Billy Joel is Finally Wrong!

When he sang that famous line, “Who needs a house out in Hackensack,” the pop star’s cynicism made sense. That was 42 years ago, however, and things have changed.

In 2012, Hackensack unanimously adopted the City of Hackensack Downtown Rehabilitation Plan . Their aim was to answer an important question:

How can an older, industrial city attract the investment needed to transform its downtown into a modern, walkable, livable, and sustainable urban environment while preserving its history and heritage?

Now, some 7 years later the latest downtown project is open for leasing. Meridia on Main is located at 240 Main St. and offers 106 units along with a first floor diner that will be marrying classic American decor with a modern, farm-to-table culinary experience.

What does this all mean to the prospective investor? Well, it’s all about the numbers. In the last year median home sales in Hackensack have gone up 8%. In the last 5 years, the average price per square foot jumped from $189 to $229. Those are the kind of numbers that look good for developers, flippers and rental property owners alike.

Who needs a house out in Hackensack? You do. If you are looking for a good place to invest.

What are these mortgage points about?

It’s time to purchase that new house and you are comparing lending options.   You’ve met a couple mortgage brokers and maybe your agent has suggested their in-house person.  There’s a lot of options and formulations to consider.  Each mortgage is like a complicated recipe that would even make the people who constructed multi-level marketing payouts blush.  One fairly common ingredient in loan offerings is points and you need to know if they work for or against you.

To answer that, you first have to understand the difference between the two types of points:

  1. Origination points – This is a fancy term for charging you a fee to process all the paper work.  One “point” is simply, one percent of the loan amount.  So if you are borrowing $300,000, then one point will cost you $3000.  Most often you can negotiate to reduce this amount.
  2. Discount points – This is more commonly seen and the most simple explanation is that it is prepaying part of the interest from the total loan… Sort of.  Many lenders will allow you to negotiate the dollar amount of these back into the loan (so now you’re paying interest on interest).  On the flip side, you can offer to pay more in discount points to reduce your loan interest.  Just how much of a reduction in negotiable, but a good median is to look for one point to take off about 1/4 percent.

So, you might ask, is it worth it to pay discount points and save interest?  If you plan to stay in the home for a long time – like the full 30 years of the mortgage – the common thinking is that it could be good.  In a recent USA Today article, an example was given in which a $250,000 loan at 4.5% interest would cost you $456,000 over 30 years.  Paying 2 discount points ($5000) to lower your rate by 1/2% would lower the total by $26,000 over those 30 years.  Not bad.   What would it take to beat that with the same $5000?

The answer is 5.6%, which yields a return of $25,628.20.  So, sticking it in a CD over and over isn’t going to do it, but using it toward any decent investment real estate or even a mediocre stock portfolio should have you seeing returns better than that.

If you go the Dave Ramsey mutual fund route, you are looking at 12%, or $149,799.61.

The S&P average of 9.14% in the last 10 years yields $68,942.73.

Investing in real estate… Well, that’s going to give you more angles of return, so it’s harder to quantify quickly.

In short, though I think you can see that you might want to look at other options before you go ahead and pay those points.

What is the Real Return on My Investment?

Math is hard.  It’s why the abacus was invented by… Well, we don’t know who invented that.  Fortunately for us, we have risen from the abacus, to the calculator, to the computer, to the handy-dandy investment spreadsheet I’ve made for you.  Before you download it though, we should probably talk about what all the numbers and terms mean.

My caveat here is that this spreadsheet is based on quick a snapshot also known as a “cash on cash” analysis which is designed to let you know if a property is even worth the first gander.  The extra savvy investor is going to extrapolate numbers over all the years he/she holds a given property, taking into account increases in rental income and costs over their holding period.  I do include an index for the increase in resale value, so in that way it’s somewhere between the “cash on cash” method and the “internal rate of return” method.  The crux of the matter is that this is a good decision making tool.  Extrapolating those extra numbers for IRR over time is almost always going to make the return look even better.

