An "informed but informal" place to find real estate information
investing - more than a line on a spread sheet
Published Feb 11, 2006 by Judy Marciano | E-mail this post
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The process for purchasing investment property such as a multi family home is different than buying a residential unit to live in. First of all, your realtor can't prepare a contract for any multiple family building that is more than 4 units. The initial offer to purchase contract must be written by an attorney. Attorney review rules don't apply, since the original contract is already written by the attorney directly, what you have instead is a contract negotiation by the lawyers. One of the reasons that the rules in buying a multiple family are so different is that you have tenants.
The rights of tenants are very important in many ways, especially in regard to the NJ multiple dwelling rules which regard safety laws and inspections, referred to as a "green card" which is applicable for places of 3 units and above.In many ways, with today's laws, you become a partner with your tenants. They have legal rights and if you don't live in the building, the tenant has the right to continually renew their lease unless rules and regulations of the lease are broken. And if you buy a place that includes commercial tenants, environmental rules come into effect.
Getting a mortgage & insurance will be more complicated and more expensive. Your closing costs will be higher, ie., appraisal, inspection, insurance, bank and attorney fees. Typically a 30% downpayment is required when its above 4 units. And the interest rates & overall bank charges for obtaining a mortgage will be different than the standard residential rates & charges.
If a place is your own personal residence you can deduct the interest payments against your personal income and taxes but if its not a personal residence you can't deduct it against personal income, only income from the building. But you will get the benefit of depreciation if its an investment property. I suggest you speak to a financial expert to get direction in this area. My accountant who is also a CPA has recently started a blog with some postings regarding real estate, definitely check it out http://www.hobokencpa.blogspot.com/ (his name is Tony Cunningham, and I love his reference under his profile "if your in a jam, call Cunningham").
It used to be that your primary concern in buying investment property was cash flow. In today's market with current prices, this doesn't always exist. The trend in some areas of Hudson County is to find a place that offers the potential of condo conversion. There used to be formulas that dictated what a fair price would be based on the cash flow of the building, todays buyers also look at formulas related to condo conversions.
Some other questions to consider when buying investment properties:
* Is there separate utilities or will you be responsible for the entire building, ie., heat/hotwater
* What type of heat, gas or oil?
* Are the windows in working order so that heat and air conditioning doesn't escape thus increasing your utility bills.
* What type of lease do the tenants have., ie. annual, month to month?
* Are there disabled or elderly tennants in the building?
* How long have the tenants been in the building, do they tend to stay long or do the tenants change frequently?
* How old is the roof?
* Does the building have a green card?
* Is the building subject to rent control (this is dependent upon the rules of each individual city) .
* What is the overall condition of the building, ie. hallways, basement, outside areas both front and back of the building?
You have to be even more aware of the overall condition of a property since you don't share expenses like with a condo. As the owner, you will be responsible for the upkeep and maintenance of the building. In addition to your fixed expenses, you will need some reserves for anything unexpected that may arise.
Be very careful when buying a muti-family dwelling because you are taking on the responsibility to provide one of the essential needs for your tenants, that is, safe and decent housing. You will quickly come to realize that your tenants are much more than a line item of a spread sheet.
About me
- I'm Judy Marciano
- From Hoboken, NJ, United States
- Thanks for checking out my blog. I am a full time licensed NJ real estate agent in Hoboken at Empire Realty Group. As I go thru Hudson County each day, often I stop to take a picture. Feel free to contact me for any real estate assistance at jmarciano@empiregroup.com
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