Hello All,
I’m looking to purchase and rent out a SFH in the central/northern NJ area, within 30 minutes of NYC. In the few months that I have been looking I have come across exactly 0 properties on the MLS that could meet the 2% rule that is discussed often in this forums. The houses I’ve looked at are going for 200k-300k, and there’s no way I’m going to get more than 3k for rent.
If anyone invests in this area, please share your experiences/advice. Thanks!
I don’t have any experience in this market, but we do a lot of SFH rentals. The 2% rule, among others, are meant to give you a cursory look at the probability of the deal working – it should not be used as the sole, or primary metric for justifying the deal.
Once you start looking at a few deals in the price range you like, underwrite them to see if the numbers make sense for you to invest. You’ll notice that areas with high tax and high HOA can kill a deal really quickly. The more you underwrite, the more you’ll start to get a feel of the geographic areas that have a strong rent in proportion to the property value (and ideally low ownership expenses like taxes and HOA), and those are the areas that you need to attack. Have your broker set you up with public hotsheets if they can, that way any time a deal is posted in a submarket or neighborhood that you like, you’re all over it.
It’s important to remember two things though… First, you should be working backwards here. Look at a property and determine what you think you can rent it for, then work backwards to determine what you’re able to purchase the property for to get your desired return, if you’re close to list price then submit an offer! Second, not all rentals should be weighed equally. What I mean is that there are different value plays… Say your market cap is 9%, there are going to be some deals that are the “junk bonds” type of rental, where it’s a low property value, but maybe it’s a 12%+ cap. These kind of deals are going to have more attractive cash flow, but the quality of tenants are usually going to be lower, and the property may not appreciate proportionately with the market. There will be other deals that may be a 6% cap, but maybe there’s data to suggest that there is huge potential appreciation in the property because it’s newer or because its a developing area, etc… These deals may not cash flow as well, but there could be more value on the back end for you. You need to figure out YOUR investment criteria, not just looking for properties to throw into the “2% rule” bucket. Once you’ve got that figured out, just keep diligently searching for a deal and you’ll find one.
Good Luck!
I invest and have several rentals in the South Jersey area. The 2% rule should be a guide, not an absolute qualifier. That being said, in six years of investing I have found exactly 0 properties on the MLS that make sense as an investment of any type, although I do admit that I have a market area and my own personal criterion that may limit my choices. Buying direct from owners is the only way I have found to get properties that have any reasonable returns, and all of those properties needed significant repairs before being able to rent. However, due to the pre-rental rehabbing I also have significant equity well over and above the associated rehab costs and although rents are always limited by market forces, the rents reflect the ARV, resulting in a higher Cash On Cash return as well as a higher overall rate of return.
As Investrix mentioned, high taxes and HOA fees will kill your cash flow so you have to buy cheap enough to make it worth your while. NJ is tough. True “deals” are few and far between, at least in my experience, but it can be done.
Those 2% deals are rarely ever on the MLS in a place where we have lots of land and affordable housing, like Texas, actually - so do not be suprised if you do not see them on the MLS there. The best deals I have found are via direct mail. I am sure you can find them there … but you just need to hunt like crazy and stay with the lower income and middle income (blue collar established areas, not fancy/newer areas) homes and you’ll have the best results.
We’re sort of spoiled here in MS because we can actually find 2% deals here listed on the MLS. Most of our deals have come from the MLS. I’m thankful we don’t have to do a lot of marketing type things beyond just advertising the rentals. The price range vs rent you listed is the type of stuff that Realtors will often list as “cash flowing” but it’s way too low IMO. You’ve received solid advice from all of the others here so far. You have to work backwards to figure out where you need to be on a deal to make it worthwhile. jmd_forest has said before how rare it is to find true deals in his area. Some areas are just more difficult than others. I’ve lived in places where rentals were very difficult to make work because many of the properties for rent in the area were from owners who were stuck with their houses after they moved away and just trying to get something out of them…thus keeping market rent down vs purchase price.
The only way to get good deals is grease the palms of a real estate agent then you will get good deals before they hit the MLS. 90% of buyers are so cheap they will not pay a real estate agent to find them good deals. We pay one real estate agent $300 per week to send the good deals our way before they hit the MLS and then we used that same Realtor to closed the deal and Realtor get their commission also.
I wanted to thank everyone for their input. I’m glad to hear that I’m just looking in the wrong place.
Working backwards makes sense. What kind of cash flow were you guys looking for when you first started out? The most lucrative property I’ve come across (on the MLS) would bring in $1500/month after P&I. It needs a lot of work though.
NJ,
Since you’re here and have read about others’ investing experiences and strategies, you’re ahead of where I was when I started. I didn’t know about REIclub until several months after we purchased our first property. I wasn’t aiming for any certain level of monthly cash flow. I just knew we had to get it cheap enough where we could pay for the mortgage, taxes, insurance, utilities, and have extra left over for repairs. I basically just used common sense to have an idea of where I wanted to be with it.
How many units is that property you mentioned? There’s a lot more that you need to know about it beyond what the mortgage payment is vs. rent.
A lot of investors want to used the 2% rule. We used common sense on what will make us a profit.
NJ, You need to look at cash flow after ALL expenses, not just P&I. In NJ taxes can run $1000/month or more and insurance can be $100/month before other expenses such as maintenance, repairs, legal, accounting, and a big killer … vacancy.