Okay.  Enough small print.  Let’s talk turkey.  Once you’ve downloaded the spreadsheet [click here] and opened it, you will see that it’s broken into color coded sections.  I have the costs in red, the income in green, and the final evaluation points in blue.  I’ve entered numbers for a property my investment partners and I looked at (although I entered a fictitious address).  You’ll notice that some of the cells have thicker black borders around them.  These are result cells and you should not be entering any numbers into them.  The rest of the cells are where you plug in your own data.

The magic answers for evaluating any property’s value as an investment are at the end and we’ll cover that after I explain how we get there.  Let’s begin with the first section of costs:

This section outlines the upfront, one time costs associated with purchasing your property.  The items are pretty self explanatory and I’ve even included a link to a closing cost calculator that Bank of America provides.  This section will represent the total amount of money coming out of your pocket before you start earning income on your property, although it is possible that, in purchases that require repair, some of your monthly costs happen before you can earn money back.  In that instance, I just add the amount into the “Other” cell.

Our example here is based on a small townhouse unit with a purchase price of $200,000.  The down payment is a standard 20%.  You’ll find the cell to input the purchase price at the top right of the sheet, after the address.  Next we look at the costs that will be there month to month.

Once again, I put a link in for you to help figure out estimates.  The site is a convenient, free tool for you to use.  I know some people like to wrap the property taxes into the mortgage. You can do that here and just enter $0 for taxes, or change that cell to “Other” and put things like PMI or anything else you might need in there.

My numbers for vacancy, repair, and property management are based on averages that my partners and I have found to be reliable.  Most any property will have some period where it’s vacant before you lease it again and it’s generally reliable to consider 5% of the life of a residential holding to reflect that.  Numbers will vary for office, warehouse, and other type space.

The reserve for repair was set to 5% on this example because it was a newer building and in very good shape.  You might want to bring that number up to 7.5% or even slightly more for older buildings.

Lastly, property management reflects standard rates in the area of this property.

Now, let’s look at the happy part of the worksheet.

This is as simple as it gets.  What’s the total rent?  Are there other income sources?  Like a building on a busy street might generate revenue from a billboard on it’s roof.  Maybe there’s money to be made with extra parking space for a contractor in need of a spot to leave trucks overnight?  Whatever that might be, it goes in “Other.”

One note for you here: If the property you are looking at doesn’t have an existing rental history, the Zillow estimates for property rent values is actually pretty good.  I wouldn’t, for a minute, consider their sale price estimates, but their rent price is a decent guide.

Resale income is where we have to do some divination.  Obviously markets bubble and crash, but over longer periods of time, it is fairly safe to expect certain amounts of growth per year.  In the area of our example, 2% is a good, conservative estimate and that’s what we entered.  I always like to figure on the high side with costs and low side with income.  The other numbers here express how long you will keep the property before selling and what your realtor fees will be for making the sale.

Our last income category is one that newer investors usually know nothing about.

26 USC 167 provides real estate investors with tax breaks for property they own.  I strongly recommend you speak with an accountant about how to best set things up so you take advantage of these benefits in the right way.  For the purposes of our sheet, I have a simple calculation to represent the two factors you’ll need to know for the value in your investment.

“Time Multiplier” is a number based on the tax code and represents how many years you get to depreciate your investment.  For residential holdings, the period is 27.5 years.  Offices, warehouses, et. Al. have different periods.  You can also depreciate some improvements outside your building.  The period for that is much shorter.

The meaning of this number is quite simple.  You just take the price of your property (in our example it’s $200,000) and divide it by the time multiplier.  Here it is $7273, which is how much income you get to take off your tax return.

In the next cell, I have an entry for “Your Tax Bracket.”  This is important for my final, “Mark’s Quick ROI” calculation, because the entire tax benefit doesn’t go in your pocket.  Your actual financial benefit here is that depreciation total multiplied by your tax bracket.

Whew!  Still with me?  Let’s get to the goods.

Here are the four numbers that you will base your decisions on.  The first is the most simple number and is often used in commercial real estate to express the quick overview value of a property.  It is quite simply an expression of the yearly income from the property as a percent of the total purchase cost.  Our example is pretty high at 13% and means that you will have gross earnings of 13% of the total property value in just one year.

