I often have discussions with my clients regarding when they should sell their investment properties in Hoboken and Jersey City. They are hearing: “It’s a seller’s market. It’s time to sell!” or, “It’s becoming a buyer’s Market. It’s time to sell”. It’s a hard decision to make based on a Real Estate agent’s feeling of the market without the hard facts. The short-long answer is that selling your investment shouldn’t be based on a scripted cold-call from a Real Estate agent, it’s all based on calculation.
Rule Of Thumb ~ “If the cap rate is below what you can earn in a risk-free 10-year Treasury bond, you should consider selling because you’re not being adequately compensated for the risk you are taking.”
I have a client who has four investment properties in Hoboken and Jersey City. We’ve had multiple conversations on his portfolio and his perspective was off regarding his Return On Investment (ROI). He purchased a condo for investment in 2010 for $549,000. His rental rate was consistently $3,000 per month, his HOA $300 per month and taxes were $7,000 annually at the time of purchase. His cap rate (4.6%) stuck with him for these past eight years. Think of your cap rate as your net rental yield. The Capitalization Rate is calculated as Net Operating Income / Value of Property. NOI is calculated by subtracting all expenses from gross rental income.
He was under the impression that he was still earning a 4.6% cap rate on his investment. I informed him that he was off and that his cap rate was only 2.4%; over the past eight years the condo’s value had increased to $850,000 with his HOA and taxes increasing to $499 per month and $9,388 annually. In today’s market, his cap rate was below the interest rate of a 10 year treasury bond which is currently at 2.97%
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Further discussion on the explosion of development in the area gave him perhaps a false perspective in value. After all, major developers are investing significant capital in building over 45,000 new condos in Jersey City and 1,440 new condos in Hoboken. To him, the development boom in Jersey City increased the value of his properties; and for the most part he’s correct. His condo has earned over $350,000 in equity over the past 8 years however this new development brings major competition for him. His most recent rent cycle took him 105 days to find a tenant and he had to concede to pay the brokers fee to get the tenant signed. Additionally, we reviewed sales in his building over the past two years and noticed that 61% of sales went below asking price in 2017, where as the year prior only 27% of the sales went below asking. Bidding wars in the building had stopped and sale prices were trending downward.
Most investors today don’t have a solid understanding of where their cap rate is, they are just banking that the value of their investment will continuously increase over time. However, unlike a risk free treasury bill, you can loose value from your principle investment if the market shifts. In essence, there are solid indicators that can inform you when earned equity could be lost as well as when your investment isn’t appreciating in tandum with other areas of a booming market.
With an understanding of today’s valuation of his condo and the massive competition in the rental market, his decision was to sell his investment and use a 1031 Exchange to re-invest in a new development in the Heights.
Realize that owning a rental home is not just an investment, it’s a business that will provide for your child’s education or your retirement. Unlike stocks, bonds, and mutual funds that can be sold quickly, it may take months to unload a house even in a strong market and if prices decline, you may lose a chunk of principal for good.
You can’t expect to sit back and let the money flow in. Whether you have one property or 10, this is a business and to be successful, you must view it as such.
What are your options?
Feel free to reach out to me to start having regular conversations about your investment property. Weigh your options on how your long-term investment strategy will work in a growing yet competitive market. Finally, develop a solid exit plan when you feel the time is right.
If you have any questions or want to discuss strategies, do not hesitate to reach out to me.
Rich Cronin – firstname.lastname@example.org (201) 566-6049