Essex County NJ Cap Rates

3 Replies

Happy Monday BP!

     I'm currently looking for my first investment property in Essex county and I'm curious if anyone has properties in either Montclair, Bloomfield, West Orange, etc and wouldn't mind sharing.  I came upon a property I'm currently analyzing that looks to be a 7.7% cap and think it might be good for the area but wanted to bounce it off of other experienced investors in the area.  Also, yes I know Essex varies A LOT from the Oranges to mega-mansions in Glen Ridge but I'm looking for the "typical" rental property.  Any info would be beneficial as I begin my journey in buy and hold.  FYI 7.7% was with it fully occupied at rent now, although I plan to live in a unit for a little while and "house hack."

Cheers, 

Ryan

Hey @Ryan Donohue --

What size is the property you're looking at? Generally speaking, 1-4 unit buildings will be valued based more so on comps than on the "income cap" approach.

Having said that, a true 7.7% cap rate -- assuming that's based on conservative underwriting -- sounds reasonable if you're talking about one of the better areas in Essex County.

Another thing to keep in mind is that even within an area, cap rates will fluctuate. If you a 6-unit apartment building next to a 200-unit apartment building next to a warehouse, the cap rate for each property will likely vary despite no discernible difference in location. The 200-unit building is generally going to have a lower cap rate than the 6-unit and the warehouse.

Happy to take a look at your numbers if you'd like another opinion -- feel free to PM me.

Best,

Ryan

It Varies a LOT. 2 things I'd look at:

1. Is the CAP Rate a true cap rate ? Have you priced in maintenance, insurance, Water/Sewer,etc. properly. Water/Sewer are high (as in most of NJ) and often insurance quoted on the property is not what you will pay (rental property insurance stinks here as well). These can kill your Cap rate, especially on smaller properties without many units. How Stable is your Cap Rate. A 9% Cap Rate in Newark will not be good (at least for me). In many areas where you can find this, the likelihood of tenants not paying, eviction preceeding/lawyer cost, damage, hassle, etc. will mean that on paper what looks like a 9% return may turn out to be closer to 2% or a money loser.

2. As Ben Leybovich tells you, you make money long term in appreciation but Cap Flow is great as well. Are you buying in an area that will have good appreciation.  I used to look only for Cap Rate but have really tightened down to make sure I look at appreciation as well. A corollary to this is that areas that are more stable and likely to grow may have lower cap rates but will have higher rent appreciation so in doing a long-term analysis, even cap rate wise, the area may come out ahead.

All this being said, I HATE low cap rates and Hate buying in areas that may be stagnant. You have to be very creative. What we try to do is buy in growing areas where typically cap rates aren't great (5%) but we get higher eventual cap rates by buying rehabs or vacant properties and using force appreciation to bring out cap rates to somewhere between 8-12%. The downside is you have to mostly buy these for cash (or with partners if you want) and wait 8-12 months to refinance out and its a lot of work. 

Any detailed questions, just feel free to PM me and will be happy to review the details of the deal with you.

Promotion
Guaranteed Rate
Guaranteed Rate is a top mortgage lender
Save $1,290 on your next home – no lender fee*
Get special perks like $1,290 in lender fee savings when you buy a second home with Guaranteed Rate.
Apply Now

Depending on the area id look for better than 7.7 although thats not too bad. You have massive headaches in those areas i dont get out of bed unless i can make over 10% on something. But again that applies to the tougher areas and the areas you mentioned arent very tough. If its on the borders or Newark or Irvington and such id like to be higher than 7.7.