The second number, “P&L Ratio” is probably the single most important number that I use.  This number represents the ratio of monthly income over monthly expenses (including the estimated expenses for repairs and vacancy).  If you are studying real estate investing at all and watching/reading interviews with wealthy investors, you will almost always hear them speak about not investing in a property unless it’s at a 1.25.  This means that you want your monthly income to be equal to real & estimated future expenses and then 25% more on top of that.  Any number lower than that and you expose yourself to unnecessary risk, especially if problems occur early in your holding period.

“Cash On Cash” is our next number and it is a good quick comparison tool when considering your investment versus putting cash into other vehicles like stocks.  Here we are looking at the amount of money you took out of your pocket to get the property (all from the “initial costs” section) and your pre-tax income for the first year.  In our example, we can see that we earned 10.84% on that investment.  Pretty darn good.

Lastly we have what I have so humbly dubbed, “Mark’s Quick ROI.”  As I mentioned above, in an extremely granular “IRR” analysis, we would take all of our numbers and do an annualized spreadsheet that shows increases in rent and costs, interest and equity, etc.  I want a quick number, however and this figure takes all the income from the annual rental profits (without increases), the profit from the resale price of the property (divided by years held), and depreciation benefits in real dollars.  When you take that number as a percentage of your initial investment, it begins to show you why 90% of the millionaires in this country got there with real estate.

As always, if you have any questions or comments, please feel free to reach out to me.  I’m always happy to chat!

5 Outside The Box New Home Buyer Tips | Thursday Thought

So you’re in the market for a new abode and you want to make sure you do the right thing.  Maybe it’s your first time and you are overwhelmed with the process (not to mention the advice from every family member and friend who has ever been there before), or maybe you’ve done this before and have a few scars to show for it.  You’ve read all the articles and you know not to do anything that’ll mess up your credit.  You watched hundreds of hours of HGTV and you know exactly what kinds of rehab/updating you want to do.  You’re cautiously optimistic.  I’m not here to give you the same advice you’ve heard umpteen times already, though.  Nope.  I’m here to give you my top five, slightly out of the ordinary tips for the would-be home buyer.

5) Consider a grant. Did you know there are government grants for home buyers?  Especially if you are a first time purchaser.  Most of these programs are going to apply in specific geographical locations or if you meet personal income criteria, but the options are more numerous than you might realize.  This one thing could be an entire article on it’s own, but there is good information just a click away.

4) Know your neighborhood (1). Just driving through when you go to see your potential dream home is not going to give you a full picture.  You might want to try to stop in at a couple different days and times of day/eve to get a feel for the activity on your street.  You don’t want to find out a week after you’ve moved in about the neighbor with the Harley repair side business that wakes up the whole block every weekend morning.  You can only find out so much, of course, but spreading out your visit times gives you the best chance at a true picture.  That said…

3) Know your neighborhood (2).  Something I do for all my buyer clients is to go visit the neighbors of a home they are seriously considering.  No one knows the neighborhood or some more facts about your target purchase quite as well as the neighbors do.  In a recent transaction, I had a neighbor be very forthright with me about the constant termite problem on their block and, although the client didn’t end up making the purchase, had they gotten as far as the inspection process, they would have had been prepared for this.  Another thing that has come up in the past is when a neighbor shared that the whole block was going to the next council meeting to oppose a strip mall that was being put up where the nice barn was at the end of the street.  These are things you might want to know!  Plus, wouldn’t you like to get a feel for the personalities of the people you’ll be living next to for the next part of your life?  Maybe you aren’t the make-friends-with-everyone type that I am, but I’ve always enjoyed living in a home surrounded by neighbors who feel comfortable asking to borrow one another’s lawn tools.  Maybe it’s just me. 🙂

2) Know your neighborhood (3). Another extremely important aspect of your neighborhood has more to do with it’s financial future.  To this end, you may wish to have your agent research how many of the nearby homes are rental properties as opposed to owner occupied ones.  When thinking about the resale value of your home, the overall quality of the surrounding homes and their resulting sale prices have a huge impact on your own home’s value.  The value of your home is based on “comps” – or comparative analysis.  That comparison isn’t based on a home 10 miles away.  It’s based on your neighborhood and owner occupied homes are going to be better cared for (and thus sell at higher values) than rental homes in at least 90% of the cases.  In other words, be in a neighborhood that’s best set up for future value growth.

