How much does it really cost to invest in NJ ?

How much does it really cost to invest in NJ ?

 

You’ve read the articles, you’ve identified the strategies, and you’ve even heard of the “invest with no money” line which makes you feel empowered to go out right now and start submitting offers, am I right?!

 

Now I won’t say that investing in real estate with no money is hogwash simply because I’ve seen and worked with investors who don’t use any of their own capital – but what I will say is that it’s tougher than most think. Not to mention, it becomes more “expensive” to invest without some of your own capital. Expensive meaning more of profit being chewed up.

 

So how much does it really cost to invest in NJ? The better question is where do you want invest and how much money do you want to invest with?  Are you looking to invest in Hudson county where average price is 425k? Or are you in Atlantic city where median home prices are 121k?  Have 5k to invest with? Or are your pockets deep with 100k in cash to play with ? The scenarios are endless!

 

Instead, for simplicity’s sake, we’ll take a home with a purchase price of 200k, rehab budget of 50k and a ARV of 350k. Then we’ll look at the various options to finance our investment – assuming we’re not paying straight cash.

 

 

Conventional or FHA financing

 

Your basic financing technique – taking out a mortgage. How much is this option? Well, to start, both programs would require a down payment.

 

Conventional  (20% down)     =     $40,000

FHA   (3.5% down)                    =    $7,000

 

This is not including any closing costs which are roughly about 2-5% of the purchase price. This includes but are not limited to any attorney fees, mortgage origination fees, appraisal fees, and prepaid taxes and insurance. While there are opportunities to roll your closing costs into the mortgage via “seller’s concession,” let’s say we had to pay our own closing costs out of pocket. For simplicity, we’ll use 3% so closing costs are estimated at $6,000 for both loans. So far, the cost to close would be:

 

Conventional                     =     $46,000

FHA                                     =    $13,000

 

By now, I’m sure FHA looks attractive with its low down payment option, but what about the rehab cost? Both loans offer different types of renovation loans which allows you to roll in the cost of the rehab into the amount of the mortgage, generally for a slightly higher interest rate. It also depends on the amount needed for renovations. Asking for 50k for renovations requires a more scrutinized mortgage application process than asking for the 20k that a homeowner would usually need to update the kitchen and/or bathroom. The down payment and closing costs on the loan are still the same, just adjusted for the new mortgage amount including the rehab budget. In the case of our 50k rehab budget plus closing costs:

Loan amount =        $250k    (200k purchase + 50k Rehab)

 Conventional  =      $50,000 down payment + $7,500 closing costs =   $57,000

FHA   =                     $8,750 down payment + $7,500 closing costs =   $16,250

 

 

FHA still looks attractive doesn’t it? Yes it does! But holddd onn there partna’!

 

With taking out a mortgage, you’ll be responsible for monthly mortgage payments right? How much is that? A good mortgage calculator I like to use is usmortgagecalculator.org

 

Inputting the figures that we’re working with, the estimated monthly mortgage payments on our home -assuming property taxes are roughly 7k a year and $175 a month for utilities equates to:

 

Conventional       =         $1,844

   FHA                      =         $2,260

 

You’ll notice the conventional loans monthly mortgage payments are about $450 less than FHA’s monthly principle. We now have an idea of what it would cost to purchase our investment property and  keep it alive on a monthly basis. If we’re looking at owning a multifamily from 2-4 units, this is exactly how we can purchase our next rental. Now it’s just making sure that are gross monthly rental income covers that expense and ideally brings you some cash flow as profit.

 

Above 4 units is considered a commercial property and would require commercial financing.

 

In regards to a flip, we can see how much it will cost to obtain the home and start the rehab project. Considering you would be paying your monthly mortgage and utilities to keep the home up and running, these are what’s known as your holding costs.  These are the costs you will incur during the rehab process and would not go away until the property is actually sold. Mind you, with FHA, you need at LEAST a 90 day “seasoning” period before you will be able to sell the property again. Therefore, even If you finish the renovations within 1 month, you would still be responsible for another $4,520 out of pocket before you can even look to sell!

 

Financially, going after a conventional or FHA loan to fund your next investment property may be an option for you. Just remind yourself that the best deals usually require speed and fast closing times. Conventional and FHA financing will always lose to all cash offers 9 out of 10 times. It takes an average of 45 days to obtain a new loan but with cash, you can close in as little as two weeks. That’s why cash will always trump a mortgage  – ugh, I don’t even like to using the word .. Trump.

