NJ Townhouse Buy and Hold Deal Analysis

17 Replies

Looking at the following townhouse in South Jersey as a potential buy and hold investment:

Purchase Price: $115,000

Rehab: $12,000

ARV: $150,000

Rent: $1,550/mo.

Insurance: $50/mo.

Taxes: $325/mo.

HOA: $70/mo.

Net Operating Income: $1,105/mo.

Financing: $92,000 (or 80% of purchase price at 4.5% over 30 years) = $466/mo.

For the down payment + rehab, I have a HELOC that could fund it. 3.99% variable rate, 15 year amortization. If I used it to fund the whole $35K ($23K down payment + $12K rehab), at a 4.5% rate (I'm not going to assume my HELOC rate will remain at 3.99% throughout the 15 years), that's $268/mo.

NOI minus financing = $371/mo.

This is a B class area...a good location with an average school system.

For the sake of this thread, let's assume the rehab amount, ARV amount, and rent amount are correct.

For you buy and hold investors, would you buy this?  If not, what would need to change for you to buy it?

Hi Harry. I will defer to more seasoned investors on this. However personally, the problem comes in for Buy/Hold investors will be the variable expenses(Vacancy/Repairs/CapEx/Prop.Mgt) that weren't factored. Even at nominal figures across the board and managing the property yourself, it would interfere with cashflow...even negative cashflow in some results. My opinion is the annual taxes are a killer for it being a SFH...but then again I'm in a different market. Therefore, IMHO, I would have passed on this one. Just thoughts. Good luck.

Hi @Jay Dewberry , thanks for your feedback. Agreed that I need to account for vacancy/repairs. In your experience Jay, what % of rent have you allocated/incurred for vacancy and repairs each month? I believe CapEx would be covered by the HOA, but will need to get a copy of their bylaws to confirm. I plan to self-manage so am not including Property Management in my costs. Agree that the taxes are a killer. That's life for us in New Jersey unfortunately.

Different people have different standards, but I am curious to hear if there is a gross margin $ threshold or gross margin % that investors on BP subscribe to.

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So your repairs and capex will be lower because you dont have an exterior to worry about.  I would say a combined 8% vacancies I use 8 % that seems to be a reasonable number here in New Jersey. Property Management is 10%.  The property does not cash flow anymore.

@Harry Metzinger definitely look at the HOA docs.  I just closed on a townhome in PA and the HOA only covers landscaping, trash and snow removal.   When I'm evaluating deals, I use a 3-5% vacancy rate (depending on the area).  Hope that helps.  Good luck.

I have to agree with @Lisa Monnig and @Chris Anderson . I think I was scaling for a house instead of Townhouse. Yes, the Variable numbers will generally be lower for major expenses. However even with lower numbers for general repairs, prop. mgt. (even if you initially plan to self manage) and vacancy, I just don't see it being a great deal as a buy/hold...and definitely check the HOA papers.

Harry,

will you come work for me and manage my properties for free ? always include PM in your numbers, even if you are doing it yourself. HOA will not take care of your CAPEX expenses, they will cover exterior maintenance, not your furnace, hot water heater, stove, refrigerator, dishwasher etc. You will probably cash flow about $150 / month after figuring in those costs.

@Chris Anderson @Lisa Monnig @Jay Dewberry @Patrick Liska

Thank you all for contributing to this thread! Sorry Patrick, between a full-time job, a family, and my real estate pursuits, I can't work for you for free, ha. The way I looked at it was if this property cash flows, say, $200/mo. after everything else (PITI, HOA, CAPEX, repairs/maintenance, and vacancy), self-managing was worth the $200 for x # of hours per month I put into it. Anyway, lesson learned, I will include property management in my #s.

In my initial post, I asked what you would need to change to make the numbers work for you.  Asked another way, what would your all-in number (purchase price + rehab) need to be to buy this property?

Rent: $1,550

Taxes: $325

Insurance: $50

HOA: $70

Repairs: $124 (8%)

CapEx: $124 (8%)

Property Management: $155 (10%)

Vacancy: $62 (4%)

Cash Flow before Financing: $640

Hi @David Carr , I live in Marlton and my focus is in areas within a half hour of my home...parts of Burlington & Camden County. With my access to MLS, I am able to see recent rental comps. I think the property in question could rent for $1,600/mo., but I tend to be conservative in my estimates, so I am sticking w/ $1,550 for purposes of this analysis.

