During this week’s episode I answer questions sent in by Lashonne from NYC. She asked:
“I love listening to your podcast while I’m at work. I’m a newbie looking for advice on my first deal. I know that I want it to be a multi family and due to my location (NYC) it would have to be out of state for economic reasons. So, I’m currently looking into NJ. I know it has some of the nations highest taxes, but cash on cash return outweighs that concern.”
My Response: I partially disagree, I believe that if your focus is on discovery of problems and solving of problems that opportunity can be found in any market or market cycle.
She went on to add:
“Here is where I need your expertise. I see so many investors purchasing NJ duplexes/triplexes for about $250k +, putting about $50-75k (or more if it’s a complete gut) into it, then renting out each unit for about $1500. Refinance and repeat (BRRR). Is it wise to have 5 or more homes with such high mortgages? They told me that their end game is not to hold on to those properties for the length of the mortgage, but to keep them for a few years and eventually sell them to have enough capital to purchase apartment buildings. My concern with this is having 5 mortgages at $300k a piece! Even if tenants are paying isn’t that too much? Or maybe I’m overly concerned and because of their exit strategy it works.”
That rarely happens in the real world, this is because they are overpaying in the first place, thus have little to no equity remaining. Hoping the market will build them equity without any input from them as the owner is a slippery slope unless you have a big bank roll backing you. That said, its critical to have the properties quickly stabilized and performing in order to realize that appreciation that because the appreciation in a multi family is very closely tied to the income it generates.
She also said:
Another school of thought is to purchase duplexes for $100k (not THE most desirable neighborhoods, but okay and definitely not war zones.) The cash flow is not as high as the option above but it still makes a decent amount.
This statement kinda sounds like you might be willing to “settle” for what is perceived to be the low hanging fruit. I assure you that this is not the low hanging fruit you may be looking for. Appreciation and cash flow both tie to location and value, that said, avoid anything that could be viewed by the majority as undesirable.
Above is a brief excerpt of what I covered in the episode itself. If you need help getting on stuck, please book time on my calendar at http://CashFlowGuys.com/AskTyler or visit my website and click on the “Ask Tyler” button on my homepage.