Is it possible to get a good cap rate in New Jersey?

Question

I'm super new to real estate investing so please go easy on me :)

My wife and I went around some open houses for duplex units today in the northern New Jersey area along the PATH train line (Harrison, Newark, East Newark, Jersey City). We came across one that was really fabulous and wonderful and we strongly considered maybe getting an FHA loan to buy it, but before doing so, I sat down to crunch the numbers.

Turns out, the property taxes in New Jersey is really high... for this one particular property, the pro forma annual taxes in the listing was $16k. Assuming I could rent out one side of the duplex at a monthly rent of $2500, the property taxes would eat into the gross income pretty heavily, and after considering maintenance costs and debt service, it was just clearly a bad deal for us. I worry that this is going to become a recurring story for us as we look around New Jersey.

How are other NJ investors dealing with this? Have all the good deals in the area evaporated? My wife and I are still pretty new at this so maybe we're just not good at finding deals that make sense yet.

Account Closed · Answer

@Christopher Cordero

Hi Chris!

Yes property taxes in Nj are some of the highest in the nation and it eats away at the rental income. The good news is the appreciation of real estate in Nj has gone up significantly especially in Jersey city where in the past year it has been up over 10%.

Realistically with buying a multi family in Nj in Bergen/Hudson/Essex counties where you live in one unit and rent out the rest- you will almost always still have to pay a portion of the mortgage/taxes/insurance even with the rental income but it is still far better than renting for long -term wealth.

I hope this answers your question and feel free to message me!

Russell Brazil · Answer

There is no such thing as a good or bad cap rate. The cap rate is a reflection of the risk that the market perceives in the asset. Higher cap rates typically indicate a higher risk asset with limited rent growth, limited appreciation, and perhaps a high risk tenant base. A low cap rate typically indicates a low risk asset with good appreciation, good rent growth and a low risk tenant base.

Jason Clarke · Answer

Hi Chris. Welcome! Buying in NJ is very tough particularly given price points typically aren't justified in light of the commanded rent & prop taxes. David brings up a good point on finding value add properties (i.e. fixer uppers), which may make the numbers better. Just be careful about estimating the costs. If there any bank-owned auction properties in your desired area, that might also be an option for you.

Scott Wolf · Answer

@Christopher Cordero congrats on doing the analysis!

In addition to what everyone here has said, you can not use Cap Rate as an effective measure for an owner occupied property. Especially for a duplex, you must value it as beating the rental market, or if you're not beating the rental market where your living, then understand you're building equity in something, and having someone else help you build that equity.

Corby Goade · Answer

You can find a good deal anywhere at any time. The key is to set buying criteria that help you accomplish your long term goals and not waiver.

Also, I'd not recommend using cap rates to determine your returns on residential properties (4 or fewer units). Cap rates are based on NOI and used for commercial properties, they are valued in a completely different way than residential properties and this is not likely to give you a universal understanding of the property you are buying or the possible risk and returns that it may provide.

Good luck!

Gerald Boone · Answer

Hello Chris,

I'm a newbie also and I am having the same issue as I would like to start investing in those same areas. I was born and raised in Brooklyn New York but recently moved out to Central NJ. I would like to Invest in North Jersey because I feel that due to the gentrification in places like Brooklyn that more people would look at Northern NJ as a place to move to and therefore increase the demand for rents in that area even more.

I recently purchased my first property at the Sheriff auction in Trenton, Mercer County NJ. I would not live in Trenton but it is a good place to invest in buy and holds because rents in New Jersey are some of the highest in the country.

Rick Stein · Answer

If you are considering "house hacking", that is, living in one side and renting out the other, you are still having your tenant pay a portion of your expenses. It can make the difference between being able to purchase the property or not.

David Lichtenstadter · Answer

@cristopher croado on the MLS you will rarely don’t a deal this days that the numbers make sense excep if it’s a fixer upper and you are will to hustle abit.

Is it possible to get a good cap rate in New Jersey?

Is it possible to get a good cap rate in New Jersey?

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