$76,800, that's with a cap rate of 10%

I will buy you lunch, this way managing my properties will not be for free anymore, of course you would have to travel about 4 hours from Marlton into PA.

you just want to include PM in case you do not want to do it anymore and have to hire, then your property will not make any money for you.

Looks like I need to become a long distance investor according to your standards then @Patrick Liska , because $76,800 is not getting it done in my area.  $76,800 all-in means hitting the 2% rule.  Finding a property w/ a monthly rent of 1.5% of purchase price + rehab within a half hour of my town is extremely difficult.  Most in my area would be very happy w/ 1.5%.  I made three offers on the property in question - nowhere near your $76,800 all-in, but also nowhere near the $127,000 all-in in my example above - and found out today that another offer was accepted.  Grrrrreat.

@Harry Metzinger I would not be too worried a/b losing this deal.  $200 take home is not a great return especially with NJ property taxes.  They have always been high and they could rise at a rate that would out pace the increase in rent that you could pass through to you tenants.  

We own homes in NJ (an hour away from us) and b/c of the price and property tax we are beginning to invest elsewhere. I realize it is a risk to be a long distance LL but it may be your best bet for low entry price point and high ROI.

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Hi Harry,

I'm and investor and agent in the marlton/cherry hill/ moorestown area and I deal with quite a few investors regularly. Around here it is difficult to find single family units that have a cap rate of 10%. However, its not impossible if you can find off market deals, grab an REO for cheap, or a short sale way below market value. Also, it may not be necessary or feasible to put a set in stone number on what your investment needs to yield. My clients and I have found deals that make sense for them that aren't at 10% cap rates, but work, for a few reasons. One is that we are buying based on the clients needs. Putting flat numbers on cap rates does help to justify an investment, but it doesn't necessarily capture what the investor is getting out of the deal. If you are comfortable with the cash flow the property is making and you know that it will fit into your longterm goal, then don't dismiss it based on rules of thumb. Another reason is there are pockets within our area that are appreciating steadily in the last few years and some of our investors are making money on that end as well (flipping after a couple years). Make sure you understand your reason behind investing and then tailor your search to meet that "why"

Well, if you are ok with the following caprates then this would have been your price points:

8% - $96,000

7% - $ 109,714

6% - $ 128,000

I always shoot for 10% - doesn't mean you are going to get it, you need to know the area, any lower than the 6% you may as well play the stock market.

Sorry to hear about the other offer, but as mentioned above by Lisa, I wouldn't get discouraged, just keep looking.

@Harry Metzinger  Thats the challenge in NJ.  I've been looking around in central NJ for the past year and have struggled to find something that comes close.  I am primarily looking to stay in A/B neighborhoods with good school districts, and there is not much that works.  I am a bit hesitant banking on property appreciation as the "get out of jail free" card on a low cash flow deal.  Probably time to either change the parameters of my search or start looking in PA/Lehigh Valley areas.

(BTW, this is my 1st post, although I have been following most of the discussions here with great interest!)

@Lisa Monnig Thanks for the feedback.  I know a South Jersey investor who owns some rental properties in Delaware due to the stark differences in taxes.  My wife already thinks I'm a little crazy for targeting properties nearly a half hour from where we live, so I doubt PA or DE investing is in our immediate future, but eventually...maybe...

Hi @Julian Orsuto , thanks for chiming in.  Appreciate your feedback.  While rules of thumb are nice, agree that it may not be wise to totally accept or reject an investment based on them alone.  In this case, the instant equity built into the purchase may justify a lower cap number.  I will email you this afternoon...this is worth a follow up discussion.

@Patrick Liska thanks for the encouragement.

@Saroosh Ahmed congrats on taking the plunge into BP!  Lots of great advice on here.  Don't be afraid to create your own posts.  We all started somewhere.  I'm still in the beginning of my real estate investing journey.  I lived in Franklin Park for a year...that was about 8-10 years ago.  Nice area.  Don't know how taxes are there relative to South Jersey, but if they are similar, I feel your pain!