1) Think like an investor. Some of what I’ve said above (especially in tip #2) applies to this, but I want to take this point even further.  I know when you’re buying a home, it’s emotional and you are picturing living in it and all the fun things you can do there.  It’s one of the most significant decisions of your life.  It’s also a monumental part of your financial health.  To that end, it behooves you to step outside of dreams of living there and step into the mindset of someone who would be buying the house strictly for profit at some point down the road.  When done right, a home can be a great investment.  In fact (as I’ve outlined in a previous article), real estate is one of the few investment vehicles in which your own effort/labor can effect the value of the investment.  I’m not saying you have to buy a complete fixer-upper, but it’s a wise decision to look at potential home purchase and ask yourself: “Will I be able to make this worth more?”  If you can think of a way or two that you’ll be able to add value to the home over the years you’ll be living there, then it’s that much wiser a purchase.  Maybe it’s just some landscaping you’ll do to really make that curb appeal pop.  Maybe it’s just some minor updating and a facelift.  Maybe it’s adding a convenience like central air.  Whatever it is, if you will be able to make your home worth more than just normal inflation will, then you have another positive and well advised reason to make the purchase.

That sums up my outside the box tips for you.  If you’re new to this and looking for some very inside the box tips, I recommend you check out the following links:

25 Tips for First-Time Home Buyers

Investment Showdown! Real Estate vs. The Stock Market | Thursday Thought

Real Estate vs. Stock Market

Round 1.  Fight!

Okay, it’s not a video game, it’s your life savings and you’ll lose a lot more than a wasted pile of quarters in an arcade machine if you lose the fight.  In truth, both investment vehicles are good things, but we’re here to get into the nitty-gritty numbers and see which is better on average.   That said, this article is going to be strictly about those numbers rather than other, functional factors.  I covered most of that last week when I gave you my “Top 8 Reasons to Invest in Real Estate.

Before we launch into our comparison, it’s important to understand how returns in each case are measured.  With the stock market, it’s pretty simple.  You buy stocks (or a group of stocks packaged in a mutual fund) and they either go up or down in value.  If you bought shares of XYZ at $10 per share and it’s $11 per share at the time you want to measure your returns, you gained 10%.  If you have collected dividends, you can add that to the total and figure out the percent return on investment from there.

With a real estate investment, it can be more complicated, depending on if you are holding and renting or just flipping something.  Obviously if it’s a straight sale, you can compare the sale price to the buy price, subtract all the costs incurred during your holding period as well as the transaction, then get your ROI from there.  For example: you bought a home for $140,000, spent $60,000 fixing it, and held it for a year where you paid $4000 in property taxes.  You sold it for $250,000, but paid 5% to realtors so really made $237,500.  In total, your profit works out to $33,500, or 16.4% ROI.

If instead you are holding a property as a rental or commercial lease, then your returns are measured by the annual income from the property vs. the current value of the property.  For a more complete picture, you have to figure in loan costs (“debt service”), but also consider tax benefits.  At then end, you may also profit from a sale and that gain would have to be factored in to the final measurement.

Of course, these quick example scenarios don’t take into account income or gains taxes, but those factors can both be mitigated depending on the nature of the investment vehicle or next investment (1031 exchanges, for real estate come to mind).

Allllll that said, the only way to do a meaningful comparison is to look at the averages in each market over time.  The best you can do when making such decisions is to play the odds and give yourself the best probability of success.  So, the crux of this article comes down to…


  • 20-year average returns in the stock market, as measured by the S&P index, have been approximately 8.6%.
  • Average 20-year returns in commercial real estate have been approximately 9.5%.
  • Residential / mixed-use returns have a 20 year average about 10.6%.
  • Real estate investment trusts (REITS) have a 20 year average of 11.8%.

These averages span the last 20 years and include the big crash in 2008.

In truth, I feel the best strategy is a mixed one.  I like the idea of investments where I can effect the value, as with any standard real estate investment.  I also like the idea of passive income, as with stock index funds or REITS.  Anything in which your money is working for you instead of you trading hours for dollars is a win.

