Hi all -
I've been looking at multi families in the Ironbound section of Newark for the past couple of months, and every time I find something I think will work, when I use the BP calculator to determine if it will cash flow it always comes back negative. I just left a property today that seems like it SHOULD work, but still isn't so I wanted to get everyone's opinion on if I'm doing this right:
Price: $235K (asking is $175, but rolling in $60K worth of renos to mortgage)
Down Payment: $8,225 (3.5% using FHA)
Rent: TOTAL: $2150 (1 BR - $850, 2BR - $1300)
I was accounting for 3% vacancy rate, 10% mgmt fee, and 5% cap ex. I plan on living in the one bedroom unit and renting out the 2BR, so won't be needing mgmt right away, but wanted to budget for that for down the line.
When I run this, it has a negative cash flow of $140/mo. Does this sound right to everyone? Any advice would be appreciated!
Hi @Travis Grossi . That does sound about right. To boot, your COC is negative. If the proforma is correct, and it seems to be (I need 1% per month in rent in my area to get about $100/door) you are spending money, great effort and ongoing headaches with tenants to lose money!
Sometimes buying at ARV can be offset with great terms, but I don't see that either. This is a straight up cash deal at full market value that is all but guaranteed to lose money every month. Throw in the rehab and tenant headaches and I would RUN. Valuations are tough out there and I feel you. Been there many times. Just don't be a motivated buyer!
at the end of the day is this going to cost to less than renting... if you buy an sfr that's total out of pocket.. so for a combo live and rent probably OK if you like the place.
is there upside in rent and values that's another item to consider.
sounds like you live in it for 990 month.. were else can you live for that.. ... that would be the question
I have lived in NJ before and look at properties there too and have looked at a lot of these duplexs both for maybe doing what you are doing and for buying as an investment. I can't give you an answer but I can give you my considerations:
1) I don't know Newark that well so maybe I am off but it seems high for Newark. I have seen much better cities for about the same or less and without the big renovation risk. For that type of renovation I think you may be able to get more. I have also seen a lot of 3 units in Newark that looked from the outside like they were newer construction and were a decent price. This would also maximize your mortgage slot because you would have 3 units in one mortgage not one and this is using FHA so its even better from that perspective. If you want if I come across one again I send it to you.
2) I see some of these 1 bedroom units and 2 bedroom units in places like Bloomfield where I do look. Frankly I only need one bedroom but it scares the heck out of me because if I want to move I still have to find someone to rent an unattractive one bedroom and that tenant probably is lower quality in many cases. At that level you also compete against the buildings with a ton of amenities for the type of buyer (i.e. not a family) where as with a 2 bedroom you can get a family that many times is more stable and may be happier with the layout of a house.
3) You left out taxes. This is a HUGE consideration in NJ because taxes can vary widely and your all-in cost can go up at 50% once you factor those in. @Jay Hinrichs
is definitely right about living cheap being a consideration but once you look at taxes and insurance the cost often will go up dramatically. With the right property you can live very cheap and this is amazing but as I said in point 2 I also like to take into account what happens when I leave (it would be hard to live in a one bedroom forever.
4) Like in all places in NJ much of the play comes down to appreciation, otherwise a good number of NJ properties don't make much sense. I like to to try and figure out what type of appreciation rate I need to make it a good investment (assuming I just rent both units) and see if I am comfortable with that number happening. I can't predict the future for sure but I can get a sense of what I think is reasonable.
Surely the problem is that ARV = Price?
If the units need renovating then head for the 70% ARV rule. Otherwise you are taking a risk for what exactly?
Thank you all for your thoughts! @Jay Hinrichs - I wasn't considering the monthly costs as compared to a rental, but that is an excellent point. I've lived and worked in Newark for the three years, and come 7/1 my current lease ends and I'll have to live somewhere. I currently pay around $900 a month, I was just hoping to reduce monthly costs by house hacking this first deal.
And @Charles Worth I forgot to mention I did include the property's taxes in the calculator ($4,500 in this case), which also probably didn't help the cash flow. But you're right about looking for a 2BR unit -- I think I'll leave the 1BRs behind.
After hearing all this, I started running the numbers on what I would want to see, rather than places I've already seen. I probably should have done this in the beginning of my search, and it seems I should be able to make the numbers work on a 3 family (2/2/1) ranging anywhere from $275K to $350K, if I'm doing them correctly.
And so the search continues. This is all definitely a learning process, but I'm having a ton of fun! I also really believe in the future of Newark, and am excited to be a part of it.
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