Decided to focus on investing in Philadelphia

[Annwar Matani]

Hi everyone

I have been researching markets and I had mentioned in my previous post I was interested in investing in the mid west. I live in Northern NJ and as I mentioned the barrier of entry for me in NJ is too high. However after speaking with my husband (who is totally on board and supportive) I feel it would be better to pick a market in my "backyard". That "backyard" I was looking into is Philadelphia. I am only 1.5 hours away and I want to be hands on- my strategy is to scale quickly so I am looking to BRRR. My first out of state rental would be "safer" buying turnkey however I won't be able to scale quickly. Anyway if you are an investor in Philly I would love to connect. Trying to establish my team so any recommendations for realtors, contractors, lenders, etc will be appreciated!

[Sudhir N.]

I have been operating in Philly since 2018 and it's a market that has seen no rent or property appreciation whatsoever. But property assessments have ballooned recently. Specifically for multifamily properties. The supply of new units is overwhelming and demand is just not there. I am hands on managing remotely and only due to the low interest rates locked in during the pandemic and tax abatement I am making some money. Prop taxes could quadruple once abatement ends. Even if you try to sell in a few years with 4-5 years of abatement left, there won't be any appreciation. As someone said earlier, show me the math and I will advice accordingly. 

[Stuart Udis]

@Sudhir N. Saying the city of Philadelphia has experienced no rent or property appreciation since 2018 is a very broad statement. I would have to disagree. Particularly with the blanket view of the city since all neighborhoods haven't functioned the same over the course of the past 6 years. Many have appreciated considerably (both in value as well as rental rates) @Sudhir N. what neighborhoods have you invested in? 

Furthermore while some neighborhoods currently have a glut of inventory, its not the case city wide. All you have to do is look at the city zoning maps to understand why this is the case. Do you believe it is a coincidence the majority of housing coming on line is in the 19123/19125 zip codes? These are zip codes with some of the most permissive zoning. Where do developers/investors swarm? To areas where the path of least resistance exists. Why has it become more difficult to lease section 8 housing in Philadelphia ? There are considerably more investors buying and renovating low barrier housing in Philadelphia competing for the same tenants. It's supply and demand. 

Let's use Brewerytown 10 years ago as a case study. After years of speculation that the neighborhood would turn the corner to no avail the transformation began. Do you know why? A zoning bill remapped considerable sections of the neighborhood RM1 which made new development suddenly pencil and in came the developers. First small multis and then ground up single family homes. 

I've personally enjoyed success in Northwest Philadelphia, particularly Mount Airy. The zoning is less permissive but the neighborhood has become increasingly popular to both renters and buyers. @Sudhir N. Using your dates for context in 2018 I wouldn't have been able to build $550,000 condos in the neighborhood but the existing housing stock continued to appreciate and reached a point where it finally made sense to build ground up condos at that price point. Others built townhome and single family homes  as well over the past few. Now I am preparing to break ground on $700K condos and $1M+ houses. Again, this was not possible in 2018 but is now because the housing stock appreciated. 

 Another winning recipe is identifying an underserved market or consumer and develop housing for that underserved need. If done successfully,   you won't be competing with the over supply dilemna many investors currently face. For illustration purposes,  I built my most recent wave of 1400-1500 SF 2 bedroom + home office/smaller bedroom condos in Mount Airy intending to sell them but missed the market with the rate increases and opted to rent instead of sell. I ultimately realized there was very little housing inventory in the neighborhood geared towards families that wanted to rent and I essentially created a new market with $3,000 rentals which has been successful and I am now looking to replicate. Now this was not an investment thesis I conceived from start. Instead, I stumbled into the strategy by accident but I believe it helps paint the picture that you can be successful if you are not merely looking to replicate the housing that everyone else in the city is offering. Again, supply and demand.

Lastly, anyone who relied on the tax abatement taxes in their operating expense analysis erred in their underwriting. Many investors overpaid over the last few years relying on these figures as it greatly impacted the cap rate/cash flow analysis utilized. Many also overpaid merely by being blinded by low interest rates. 

[Travis Biziorek]

Hey Annwar, just stopping in to say congrats on picking a market. That's a huge step, really!

And even better you can stay so close to home for your first investments. 1.5 hours isn't bad, and if you need to make that drive for a day or even grab a cheap hotel for a night or two that's pretty nice.

Best of luck. Look for some local meetups and FB groups for the Philly area.