If you’re interested in a more granular look at the numbers, see this article on Investopedia.



Top 8 Reasons You Should be Investing in Real Estate | Thursday Thought

My father has a great saying: “We keep making more people, but there isn’t more land.”  Specifically, population in the world is currently (2017) growing at a rate of around 1.11% per year. The current average population change is estimated at around 80 million per year. *

I’m pretty sure this is the very definition of a positive supply & demand scenario.  If ever there was compelling logic to make an investment, it is a situation in which the demand always goes up and the supply cannot.  Besides this most obvious reason though, there are quite a few other potent factors in play.  So, without further adieu, here are my top eight reasons to become a real estate investor:

8) You can be active or passive and both work.  If you’re the hands-on type of person who likes to  fix and improve things, you can increase the value of your investment with your own sweat equity.  Try making a company you own stocks in operate more efficiently!  If, however you don’t fancy yourself a handy type, then you still grow your investments by letting others handle the work and (if you made well informed investments) you’ll still have good margins.

7) It’s an asset you can actually use for yourself. When’s the last time you had a good night’s sleep in your savings account?  If you are in the midst of some major life changes, you might find yourself in a position where you become a consumer of your own investment for a time.  In other scenarios, I’ve had clients who use part of a rental property they own for their business.  An auto restoration specialist using a detached garage on a two-family rental comes to mind.  You can have a space to conduct your business and own a property that generates income instead of being a fiscal liability.

6) You have 100% control. Although you will likely conduct purchase (and perhaps rental) transactions with a real estate agent, you won’t be needing them every time you collect a rent check.  Unlike stock trades where you are using an agent or investing in business ventures where the operations of the business have nothing to do with you, real estate is an asset where you can drive the ship at all levels.

5) You can add value to the investment. Your IRA is wonderful and so is compound interest, but can you add value to it with a fresh coat of paint and some nice shrubbery?  The amount of rent you can collect can be directly affected by improvements you make to your property as can a resale price when the time comes.

4) Research is much less complicated than other investment vehicles.  Yes, you can dump money into mutual funds with little to no research.  You can buy individual stocks the same way.  Is anyone building millions on dumb luck like that?  Wealthy stock traders do tons of research in ever-changing markets.  Successful angel capital investors do a ton of due diligence on the companies they will be investing in.  With real estate, there is some research needed to succeed, but it is not nearly as complex or as volatile as with just about any other investment.  Yes, the market has had bubbles and bursting of said bubbles, but in the long view values continue to rise.  If purchasing is down, renting is up.  If the rental market is weak, it’s because people are buying again.  Either way, you have a versatile asset that you can rent out or sell.  The amount you can ask for requires no more than a day worth of research into the locale you’re property is in.

3) Appreciation. I just touched on this above.  You can, over time, count on your property to grow in value.  Obviously, if you buy at the height of a rapidly growing market, you may face a period where your asset loses resale value for a time, but it will come back.  In a normal environment, growth will be slow and steady.  We only have a couple hundred years of history to back that up.

2) Depreciation. This one is not often spoken about, but it is my #2 most compelling reason to invest in real estate.  Title 26, U.S. Code 167 sets forth the tax benefits for investment property owners.  In short, you can deduct from your income (not just that earned from your real estate, but even your employment income!) an amount based on the depreciation of your real estate assets.  There are various formulas based on property types and you should consult an accountant, but never miss out on your chance to increase your return on investment by also cutting down on your tax liability with depreciation.  I cannot overstate how powerful this is if done properly.

1)  OPM. When most people think about their retirement, they set up an investment fund through their employer and save $x per month.  It goes into the fund and also grows internally as the interest from the fund goes right back into it and you build quite a nice nest egg.   The key factor here is that all the income going in to build the fund COMES OUT OF YOUR PAYCHECK.  How much better would it be if you only had to put 20% of the money in and a bank would lend you the rest at less than half the interest that it’s earning in the investment vehicle?  If you’re getting a loan at 5% and the investment is making 10%, then you would be smart to borrow every penny they will offer!  I’ll gladly take $1,000,000 at 5% interest to make 10% back on it.  That’s a net gain of $50,000.  Lend me $500,000,000 would ya’? This is exactly what happens with real estate investing.  You don’t buy investment properties as all cash deals unless you might be turning around and selling them very quickly.  If you’re going to hold and rent, and your cap rate (we will discuss this next week) is anything decent, you will earn returns faster than you pay interest on any loan.  Your investment capability will only be limited by how much you can borrow and that amount will increase over time and as your portfolio grows.   There’s no better way to become a multi-millionaire than on the backs of billionaires.

