In this episode, Cynthia Meyer and Veronica Woods tackle questions a NY or NJ resident has when considering real estate investing next door in PA.
In this episode of the Rental Property Café™ Video Podcast they cover:
“...if you're looking for small multifamily, the Philadelphia area itself has the largest inventory of small multifamily, so you may want to start there.” - Cynthia Meyer
“Don't go with the eyes of Jersey City and look at a property outside of Philly and say, ‘Oh, it's so cheap!’ and overbid. The numbers aren't going to work because the rents are only going to budge but so far.” - Veronica Woods
About the Rental Property Café™:
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
☕ See more financial planning guidance for real estate investors from Cynthia Meyer on the Real Life Planning blog: https://reallifeplanning.com/blog
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Connect with Veronica Woods:
- Veronica Woods on YouTube
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Transcript of Episode 20
[00:00:08] So you live in New York or New Jersey and you want to invest in Pennsylvania real estate; our neighbors right next door. This is the topic of episode 20, our 20th episode of the Rental Property Cafe™. I'm here with my co-host, Veronica Woods. I'm Cynthia Meyer with Real Life Planning.
[00:00:29] And I'm Veronica Woods with Daniel Woods Real Estate.
[00:00:32] And today on the Rental Property Cafe™, Veronica and I are digging into being a New York or New Jersey resident and investing in Philadelphia; her home area where she lives and works. I'm really excited to talk about this today because I get this question all the time from clients and other people that I know who are thinking about investing in the state next door.
[00:00:56] Veronica, you've lived in both places. What is different about the New York metro area and the Philadelphia area?
[00:01:03] Yeah, interesting. I lived in Brooklyn for a few years, so I'm a former New Yorker and a New Jersey person. I lived in Jersey for longer, but I called the New York metro area in my home for long enough that I say I'm a quasi New Yorker living in Philadelphia now and I would say it's more similarities than differences. The biggest difference is obviously price. So as someone searching or wanting to ramp up their real estate investing career, the Philadelphia metro, extended metro, it's definitely much more affordable than the New York area.
[00:01:40] (What is the biggest difference between an entry level home between the NY and Philadelphia metro areas? ) A single family average price in Philadelphia is like $240,000 ish. So if I say numbers to people in New York and throw out numbers, and then they're gasping, like really? What is that a shack? No.
[00:01:56] A down payment in New York City area.
[00:01:58] Actually, a decent house. It's more like a starter home. But that's the biggest difference. But in terms of older housing stock and kind of styles of homes, there are a lot of similarities which makes it natural for folks living up the Turnpike to look at stuff down here in Philadelphia.
[00:02:17] Yeah. That's fascinating. I hear in my local area in central New Jersey, in Somerset County, a starter home is about half a million dollars for just a little, little bungalow. It's amazing that it's actually cheaper to rent a starter home here than it is to buy one.
[00:02:34] Is that true in your area?
[00:02:36] Actually, I don't have the stats in front of me, but they- right now, with the inflation and the trends that are going on in the economy- the line toward renting to versus buying is really relatively close or it is almost cheaper for people to rent now in Philadelphia, which is unheard of. So it's just based on where we are in the economy. It is actually cheaper. We can share some stats about the different cities around this area. There was a study I saw in the local paper about that because that's something just with the economy that they're really watching as far as housing affordability and where that line is.
[00:03:16] So it makes a difference as a real estate investor, and we have higher rates in terms of mortgage money than we've had in the past 10 years, and making the numbers work on an individual property as a rental property owner becomes more and more important, right? You have to really pay attention to running those numbers before you even bid on something to know if it's going to be a profitable rental.
[00:03:40] What I tell New Yorkers who are looking in Philadelphia, that still holds true- even though the number is smaller in terms of what that price of the starter home, you don't want to come down to this market and overbid just because it looks so much cheaper. That is a takeaway for someone who's a New York/ New Jersey person looking in this area. You still have to fundamentally evaluate what is the fair value of the property that you're looking at.
[00:04:07] Don't go with the eyes of Jersey City and look at a property outside of Philly and say, "Oh, it's so cheap!" And overbid. The numbers aren't going to work because the rents are only going to budge, but so far.
