing a blog post about it.  Essentially, high rents mean that the absolute dollar value of each of those things are high - real high.  If you were only expecting $800/month in rent, the absolute numbers are not as high (but your rent as a percentage of purchase price is likely higher in a cheaper market), so those investors can essentially afford to budget for such high percentages, because the absolute value will be substantially lower than if you tried to do that on a unit renting for $1500/month.

It's just a thought I've had (and heard, I think); I have not actually sat down and really crunched different markets yet to prove it.

Also, if I was househacking, I would probably handle the lawn/snow and other such things.  While some may advocate that even if you plan on doing that, budget for it when purchasing so you don't take a hit when you move out, I think that might not be strictly necessary.  When you do move out, your income from the additional unit should more than cover any additional expenses caused by your moving out.

@Simcha Davidman

Agree the numbers and percentages I gave may not work for your area (NJ).  That is why I said they are not hard and fast.  In my area (San Antonio) they can vary widely from one side of town to the other.  However, the list of things to look for is good for any market area.  And that is what @Criselda Ilao was asking for.  

Also, you are giving bad advice on the house hacking.  The reason you should always include ALL expenses doing your analysis is to insure the property will have good Cash Flow if you want to grow your business and need to contract everything out.  You may be too busy acquiring new properties to handle the day to day management (we all hope).  Therefore, if you do not include expenses such as Property Management, Lawn Maintenance, Snow Removal, minor maintenance/repair (because you choose to do them yourself) you will adversely affect your Cash Flow if and when you do include them.  Additionally,  if/when you sell the property in the future, the new Investor/Buyer WILL be using them in their analysis.  It would effect your investment returns and profit margins because you did not account for those expenses to start with.

I have only been doing this for a couple of years and still consider myself new to the game.  If you still doubt what I am saying just ask any of many experts here on BP.

@John Leavelle I agree with what you're saying in theory (except for the bad advice part - but you're more than entitled).  Again, it will be very hard for Criselda to get into a house if she runs her numbers too conservatively (maybe that should be the case, one could argue). I also sort of assumed that househacking means trying to minimize the expenses.

I guess it really comes down to whether she's figuring her residence/unit in the income numbers.  If she does, even if she's not really earning it, then I would agree, treat it as a full investment property.  If she does not, though, then is she supposed to find a property that give her investment returns while only including 1/2 or 2/3 of the income?

I am actually having a tough time working the numbers when I analyze properties. Either I'm doing it wrong (not putting all the numbers - expenses, income, etc. correctly) or the properties I analyze are just not great deals. I plan to househack my first property and eventually move out in a year or two and purchase another one. Im unsure as to whether I should add as income what I would pay if I were a tenant or if I should only count the other unit as income and not mine. I tried running numbers both ways but none gives me a good cash flow. I just want to make sure Im analyzing properties correctly.

NJ is tough for the standard house hack in the modern real estate era. Pre-2000's it was a much easier prospect, i.e. - tenant's rent covered property taxes and a good portion of mortgage. The owner's main risk was with finding out if they could or could not deal with the landlord business. Take the town of Palisades Park in Bergen County for example, nice town, great amenities, nice location in relation NYC. They will knock down an existing two family and build a huge brand new one with a for sale price of approximately $500-600k or more with zero intent on marketing it to landlords. More like the house gets sold to one or two well to do families who split the mortgage and taxes on the property.

Comparing property in NJ, especially northern NJ and Texas doesn't line up, they are on two different playing levels. Incomes are way out of skew, as well as the state income tax structure. I have family that moved to Austin from NYC because they kept their NYC salaries when they moved there. Without sacrificing anything along the way, they bought a primary SF ($500k initial purchase price) and then bought two rentals ($140k and $200k) in great neighborhoods. Good luck getting those low prices in A or B neighborhoods in NJ.

@Criselda Ilao Taking note that you live in Edison, you are faced with a similar situation as I described in Palisades Park except in a more affordable town. Unfortunately, most two legal families in good neighborhoods, don't cash flow positive. They exist now either to soften the blow of living in a nice area and then later taking your equity and moving onto something else, or as in the aforementioned Palisades Park example, letting a close knit family live side by side in an affordable fashion.

Please do not take my comments to defeat your efforts or your goals, they are merely my view of this reality, and are meant to inform you of the current real estate market. Basically, since gurus started effectively writing books on using real estate to acquire wealth and even more effectively marketing them, a huge portion of the population read and became inspired by them, think early 2000's and Kiyosaki. Househacks that acted as springboards that soften the blows of living in nicer areas became more the norm in NJ and a lot of people jumped on them. Cash flow essentially took a backseat.

I will close with this, there are several members of this forum who also reside in Middlesex County and they found a lot of success traveling 45-60 minutes west into PA and investing there. All the best, and please keep us posted on your findings.

(732) 707-5559

@Criselda Ilao If the house does not cash flow with you renting out all units, then it's a poor investment.  You could hack like @Robert Soto said, to lower your personal cost of living until you move on to something better, but you would most probably have to sell a losing investment at that point.  Just keep looking.  That's what "they" tell me, so I'm telling you.

Good luck!

@Criselda Ilao apparently my point is getting misunderstood.  When investing in real estate you need to have a good plan before you purchase.  You have 3 parts to your plan:  1.  Have a target property investment strategy going in (Multi Family Buy and Hold).  2.  Have a financial and operating plan (House Hack).  3.  Have an exit strategy (Sell to new Investor and buy a new property).  

You must always go into an investment with your exit strategy in mind.  It works the same no matter what part of the country you invest in. When you purchase the property and it does not Cash Flow (with all units rented) then it probably will not when you sell it.  And you would be loosing money (equity) if you sold at lower price than you paid just to get out of a negative cash flow situation.  The exception being if you could force appreciation (increase below market rents and renovating/upgrades).

So, when analyzing properties include all potential rental income (as if you are not house hacking) and all possible expenses (even if you self manage, do lawn care/snow removal, minor repairs, etc.).  Because, the investor who buys from you down the road will be doing that (Exit Strategy!!!!).

Once you get into that Cash Flowing property then the house hacking comes into play (both positive and negative).  You will not receive income from the unit you occupy.  But, you will save on operating expenses from self management, lawn care/snow removal, or anything else you choose to do yourself.

You say you are having trouble analyzing properties.  Why don't you post some examples and people can then let you know what you are doing right and what you are doing wrong.

John. :)

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