So there you have it: My top 8 reasons to invest in real estate. Next week I am going to compare an IRA with a good avg. return against a real estate portfolio with the same.

As always, if you have any question or comments, feel free to contact me. I always love to hear from you.


Don’t Lose Your Profits To Property Management | Thursday Thought

If you’re like most real estate investors. the early stages of your journey began (or will begin) with properties close by that you can manage and maintain yourself.  You know the local market.  You have good good contractors and repair people for things you can’t do.  You can go collect rent checks yourself.  This is all fine and good, but what about when you want to look into higher cap rate investments in other parts of the country.  Or, perhaps your portfolio of properties is getting too big to manage yourself.  “High class problems,” my most lovely friend would say.  If you really want a significant real estate “empire” though, you are going to need to look into having an expert company take care of at least some of your holdings.  Before you do this, there are some things you most certainly need to keep in mind:

  • The first and most obvious is to check their references.  Don’t be lazy about due diligence here.  Get a list of their clients and call a few.  Check some of their properties and make sure they are well kept.  You might even want to go on a site like Bigger Pockets and see if any of the good folks there have had experience with your prospect.  You can learn a lot at a site like that, especially from someone else’s tale of misfortune.
  • READ THE CONTRACT!  While it’s not the user agreement for iTunes (which takes a CNN article to explain), it’s going to be somewhat complicated and have various cost breakdowns.  I’d even go so far as to suggest having a lawyer review it first.  The main thing you want to have in crystal clear, bullet point detail is the breakdown of fees.  Normally you will be looking at a one time setup fee (usually not much more than $100) and a monthly fee of around 10% of the rental income.  There might also be a one time “leasing fee” if the property management firm is finding you a tenant right from the get go.
  • Give yourself options in the contract when it comes to choosing contractors for repair work.  Some property management companies will have arrangements with contractors to hand them work and might even get kickbacks from it.  In turn, the rates can be quite a bit higher than if another local contractor was used.  Sometimes to the tune of $7000 for a boiler repair that could be done for $350!  Make sure your contract is setup to require more than one estimate and the ability for you to bring in an independent estimate on any work that comes up.  Also make sure it has to be done in a reasonable time frame.
  • Have a clause for a certain amount of check-ins on properties in a given time frame, especially vacant ones.  Your property management firm needs to be diligent about keeping an eye on your investments.
  • Protect yourself in the event either party wants to terminate the contract.  If you live in New Jersey and have properties being managed in Las Vegas and it’s not going well, you don’t want to find out when the poop is hitting the fan that you have a huge early termination fee to pay.  You also don’t want your company to up and quit on you with no recourse.  This is a very important part of the contract.
  • Keep the term as short as you can.  Most companies want one or two years and won’t do month to month.  Try to avoid two years if you can and keep it to one with simple renewal terms.  Like with anything, a contractor looking to get a renewal is more likely to put in the extra effort and thus it’s good to not have that renewal too far in the future.  The length of the contract can also come into play with some other possible fee rates that look at the entire rental income over the term of the contract.

With all this in mind, you may be thinking that you’d rather just stick with a small, local portfolio and manage it yourself.  I understand.  But I also know that I’d rather have 50% return on the efforts of 10,000 backs than 100% return from only own.  If done right, a good property management firm can be a key factor in your path to meaningful financial success in real estate.

Is This The One To Flip? | Thursday Thought

It’s 1:30am and you can’t believe you’re still awake, but you just watched a 12 hour HGTV marathon of house flipping shows.  This is your jam.  You can rehab with the best of ’em and you’re ready to take your share of the real estate fortune pie.