[00:04:20] So, Pennsylvania- a huge state. If you're watching or listening and this is not your area of the country, my little state of New Jersey and Veronica's former home is this tiny little slice that takes about two and a half hours to drive from end to end, right? But it's very densely populated- you know in the whole area surrounding New York City.
[00:04:40] But then in a relatively quick drive or a train ride, you can be in an hour or two hours, you can be a New York City area resident and get to interesting rental property markets in Pennsylvania. What areas do you want to focus on in terms of telling us what's within driving distance we should be looking at?
[00:05:01] I think it's a lot of opportunity, and let's call it southeastern Pennsylvania. And so in Southeastern Pennsylvania is made up of kind of the Philadelphia metro, which it's the Philadelphia County and the surrounding four counties; it's generally known as the Philadelphia metro.
[00:05:22] And then further west in Berks County, there's Reading. And then north of Montgomery County is part of Lehigh County, where Allentown is. Allentown's really the smallest out of the three. We were just talking before we jumped on that you could argue that the lines are blurring between what's the Allentown metro and what's the Philadelphia metro as some of the outer suburbs, northern most suburbs of Philadelphia have really blending the lines.
[00:05:56] So there's housing construction an infill basically that both out from Philly and in from Reading in Lehigh Valley area.
[00:06:05] Yeah, so if you can imagine, what was maybe 50 years ago, a rural, more rural area. So there's been- that's where there was a lot of vacant land, so newer construction- townhouse development.
[00:06:17] And then as the kind of middle area develops, people can work/ live in upper Montgomery County work in Allentown, or they could commute to Philadelphia. And so sometimes- it's really around the economy is really driving. It's not really the real estate driving the story. It's really around where businesses are located and people looking for cheaper options to live. As industry is growing, they're not always commuting into Philadelphia. They're commuting in the greater Philadelphia area, which is continuing to expand.
[00:06:52] And interestingly, in my husband's former office before he went work optional, he had a colleague who moved from Chatham, New Jersey, to the rural area around Easton, Pennsylvania, which is just over the border. In part, I think because they wanted a little bit more land, but also in part because it was a more tax favorable location, the colleague would just jump on I-78 and would be at work in Summit in an hour.
[00:07:17] Yeah, I think just in terms of- we were talking about investors, but just- homeowners who are just looking for not necessarily having to live right next to their job. There are definitely a lot of people living in the Philadelphia metro area, hopping on the train and going to New York every day.
[00:07:36] So that's quite frequent.
[00:07:38] How does it compare in terms of total expenses? We talked about the actual price to get in is generally lower- what else would be cheaper or more expensive in terms of rental property expenses?
[00:07:52] (How are property taxes different between the NY and Philadephia area markets?) I can't get into the detail about each specific town because there are actually some variations. I could talk more about Philadelphia because I know that better. So the taxes are much lower in Philadelphia County than New Jersey for a whole state. So...
[00:08:07] It does not surprise me.
[00:08:09] Let's say a three-bedroom house. People may be complaining about taxes of a thousand dollars.
[00:08:15] A thousand dollars?
[00:08:16] Yeah. So that's the dramatic difference.
[00:08:18] So what would that in New Jersey that might be depending on the price of the house, maybe $8 to $15,000?
[00:08:24] Yeah. So, in general, even in the immediate suburbs, maybe $5 or $6,000 is considered a higher taxable property. But generally, taxes are lower.
[00:08:36] I would say generally the cost of construction or repair- general repair/ maintenance costs- if I compare notes with my friends who have properties in northern New Jersey, what it takes for a handyman to come out to do stuff- so it's generally those costs will be a little lower as well.
[00:08:54] In terms of potential tenants, would you say that the Philadelphia area is growing, and expanding, particularly in the young professional area? Where's there the most opportunity for rents to be going up because there's high demand?
[00:09:08] The story of the Philadelphia area is being growth in the life sciences and biotech.
[00:09:15] So a lot of those companies are expanding and we're known for being a medical and education area with the I don't know, 20 universities in the area? So there's a lot of debate on what can we do to keep those newly minted college graduates locally. And so that's always a story around how can we do better at that. Overall, I would say there's not a huge population growth story in Philadelphia.
