Father-Son Investors
Have a Narrow Focus

The property: A two-unit brick building in downtown Burlington, N.J., built between 1910 and 1920. Each unit contains two bedrooms.

The investors: Josh Kahr, 30, and his father, Richard, 66, have spent about five years building a portfolio of small residential properties in Burlington, N.J. The community of about 10,000 located between Trenton and Camden, is near the New Jersey Turnpike and within commuting distance of Philadelphia, Manhattan and Delaware. Though it's inexpensive relative to other parts of New Jersey, the city has seen many residents move away rather than wait for the city government or business investors to revive the downtown, says the younger Mr. Kahr.

The elder Mr. Kahr, a resident of nearby Bucks County, Pa., is a residential real-estate developer. His son, a New York City resident, works on deals with his father and teaches real estate at colleges and at companies as a consultant. Since 1998, the two have bought 19 small residential and mixed-use (retail-residential) buildings, most in downtown Burlington. While buying in only one small, down-at-the-heels city might seem counterintuitive, Josh Kahr says that, with a few safeguards, putting all your eggs in one basket can have positive results.

"That's what most real-estate investors do. They find a junky little town and try to time it right," Mr. Kahr says. "We took advantage of demographic shifting."

Purchase price: $60,000 in 1998.

Amount invested: $22,000. The Kahrs spent about $7,500 on carpeting, landscaping and other cosmetic work; $6,000 on two new gas heaters; $5,000 on kitchen renovations and new appliances, including installation; and $3,500 on an electrical upgrade.

Strategy: Mr. Kahr and his father hold most of their buildings for the long-term and sell only if they need to free up cash for other enterprises. This two-unit brick building was sold in July to fund a fence business.

The Kahrs believe Burlington is making a comeback: It's a stop on a new commuter light-rail system from Trenton to Camden, and a new mayor is intent on rejuvenating the downtown. Meanwhile, the Kahrs are taking advantage of its inexpensive home prices to buy properties, make minor repairs and improvements and fetch low -- but still profitable -- rents.

"The area had great history, great bones and a great location. It's two miles from the [New Jersey] turnpike -- exit 5, to be exact," says Mr. Kahr.

Total profits: $87,000 -- $32,000 from rental income and $55,000 in before-tax profit from the sale of the building for $148,000.

To explain how he calculated the rental profits, Mr. Kahr says that the mortgage, taxes, reserves and maintenance fees on this building totaled $10,300 per year; the units rented for $725 and $830 per month (a total of $1,555), which generated $18,660 per year. The rent minus the costs for the building left an annual profit of $8,360.

To calculate the $55,000 profit from the sale of the property, Mr. Kahr took the $148,000 sale price, subtracted $11,000 in sale-related fees and real-estate commissions, $22,000 for renovations and the original $60,000 purchase price.

Unexpected costs: Mr. Kahr says he and his father had no major surprises because they acted as general contractors, but repairs and renovations on older buildings tend to be more time-consuming than those on modern construction.

1. Focus on one market. The strategy allows the Kahrs to achieve efficiencies. In doing so, they can afford support staff, including a leasing manager and handyman. (Paying employees for hours spent driving between properties in different cities would be cost prohibitive.)

They know the local permitting and zoning codes. A focus on only one municipality's codes reduces the time they need for permit-related due diligence on new acquisitions and helps speed repairs.

They've been able to influence community development and neighborhood improvements. The Kahrs own some mixed-use buildings with residential housing above ground-floor retail space. Recently, they decided against offering a lease to a check-cashing business. Because they own other property on the same street, they effectively protected their block from a down-market tenant.

2. Buy only already-profitable or market-rent buildings. Commercial-mortgage loans for buildings with more than four units always require buyers to demonstrate that the properties they want to buy are already generating profits or market-rate rents. But some investors who buy smaller buildings aren't subject to that scrutiny and buy unprofitable buildings on the assumption that a local market will eventually improve.

This initial-loss strategy is a no-no for buyers who plan to buy multiple properties in an unproven area, the younger Mr. Kahr says. When he and his father began acquiring properties in 1998, it was unclear when Burlington's revitalization would kick in.

"If you want to buy in this kind of town, don't buy on the future; buy on the cash flow," Mr. Kahr says.

3. Be your own general contractor. "We buy buildings that need work," Mr. Kahr says. "The trick is that we repair them cheaply." Had the Kahrs hired others to do the renovations, the costs could have run two or three times higher. While price appreciation helped them turn a profit, the bulk of the gains came from savings on contracting costs.

Mr. Kahr also advises investors not to renovate beyond the bare necessities. Air conditioning, dishwashers and other extras can push rents beyond market rates and hurt revenue. While Mr. Kahr and his father believe personal incomes in Burlington will rise eventually, it doesn't make sense for them to add these luxuries until more residents are willing and able to pay higher rents.

"Now that the town's improving, we're doing more renovations," Mr. Kahr says. "Each little bump up in rent means you need to add a creature comfort."

-- Ms. Hodges is a free-lance writer in Seattle.

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