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PURCHASING INVESTMENT PROPERTY IN LAKEWOOD, NEW JERSEY (PRIVATE HOMES AND CONDOMINIUMS)

11/28/2011

   After writing about commercial real estate for the past three months, the next few articles will deal with the residential investment field.  A great way to start investing in real estate is to purchase a one or two-family home or condominium and then rent the units.  In this fashion, one can start on the trail to property ownership.

   There are some pitfalls to avoid.  These articles will address those pitfalls.  Generally, this type of real estate investment is a great way to begin the quest for personal financial freedom. 

THE PURCHASE
 
   You need to identify your area(s) of interest.  Most investors like some areas and dislike others.  Pick the two or three criteria that matter to you most, and identify two or three locations where you want to look to purchase such investment property.  Your criteria should include; quality of the immediate neighborhood; maximum purchase price; ease of rental; quality of the residents; amount of work the property requires; and many more indicia too numerous to mention here. 

   Your purchase will be made simpler by picking one or two brokers you enjoy dealing with.  The brokers should do a great deal of the leg work for you.  He/she should analyze the transaction at some level; to insure that it matches your criteria.  A broker is useless if he shows you a property that is $50,000 more than your maximum price.  Once you develop your relationship with your brokers, they will come to you with deals that make sense for you and your pocketbook.

RESEARCH

   You need to research comparable sales (“COMPS”) in your designated areas.  Your knowledge of your neighborhoods will insure that you won’t overpay for any property.  Review the comps for the last six months and determine what you will have to pay for the three, four or five-bedroom house, duplex or condo that you are searching for.

   Once you identify a site, you will have to negotiate a contract of sale for the property.  The process of entering into the contract of sale deserves a few articles on its own.  That is not the point of this piece.  All you need to do is google the words “contract” and “house” and you will find most of the information you will need to educate yourself about the contractual process.  The right lawyer is worth his fee, many times over.
 
   Let’s assume you have the contract ready to go.  Your next major concern is arranging financing for the purchase.

FINANCING
 
   We will dedicate another article to deal strictly with the financing issues.  However, we will touch upon some of the essential points you need to consider.

   Securing “investor-owned” financing in this marketplace, at this time, is very difficult.  I spent over a year with a recent client in securing decent financing for a quality property in Flatbush, Brooklyn.  While the financing was not simple for other reasons, the broker indicated that investor financing is difficult today in most, if not all, markets.

   You will have to show the bank that you are a quality credit risk; you have no litigation in your background; your income from the property will be enough to pay a large portion of your holding costs for the property; and that the investment property otherwise meets the bank’s loan criteria.

   The banks are looking for excuses to reject these loans.  Poor credit scores, too much debt, and questionable income are amongst the main reasons banks refuse these loans.

   I strongly urge that you use a qualified broker to secure your investor financing.  Your broker should be able to guide you to the two or three banks that will likely finance your transaction.  There may be dozens of banks active in the neighborhood.  However, only two or three will be tailor-made to fit the elements of your transaction.

SELECTING TENANTS
 
   It is generally a good idea to vet your potential tenants by requiring the following documents:
•    prior year tax return, signed by the tenant;
•    full credit report, including litigation search;
•    last two pay stubs for husband and wife, where applicable; and
     completed tenant application, providing all types of important information.
   If you don’t receive all these documents, you are flirting with trouble.  The likelihood of a tenant becoming a non-paying tenant increases as the credit score goes down.  The likelihood of a problem tenant also increases if you neglect to secure any of the above-referenced documents. 

   I like to see a credit score of at least 650 before renting my apartment to any particular tenant.  Any judgments on the credit search should automatically disqualify the tenant from consideration, unless there is a very strong mitigating factor in the tenant’s favor.

   Any prior litigation involving the tenant should also ordinarily disqualify the tenant from consideration.

   Next week we will return to a more in-depth analysis of these issues.

“SECTION 8” REDUX
 
   A reader responded to the series of articles on Section 8 tenancy.  The reader made the comment that I shouldn’t be so negative regarding Section 8.  Many tenants rely on the Section 8 program for the payment of their rent in Lakewood and my articles could be deemed to be discouraging the landlords from taking Section 8 tenants. 

   Let me first state that I agree with the writer, but only up to a point.  Most of this series of articles was aimed at the commercial sector of multi-family housing.  That is where all the problems seem to occur.  Life for landlords is often made very difficult by NYCHA and it need not be so.

   On the other hand, the one and two-family houses that are predominant in Lakewood, where Section 8 is used, do not necessarily have the same problems.  Much of my analysis does not really apply to the one and two-family home situation.

   I hope this clarifies the scope of our Section 8 series.
 
 
 
 
 

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