[00:09:46] Just from the stats as far as population in this country, Philadelphia for a long time, was the fifth largest populated city in the country, and it's slipped to sixth. So just by that nature, I wouldn't say it's a fast-growing population, but I think there are a lot of diverse businesses which kind of really makes us a stable market. If you want to talk about Austin, Phoenix, it's like a high growth demand market. It's a good stable market and there's still room for growth in terms of attracting industry to the area.
[00:10:22] So if I were a New Jersey investor, and I was thinking about getting into the Greater Philadelphia area, for example, for the first time, let's talk through some of the questions that we might discuss, right? And talk about it from the point of view of that Jersey investor. So the first thing that you and I talk about all the time is, are you a buy and hold investor? Buy and sell investor? Or flipper, I guess, would be another way to talk about it.
[00:10:51] What should the Jersey or New York City person that's looking in Pennsylvania for the first time how should they think about location in the context of those questions?
[00:11:02] I would answer that question by just stating- we're talking about the New Jersey/ New York people specifically, but you're investing from a distance. So that's kind of like the underlying thing to your question. It's really hard to do flips from a distance because it's so project driven. People are making a lot of money from flips in Philadelphia. If you look at some articles in the past, it has been one of the top flipping metros in the country.
[00:11:31] However, if you're not local, to be able to manage that project hands-on, it's very difficult. If you have a busy, full-time job and you don't want to be a full-time investor or kind of hunker down here in Philadelphia to manage a six-month rehab project, then you probably need to be doing buy and hold that means rental properties.
[00:11:53] Yeah. That makes so much sense. And as a buy-and-hold investor, somebody looking to rent out long-term or maybe midterm, right? Are you going to be hands-on or hands-off, right? So I think a lot of people might ask themselves, "Hey, I'm an hour away, or I'm two hours away. Maybe I should manage my own doors." How should somebody be thinking about it in terms of a property manager? No property manager?
[00:12:18] Yeah, I think some of the municipalities here have made a decision for you in terms of some require a local contact, So, if that's the case with the town, then you know that you need to at least have a local contact to help you.
[00:12:33] But in practicality, if you're more than 30- 45 minutes away, it's really difficult to do a good job managing your property. So if you're considering investing in the southeast Pennsylvania area, you'll need a property manager and you should start looking for that person early on in the process and that's a pretty broad area if we show a map. You were talking about, New Jersey is small in terms of drivability; it's definitely like probably two hours from the bottom of Delaware County up to Allentown could be two hours and now to Reading could be two hours. And maybe where you can find a good partner and team is where you start. That's part of how you decide.
[00:13:19] If we get into like, how do you pick a metro? How easy it is for you to find a team? There's more of everything in Philadelphia I would say in terms of there's more volume of sales, there's more probably real estate professionals, so you probably have more to choose from, but that should be part of the process.
[00:13:38] If I were this person, say, living in Brooklyn or Manhattan, maybe Jersey City, and I'm thinking, "Okay, I'm ready to get started in real estate, but I'm going to go outside of the New York City metro area and into Pennsylvania."
[00:13:54] What's the first thing that they should do assuming they know they're a buy-and-hold investor and they want to be, say, hands-on?
[00:14:02] I think one thing is just to narrow the scope of the properties in terms of do you want to buy a multi-family or do you want to definitely want to buy a single family?
[00:14:12] If you want to buy a multi-family, I would lean towards Philadelphia because there's just more stuff to buy. There are just more multi-families for sale; definitely want to duplex, triplex. I'm talking about a small multi-family. I'm not talking the apartment. But if that's what you really want to buy, then there's a lot more of that in Philadelphia.
[00:14:28] So that would automatically zero you in Philadelphia versus Reading or Allentown.
[00:14:34] (Single family or small multi-family?) I really like that idea for the new real estate investor, assuming that they have enough capital and liquidity for down payment and renovation and first year cash reserves for the property. That small multi-family category of either a two to four doors; easy to get a loan, less expensive in the Philly area than in, say, somewhere like Jersey City or Hoboken- and immediate rent diversification. So if you have four doors in a quad, it's unlikely that all of those units are going to be vacant at the same time once you get them rented for the first time. It's just a wonderful way to supercharge the beginning of a real estate investor journey.