Now, there are a million ebooks and videos on how to make a fortune flipping that will tell you it’s not all as peachy as an HGTV show – yet still profitable if done right.  What I’m here to talk to you about, however is what might be the single most important decision you are going to make if you’re looking at a potential rehab project:

Is this the right property to flip?

Sounds obvious, yet so many people get caught up envisioning a beautiful final product and how inexpensively they can do it with their own sweat equity.  Losing sight of the first step – a zero-emotional analysis of the profitability potential – is an easy trap to fall into.  It’s not voodoo magic figuring it all out of course, but it does take some effort and attention to detail.

  • Step one: Once you’ve found a potential place, drive around the neighborhood and get a feel for the quality and size of the other houses on the block (and perhaps the two nearest blocks), especially the newest ones.  Write down all the addresses.
  • Step two: When you get home, plug each address into a site like Zillow and get the info on it’s last sale date and price. It’ll look like that and is in the upper right area of the text info on the property.  DO NOT go by the Zestimate⌐ to guess values.  They are more often than not too high and you will get burned!*  Looking at all houses in your area that have sold within the last year or maybe two, you can get a feel for exactly what that neighborhood will bear and what quality of home you will need to be in a desirable range there.  Houses that are currently for sale give you useful info as well, in so far as you can look at ones that have been on the market more than 60 or 90 days and know that a house of X quality at Y price doesn’t sell easily in that neighborhood.  Getting all this data can be arduous and it’s certainly more available to a real estate agent, so if you know one (*ahem, CALL ME 201-800-2166), you might one to lean on them for help.
  • Step three: Make sure you’re not going to end up with the most expensive home on the block.  It’s okay if you’re going to fix it up so nice that you think it’s got the best detail work, but you don’t want to try to recoup your investment when you’ve got something that’s bigger and going to go for $100,000 more than anything else in the immediate area.  Invariably, the biggest house on the block will give you much less return on your investment than if that same house was in a more fitting neighborhood and was of median price to the area.

When my partners and I look at a property, I do all this, plus a full workup on the local economy – looking for any pending changes that might effect value.  A Walmart coming in, a major employer closing, etc.  My reports are 6 or 7 pages, and look like the image below:

As you can see on this one, it wasn’t an investment we’d pull the trigger on.  Hopefully this gives you an idea of the amount of attention you need to pay to your ROI potential before making a purchase, though.  From there, it’s onto the other steps that are all on your HGTV mind. =]


* In the Zillow graphic above you see a Zestimate⌐ of $593,312.  I can tell you with a high degree of certainty that that house wouldn’t go for more than $575,000 today, especially given that I live in it and know the neighborhood inside and out.  Another person down the street from me has their home listed at the Zestimate⌐ price, which is a solid $100k too high, given that the interior of the home hasn’t been updated in a couple decades.  As you can imagine, there’s been exactly zero interest in the property and it’s been on the market for a month already.  Get REAL comps if you are going to do serious business.



Recovery Report | Thursday Thought

Ah to have the glory days of 2008 back!  Real estate prices were trending upward in double digits and mortgages were flying off the shelves like Twinkies in Zombieland.  Unfortunately, those loose mortgage practices would also lead to a crash that we’ve slowly been climbing out from under.

So where are we at now?  From a pricing standpoint growth is slow, but steady.  Perhaps it’s more realistic, one might muse.  It’s also very dependent on what area of the country you are looking at.  Places with burgeoning economies are still seeing growth and in some places double digit upward trends have returned.  Areas like Denver, Seattle and San Francisco are doing very well.  Based on data from Trulia, 98% of homes in those markets have surpassed their pre-recession peak.  Other, perhaps more surprising markets to do well have been Oklahoma City and Nashville, Tennessee.

For the markets I work in primarily in Northern New Jersey, growth rates have been modest, but steady.  On the whole, we are seeing prices at about where they stood in and around 2003.  Looking at countywide trends reported by the New Jersey Realtors Association:

  • Bergen County rose from median prices of $508,850 in 2010 to $531,621 in 2015.
  • Passaic county, 2010 prices averaged $340,614 and dipped to $334,274 by 2015.  There has been a 3.2% growth in Passaic County in the last year, however.
  • Morris county rose from $473, 205 in 2010 to $506,946 in 2015.