[Sheldon Alex]

That's great you've narrowed your focus into Philadelphia, PA. When going to those networking events in that area, put your name out there and talk to as many investors, attorneys, wholesalers, and agents as possible. Let them know not only what you're looking for, but what value you can bring to the table as well. That will make you truly stand out. 

And if you're looking for lenders who can fund your deals, let's connect. I'm more than happy to help you. 

Sheldon 

[Sebastian Bennett]

@Greg Kasmer Have you had much success with DIG? From what I've heard it largely consists of a bunch of unrealistic investors who try to do subto, seller finance and other creative deals and everyone knows a guy who knows a guy who knows a guy..... but nobody is the guy if you get what I am saying. It has me on the fence on whether or not to join.

[Sudhir N.]

Hi Stuart - My investments (primarily multifamily dwellings) are just outside of Temple's student housing zone, near Girard. I don't get the student population at all. My tenants are professionals for the most part. Yet, I have seen absolutely no rent or property appreciation. In fact my average rent/unit is exactly what it was 5 years ago. Philly has seen no meaningful population growth in the last decade or so. In fact the population has only declined in the last few years. It's not a Miami or Austin or what Seattle once was by any stretch of imagination. There is a never ending supply of new construction units as well. Often it takes one desperate investor/ owner to drop the rent by a few hundred $ to get the ripple effect going. Property assessments are out of whack. Tradesmen charge as if it is the most expensive city in the world. My investment goals are modest (say, 9-10% IRR over a 7 yr period) and I am convinced Philly will not generate that. I am very data driven and I simply don't see Philly as an attractive destination unless you are -- local, hands on, DIY, don't have prop mgmt expenses, don't pay leasing commissions, get preferred rates from lenders, know a guy who does handyman work, etc. There could be a very few pockets like you describe, but that's like less than 10% of the city. I have 7 years of data from multiple properties and pore over a ton of new listings literally every day and I don't see a pathway to rental investing success in Philly.

[Geoffrey Paugam]

Where you located!? I’m in West Chester, looking too! Not in the city though, unless it’s Germantown, but yea Pottstown, Norristown, Allentown, Coatesville

[Eric Greenberg]

Quote from @Sudhir N.:

Hi Stuart - My investments (primarily multifamily dwellings) are just outside of Temple's student housing zone, near Girard.

This seems pretty spot on for certain locations in Philly, specifically where you are talking. That said there is alot of new development happening specifically around broad and Girard but again that area to me is still a dead zone and not an area I would buy in. 

We have seen quite alot of appreciation in the Fishtown/Olde & East Kensington /Northern Liberties areas in the last few years but its really hard to make things pencil now without finding a great deal and/or something that needs a good deal of work. 

[Lu Kang]

Quote from @Sudhir N.:

Hi Stuart - My investments (primarily multifamily dwellings) are just outside of Temple's student housing zone, near Girard. I don't get the student population at all. My tenants are professionals for the most part. Yet, I have seen absolutely no rent or property appreciation. In fact my average rent/unit is exactly what it was 5 years ago. Philly has seen no meaningful population growth in the last decade or so. In fact the population has only declined in the last few years. It's not a Miami or Austin or what Seattle once was by any stretch of imagination. There is a never ending supply of new construction units as well. Often it takes one desperate investor/ owner to drop the rent by a few hundred $ to get the ripple effect going. Property assessments are out of whack. Tradesmen charge as if it is the most expensive city in the world. My investment goals are modest (say, 9-10% IRR over a 7 yr period) and I am convinced Philly will not generate that. I am very data driven and I simply don't see Philly as an attractive destination unless you are -- local, hands on, DIY, don't have prop mgmt expenses, don't pay leasing commissions, get preferred rates from lenders, know a guy who does handyman work, etc. There could be a very few pockets like you describe, but that's like less than 10% of the city. I have 7 years of data from multiple properties and pore over a ton of new listings literally every day and I don't see a pathway to rental investing success in Philly.

 I actually looked at quite a few of these around temple. Also curious based on the rent rolls, but as you stated, when new the rents were high but as your multi gets older the rents drop due to more competition. Those really made more sense for someone who could be more local and then find own tenants, cause college students / young professionals seem to turnover more quickly. 

If you are remote, tenant turnover is a killer. When I was starting in 2010's, Philly had the advantage vs the suburbs due to the lower property tax vs the suburb tax. But now the taxes are also higher as without good schools, you don't get the super appreciation vs having a suburban house.