Is this worth investing?

Question

Hi guys,

I can't decide whether to invest in this property or not. We currently have a multi-family that we net $1500/month.. we been saving that profit and using it as down payment to invest in a condo in another part of NJ.. we don't mind low cash flow as we are mostly looking at the investment for appreciation... here are the details:

Price: $300K

Taxes: $10,300/year

HOA: $350/month

Tenants in place: $2650/month... (reliable tenants. Been there for over 10 yrs)

Newish building.. only 15 yrs old

Pros:

- Right across the street from train station that takes you directly to NYC

- Growth potential... new condos, businesses are getting built near the train station

- Great school system

- Desirable market (for now): It's a sellers market.. bidding wars with accepted offers in usually a week

Cons:

-OMG THE FREAKING TAXES.. $10K+ for a 2b/2br. I worry that more $$ will end up paying for taxes and less to equity, so would essentially make this investment not a good deal, even for appreciation purposes.

I consider myself a newborn (or just a fetus) when it comes to RE.. what are other experiences/advices here? Esp. in higher price markets?

Rich Vogel · Answer

@Kibby Twong this house is going to be a loss for you.  What happens when you figure in cap ex vacancy and repairs.  I just did a quick analysis with cap ex vacancy repairs and it puts you at a $376 a month.  Say you sold it in 5 years that is a 18k loss there.  Then you have to pay closing costs when you sold it. Say you sold it for 350k minus 21k for your 6% commission and 18k you made 1k.  There are much better opportunities out there. Maybe if you thought it was going to go up to 450k it would be a good deal but that is essentially gambling.

Judy Parker · Answer

I don't touch condos.  For $300,000 you can purchase an actual house, on land that you will own outright.

Chris Masons · Answer

Hi Kibby,

I invest in nearby Union township. I tend to not use the 1% rule or the 50% rule as absolutes but as guidelines as I tend to mange pretty aggressively...  That being said I would not buy this property unless you know something mitigating factor that we do not know about... From a numbers standpoint I think you can do much better.

best regards,

Chris

David Dachtera · Answer

@Kibby Twong,

All the rest aside, buying for appreciation is speculation - read: gambling - it's not investing.

You may as well roll the dice on Wall Street.

David J Dachtera

Rich Vogel · Answer

@Kibby Twong, I live in Milltown NJ which is near East Brunswick and New Brunswick.  I only have one buy and hold in New Jersey and that is in Somerset.  The rest of my buy and holds are in PA which is about an hour from my house.  Which I am getting very nice returns compared to New Jersey.  I do know people who are doing well by universities in New Jersey.  If you ever need help you can shoot me a pm or we can grab coffee some time.

Kibby Twong · Answer

@Rich Vogel, do you buy and hold in Millburn, NJ? The investment property is actually one town over from Millburn (South Orange).. its across from the train station... I know I can rent the unit for a few hundred more (~2800) which is the going rate for the area there, so there's always that when the tenants move out.

I always wonder how people buy and hold in high cost markets (not that South Orange is that high cost) but most of what i've read here are properties for 75K, and rents out for 900/month (generalizing here).. I wonder how investors do it areas like NYC, LA, SF.. even Millburn...

My only experience is from my dad who has a few buy and hold properties in Manhattan, NYC ... given all the "formulas" and stuff here, it would have been a horrible buy for him. The cashflow is not the best, but he does quite alright when the properties are paid off.

Anyways, just wanted to get public forum opinion. I'm still on the fence. Thanks for all the replies so far.

Russell Gronsky · Answer

If your monthly is 1100, the total from mortgage, taxes and HOA is 27700.

27700/2650 = 10.45 so it takes you ten and a half months to pay just those 3 expenses. What about your insurance? Repairs from wear and tear of things in the house? Damages? Tenants move? Oh, and don't forget, your property taxes will very likely go up over time.

I know you said you don't mind making a small profit but your desire for a good school system seems to be the main driver for this deal, not the numbers. Honestly, some years you'll make a few hundred buck profit on this place and other years, you will be losing anywhere from a few hundred to a few thousand bucks on it. So, as long as you are okay with taking losses on the property regularly in exchange for the schools, then go for it. We all invest based on what is important to us individually.

One final thought: in the early 2000's, people were buying up expensive property for appreciation....then 2008 happened.

Kibby Twong · Answer

We are putting 25% down.. so mortgage is around $1100. There's no getting around the high property taxes.. its all high, esp around that area where the school system is top notch/blue ribbon....oh and b/c it's in NJ...

I thought the 10% rule is taking the annual rent amount, then dividing it by sale price...again, looking at it for long term investing for appreciation so we're ok with not a high cash flow.. as long as its possible, which based on our numbers, it is (25%) down..

We'll think about it some more. Thanks for your input!

Russell Gronsky · Answer

I wouldn't touch this deal. Property taxes alone kill this deal for me. it takes you almost 4 months of rent for the year just to pay off taxes...and that's assuming no repairs or loans. Also, the taxes will go up so this is only the beginning of the pain. Then, add HOA....another $4200!!! Now, you spend 5.5 months worth of rent just getting out from underneath taxes and HOA??!?!!? I don't know how much you have for a down payment on this place but I'm guessing your monthly mortgage will be somewhere in the $1400 - $1800 range. Even taking a good case scenario (1400* 12 = $16,800).

16800+4200+10300 = 31300.

31300/2650 = 11.8

So just handling taxes, HOA and a good case mortgage payment will take you 11.8 months to pay off. If your mortgage payment is anything over $1,400 per month, you're already losing money or as one of my friends says, you're paying the tenant to live in your house.

Oh, that's not including any repairs or upgrades to the place..oh, and don't forget possible assessments by the HOA for some "special project" or "upgrade" for all tenants or the new favorite one....charging everyone in the HOA for hail damage. The tenants miss a payment or move, you're in the negative for cleaning, damage repairs and moving in new tenants.

Third, your rent income is lower than I like. On a $300K price, I like to see at least $3K per month from rental income.

In my opinion, this "deal" is not a deal at all. I would run for the hills and never look back.

Is this worth investing?

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