In most cases, full recovery is expected by 2025 at the latest.  Standard & Poors has a nifty little map based on a study called, “The Case-Shiller Index” which can give you a good visual representation of where your area is at.  I’ve attached the graphic here for your perusal:

Until next time, my friends.  Happy property hunting!

My Money or the Bank’s? | Thursday Thought

In my adventures as a commercial real estate agent and consultant, I frequently come across investors who are new to the game and still haven’t developed a structural procedure for how they go about doing deals.  As such, one of the first common questions is whether or not the investor wants to use their own capital.  Many new investors have put themselves into a position to invest by being conservative, good at saving, wise with credit cards, etc.  Often that mentality couples with a thought process of borrowing as little as possible and paying off any loans as quickly as possible.  It worked to get the investor to where they can afford more than just their own primary residence, so why wouldn’t the same principle apply now?

Here is where I resist the urge to link to the Urban Dictionary’s entry on “OPM.”  More than just a euphemism for “other people’s money,” it’s a solid entrepreneurial precept based on the simplest math.  If it costs you less in interest to borrow than you get on your return on investment, then you should always use OPM.

Okay great, Mark.  How do I know if that’s going to be the case?

A good question, but not as difficult to suss out as one might think.  It really comes down to knowing just two factors:

  1. What is the interest rate on the loan?  That answer isn’t rocket science.  Your lender is going to tell you this is the most certain and simple terms.  Interest rates are still at historic lows (4% is the prime rate at the writing of this article), even though the trend will be upward in the foreseeable future.
  2. What is the rate of return on my real estate investment?  Ahhh, now we have the meat of the question in front of us!  Anyone who has looked into investment real estate has come across an industry term called, “cap rate.”  Quite simply this is a percentage arrived at by dividing the purchase cost of the property into the annual profit it produces.  So as an example, let’s say you buy a building with a couple stores on the first floor and a bunch of apartments above it.  The PROFIT (income after expenses like repairs and maintenance) earned is $120,000 per year and the sale price was $1,000,000.  $120,000 / $1,000,000 =   12%.  It’s a darn good cap rate.

Cap rate is so important in fact, that commercial lenders care far more about this factor than they do about any comparative analysis of the property they are offering the loan for.  Unlike with a residence in which an appraiser comes and looks at the condition of the home and then compares it based on other homes sold in the area; a commercial loan focuses on the income the property produces and if it will be realistic that the borrower will be able to use it to pay the loan back.  This isn’t to say that the building conditions don’t matter at all, but they are not the primary consideration.

Alas, I digress though.  In the most basic of terms, one could look at the items I listed above and apply it to their real world example to make the decision.  If an investor had the $1,000,000 in cash to buy the building outright, yes they would be making 12% return on that investment, but then all of their cash would be tied up in that one investment.

If instead, they got a commercial loan for something in the area of 5%, then they are making a net gain of 7% AND keeping their own money so that it can earn further interest in other investments (be they more real estate or other typical investments like stocks).

Granted, this is an over-simplification because there are costs to acquire the loan (down payment, points, etc.), but when the cap rate on a subject property is so many points in front of a loan interest rate, the devil in the details isn’t big enough to change the efficacy of the concept.  Real estate investing with OPM – when the cap rate makes it feasible – is akin to the power of compound interest in mutual fun investing.  One property can quickly become two, which can become four and so on…

For those who want to see the numbers with loan costs (“debt service”) figured in, the calculation is referred to as “cash on cash.”  A simple calculator for it can be found for free at

I did a quick example based on the numbers I was generalizing above:

  • $1,000,000 purchase cost.
  • $120,000 per year in rental income (although GROSS income, not profit in my calculation)
  • A loan with 5% rate, 30 year amortization period and 20% down payment/cost to acquire.

It looks something like this:

On this particular property, a smart investor would be in no hurry to pay off the loan.  In fact, they would likely keep borrowing against the property if possible.

Every situation is going to be different.  The main thing to keep in mind, though is that it is just about numbers, plain and simple.  If you do the math, you will have your answer.  Don’t just make any assumptions one way or another, even when based on previous experience.