 

So where can we find the cash to  present better offers to purchase? Everywhere.

 

You can use your own cash if you have it,  pull it out as a HELOC (Home equity line of credit), use hard money, private financing, or a combination of all 4 – just to name a few. For the purpose of this article, we’ll focus on Hard Money. Most people have heard of hard money but can’t seem to recognize how much it would cost, both figuratively and literally. For a recap of the origin of hard money, you can check out my article “4 Ways to Finance your next Investment Property” here!

 

 

Hard Money

 

Hard money loans are notorious for their upfront points (interest charged at the beginning of the loan) and much higher interest rates. These are the costs of gaining access to straight cash. Not to mention hard money lending is ASSET-based lending, therefore, your credit/financial situation is put more on the back-burner as the investment itself will determine whether or not you will receive the funds to complete the transaction. If a hard money lender knows they can make money off of the deal, they will happily lend to you. The more experienced you are, the more willing they will be to lend to you.

 

We’ll take our same purchase price of $200k and rehab budget of $50k and ARV of $350k and apply it to a hard money loan.

 

Although closing costs are calculated a bit differently for hard money, you can expect 2-3 upfront points that HML’s will charge as part of the loan origination fee (closing costs) and don’t be surprised to see 11-14% interest rates – almost triple the FHA or conventional interest rate. HML’s will usually cover 75-95% of the purchase price and 100% of the rehab. In our example we’ll assume the HML will lend 85% of the purchase price, 100% of the rehab, and will charge 2 points and 12% interest. Let’s see how much we will need to invest.

Loan Amount:  $220,000        (85% purchase price + 100% rehab)

15% of purchase price (Lender will provide 85% of purchase price)    =  $30,000

Upfront 2 points (2% of loan amount) = $4,400

Total down payment cost   = $34,400

 

This is to get the transaction started.  You would have come out of pocket $34,400 to get the project started. Now remember with the Conventional or FHA loan, you’re responsible for the monthly mortgage payments. With a Hard Money Loan, you may require to pay a monthly loan payment, but usually Hard Money Lenders will offer an interest only monthly payment option.  What does this look like ?

Interest Rate                              =       12%

Annual interest amount          =    $26,400

Monthly interest payment      =   $2,200

Monthly taxes   ($7k annually)  =  $583

Monthly Utilities                       =  $175

Total Monthly Holding Costs  =  $2,958

 

You’ll quickly see how expensive using a Hard Money Loan is. Yes, while you should take into account how much you’ll need, if you can make a profit, hard money might definitely be the way to go. Thousands of investors choose to use hard money on a consistent basis, but only when the end result is still profit and a good one at that. You can use hard money for both investment strategies whether rehabbing or buying a rental.

 

With a rehab, you’ll just want to make sure your profit far exceeds your original down payment plus your holding costs. This is where you will be able to calculate your ROI based on how much cash was invested. If you’re buying a rental, you can check out my article, “5 Steps to buying your next rental property” here!

 

Private Money 

 

Similar to Hard Money, private money is also a source of straight cash to finance your investments. Private money, however, usually has much less strenuous lending criteria/contingencies. Why? Because anyone with cash can basically claim the role as a private money investor.  These are individuals or groups of individuals who offer their funds for investment decisions. The lending terms are much more favorable, after all, you could talking about partnering a deal with your doctor!

 

If you, yourself had $50k sitting in the bank and knew you wanted to invest it somewhere, you may look to fund a deal. After all, you work 60-70 hours a week and have no time to go searching for deals. You may find it easier to connect with someone who is finding the deals and managing the projects.

 

This is exactly the scenario in which one might choose to invest in real estate with no money or poor credit – combining the strategy of hard money and private money. Taking the example of the hard money down payment of $34,400, this is how much you need to get the transaction started. Let’s say the total project took 3 months from start to finish. That would bring your holding costs to $8,874 which brings your total out of pocket investment of $43,274.

 

Do you know someone who will lend you $43k ?  Do you know two people that would lend $21.5k each?   How about 3 people with $14.3k? Do you see where I’m going with this?

 

Maybe you have 20k and just need the remaining 23k? Whichever the situation, you can mix and match to have your goals achieved.

 

 

Now that you have an idea of how much it will cost, you can now do your own research on properties. The math will always be the same, you’ll just need to toggle based on the variables such as purchase price, taxes, rehab estimate, etc. It’s up to you to find deals and start making offers.  Your investment goals are looking for you!

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