NJ Investment Properties 101, Part 4: Achieving The Right Price

Remember this: You make your profit when you buy a NJ investment property, not when you sell it. Pay to much and you will NEVER recoup as much as you could have had you driven a better bargain!

The NJ rental real estate market is generally tougher on investors who overpay than on homeowners who do the same thing. While a home is an emotional purchase, many times leading to the “I must have it!” offers and bidding wars, most landlords look strictly at the numbers to see if their investment will pay off. If you pay too much for a rental NJ investment property, you should not count on a greater fool to come along later to bail you out of the purchase. Avoiding overpaying can be tough in a hot market. Towards the middle of 2007, purchases of NJ real estate between 1 and 2 miles from the beach were going for a 60% premium over their “inherent” value. In other words, they were selling for much more than the income streams the apartments and condos were generating. This condition has cooled considerably, to make these Monmouth County and Ocean County purchases a wise move for the savvy investor.

Some landlords use formulas, such as not paying more than 6 to 8 times the rents they expect to make in the first year. Other try to estimate what the property could be worth after needed repairs and upgrades are made. Then, not paying more than 70% of that price, less the cost of repairs. Every local real estate market is different, so these formulas may not work in your area.

The key is to make sure your rental income will cover your out-of-pocket costs. That includes the mortgage payments on the property, taxes, insurance, maintenance, repairs, and a vacancy rate averaging at 5%. (If you have 5 units, usually one unit will be empty for 1/4 of a year.  Math: 5 units x 12 months = 60. 60 x .05 = 3.)

The primary goal is to break even with expenses. That way you’ll be able to profit from any price appreciation as well as from tax breaks available to rental properties. Talk to the city housing authority for that!

When crunching the numbers, you should know that their is a big difference between the tax implications of repairs and improvements. You can typically deduct the cost of repairs, such as patching a roof or fixing a leaky pipe, on your tax return for the year in which the repair is made. However if you REPLACE the pipes or roof, that is generally considered an improvement, which means the cost cannot be deducted. Instead it’s added to the amount you paid for the property to determine your tax basis when you go to sell. The higher the basis, the lower your taxable profit. But if you have to wait at least 20 years after making a major improvement to recoup any costs for tax purposes, you may think twice about buying a property that needs a lot of upfront work.

To better estimate your costs, get a thorough inspection before you buy a property. Remember our talk about creating relationships with the right people? Some landlords have a trusted electricians, plumbers, and contractors who they send to any prospective property, promising them that they can do the repair work they find. Others use professional inspectors.

Many landlords say all this work pays off in profitable properties that build their net worth while providing a steady income stream. If this seams like an option you would like to look into, contact me any time and we will discuss your options and the local inventory of investment properties.

To learn more about NJ investment properties, contact Dan Kurland, (732) 233-6969 or dkurland@weichert.com

To check out other articles in the NJ Investment Properties 101 series, click on any of the below links!

NJ Investment Properties 101, Part 1: Know Your Time

NJ Investment Properties 101, Part 2: You ARE Your Network

NJ Investment Properties 101, Part 3: Financing

NJ Investment Properties 101, Part 4: Achieving The Right Price