[00:15:14] (What about vacation rentals in PA?) Now, if you were leaning toward a short-term rental or vacation rental, then maybe you would think more of the Poconos because that's where there's a pretty seasoned vacation, short-term rental community. Now, that's a niche type of way to build a real estate business.
[00:15:34] I would really want to make sure that I link up with a team that's really expert in that because of what I know and I don't do any business in the Poconos, but there are some communities that don't allow short-term rentals. You really want to make sure you're not wasting time looking online at houses that you'll never really be able to do a short-term rental with because that nuance may not be on the listing, but if you go to the right Realtor®, they could definitely point you in the right direction.
[00:16:04] In the right direction. Yeah. And for somebody who is, again, that New York City area- general area of New York and New Jersey, that is thinking maybe, "Okay, I'd love a vacation property out somewhere where it's green within pretty easy driving distance, but I want to rent it out either to make a profit or to break even."
[00:16:24] Certainly, looking in the Poconos would be a great place to start. There's a lot available, and prices have gone up. That's definitely a part of Pennsylvania that's brewing. One thing I would say about that- take it or leave it to the people that are listening is there's a lot of people going from New York City to the Poconos on a weekend, on a Friday or coming back home on a Sunday.
[00:16:45] So it does take a little bit more time driving along on I-80 than you might expect, even though the mileage is not that far.
[00:16:52] But again, we talked about hands-on versus hands-off. So you may not necessarily be the person who's driving back and forth, and there's probably a whole team that can manage that maintenance part for short-term rentals is different than a different level than a long-term rental. You don't necessarily have to do as much kind of turnover maintenance work. So you would definitely need to have a team to help you with that.
[00:17:20] Yeah. So Veronica, you and I have been talking about this a lot and we have developed a masterclass on this topic for New Jersey and New York investors who are thinking about investing in Pennsylvania.
[00:17:34] We're going to dig into it in a longer webinar with the opportunity for discussion and to ask lots of questions. So we wanted to give you a little teaser about that. Anything that you want to say about our upcoming class to give people a little more details about it?
[00:17:49] Yeah, we'll definitely have the time to dig into more specific numbers on what a multi-family outside of Philadelphia would look like versus Allentown and get into more detail in terms of maybe the differences in the operating income. Just to give you a sense so that you could take the next step and make decisions about where you want to focus because obviously, like I was alluding to- it's a broad area, even just southeastern Pennsylvania and a lot of times people spin their wheels because they need the shortcut kind of doing some of the due diligence. Hopefully, we'll do that in that class.
[00:18:29] Let's recap for those New York and New Jersey investors who are thinking about investing next door in Pennsylvania.
[00:18:36] Point number one is that the biggest difference between investing in the New York City and New Jersey metro area and Pennsylvania one of the biggest differences in price. You can get a lot more for your money in Pennsylvania.
[00:18:48] Point number two, Pennsylvania is a big state. For today's discussion, we've focused on Southeastern Pennsylvania; Philly, Allentown, Reading, Easton, and the whole sort of Lehigh Valley, and we've talked about how those areas are starting to converge on each other in terms of growing in towards each other.
[00:19:07] Third point is that (Should I consider an out-of-state flip?) even though you're only a few hours away from your rentals, this is certainly a situation where it's easier to be a buy-and-hold investor than it is to be a flipper or a buy and sell investor just because of the complexity of project management; flipping. It's hard to do from a distance, even if that distance is only two hours away. So definitely rewards long-term renting.
[00:19:32] The fourth is making a decision about who manages the property. Are you going to be hands-on or hands-off with your doors? And it may be that picking a good team is going to help inform what neighborhood you pick because you've already got some teams in the ground.
[00:19:48] And then finally, we talked about what types of property- if you're looking for small multifamily, the Philadelphia area itself has the largest inventory of small multifamily, so you may want to start there.
[00:20:00] Again, we'd like to invite you to a masterclass that Veronica and I are doing about this topic in particular. We're going to dig into a lot of details about all of these points and have the opportunity to ask questions and learn from us and from each other.
[00:20:16] So, thanks again, Veronica. It's always a delight to talk to you in the Rental Property Cafe™. Any parting words?
[00:20:22] No, just looking forward to talking more about southeast PA.
[00:20:27] All right, great. That's episode number 20.
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