Newark, NJ Deal Analysis (low income Area)

Multi-Family and Apartment Investing
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Newark, NJ Deal Analysis (low income Area)

Sant S.
Hoboken, NJ · Member since 2013 · 30 posts · 10 votes

Just saw a 12 unit property yesterday in Newark, NJ about an hour outside of NYC via bus & train. The area is a low income area, a little on the rough side. This is my first time considering a property in a low income area, so upon viewing the property I really felt like an outsider. As a matter of fact right when I pulled up to the property I was stared down by all walker-by's and locals. After meeting the property manager/owner I felt slightly more comfortable in the surroundings as he also looked like an outsider. He has been managing the property for 6 yrs (I confirmed this by looking at the public tax records). While showing me the property he collected some rent checks. There is a mix of tenants in the 12 units. (White, Black, & Spanish) No section 8. If I were to move forward with this property I would probably hire a property manager.

See income/expense numbers below.

Purchase price:
595k

Income:
119K

Expenses:
Tax: 9800
W/S: 3600
Electric/Gas: 400
Gas Heat: 4k
Insurance: 4500
Maintenance: 6k
Total: 30k roughly

Net before Debt: 84k

Debt Service: 30k

Cash flow 54k

Can anyone give me their feedback purchasing and managing properties in low income areas? My goal would be to lock in a 20 yr fixed loan and hold the property till the debt is paid off.

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Ankit Duggal
Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes
13y

Sant Sobhraj

It really depends where in Newark you are buying as that is unique market in its own right.

Just a couple points of concern:
Expenses are only 25% of gross income. That ratio feels low.
Key question to ask would be how many times have you had to file notice of eviction to get paid?
If none is section 8 then how long have the tenants been living there and what is the property manager underwriting process.

Ankit

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  • Ankit Duggal
    Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes
    13y

    Sant Sobhraj

    It really depends where in Newark you are buying as that is unique market in its own right.

    Just a couple points of concern:
    Expenses are only 25% of gross income. That ratio feels low.
    Key question to ask would be how many times have you had to file notice of eviction to get paid?
    If none is section 8 then how long have the tenants been living there and what is the property manager underwriting process.

    Ankit

    1Reply
  • Sant S.
    OP
    Hoboken, NJ · Member since 2013 · 30 posts · 10 votes
    13y

    Area of Newark is border line central ward/south ward. About 2 miles away from the UMDNJ campus.

    I agree on the low expense ratio. I have read that a lot of sellers show low expenses when selling their properties.

    About half the units are long term tenants (4 yrs plus) and half are 1-3 year turn overs.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Have the owner produce Schedule E from his tax returns for the past couple of years to see the expenses being claimed for his tax deductions ... 25% is too low. I think if the landlord is paying electric or gas, that the 400 number is too low - and BTW which is that electric or gas, because the next line has 4K for gas. And I suspect that the 4K number might be a bit low depending on square footage and energy efficiency. How is hot water heating handled?

    No mention of things like lawn care, snow removal, trash, legal and accounting fees ...

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    You didn't list rent per unit.

    You say 119,000 gross income so we will take that and divide by 12 units = 9,916.67 per unit per year / 12 = 826.41 a month per unit.

    119,000 x .40 = 47,600 NOI at a 10 cap is 476,000

    595,000 asking is an 8 cap. I do not know your area there but for a rough area an 8 cap doesn't cut it and neither does a 10 cap. You need to be at a 12 to 14 cap to compensate at least in my area to take that on as you can find nice properties in good areas for a 9 to 10 cap.

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  • Ankit Duggal
    Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes
    13y

    Sant Sobhraj You need to be asking for a cap rate closer to 13-14 if you are in the central/south ward.

    Ankit

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  • Ibrahim Hughes
    Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    I totally agree with Ankit Duggal. He knows multifamilies and Newark extremely well. I just want to add that in Newark you have 2 types of neighborhoods with 2 types of tenants:

    1) Neighborhood and tenants are decent enough where they mail in your rent.

    2) Neighborhood and tenant are rough where the landlord has to pick up the check. You were blessed to witness this yesterday. That means the LL is likely collecting rents in person or else he won't get paid if he has to rely on enough professionalism from his tenants for them to mail rents in on time. Rarely happens in rough neighborhoods. As a result, LL may be in eviction court every other month (learn how to use the civil computers downtown to be able to tell). So I would casually find out what percentage of his tenants mail in the rent and which ones he has to come down and pick up the money. I know LL's who spend an entire month running back and forth to a building trying to catch up to this and that tenant just to get the rent. By the time he catches them all it's a new month again. Smh.

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  • Jose Garcia
    Investor · Hampton Roads Va · Member since 2013 · 123 posts · 17 votes
    13y

    Sant Sobhraj i'm looking into Newark myself and the reason why is because I was raised in North Newark and still have plenty of family there. Just like Joel Owens mentioned the cap rate. If you would like to brainstorm I will be more than happy to, just send me a message. Good Luck to you

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  • Ankit Duggal
    Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes
    13y

    Ibrahim S Great points.
    Sant Sobhraj You can also just run a eviction search with a firm like Corelogic to get the eviction records of tenants when you are conducting due diligence on the asset. Or you can use the civil records to see how many times the landlord has been in landlord-tenant court

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