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As the Northern New Jersey housing market works into its final stages of finding the bottom in many sub-markets, more and more demand for rental units continue to heat up. Challenging home financing requirements, foreclosed / short sale homeowners who are pretty much forced to rent, and preference of lowering personal living expenses are just a few reasons for why people are renting, resulting in lower vacancy rates. As a result, more investors are on the hunt for New Jersey apartment complexes for sale.
Finding the right apartment complex or multi-family dwelling can be tedious but tremendously rewarding. As inflation nears, so do increases in rental rates. Combined with the historically high number of rental demand in today’s market and the dwinding supply of living units, the upside for NJ multifamily is great. These factors are resulting in the perfect storm for real estate investors. NJ Real Estate Guys can provide non-public offerings as well as act as your representative to assist in the entire acquisition and Due Diligence process.
What makes a good multifamily or apartment complex investment. Well, the first thing most investors want to know is “What is my ROI?” or “What is my Capitalization Rate?” Your Capitalization Rate (Cap Rate) is the correlation between Net Operating Income (NOI) and Market Value. Or it can be described as your first year yield. Either way you look at it, the Cap Rate is calculated by taking your NOI and dividing it by your purchase price. Or if you are looking at a specific property, you can calculate it by dividing the NOI by the asking price. In short, the NOI is derived from taking your total Gross Income and subtracting all of your operating expenses, ie.. Taxes, Insurance, payroll, water/sewer, maintenance, management, and about a million other things. A good commercial broker can look at an operating expense statement and determine if it is realistic or not. We provide a hands on analysis and evaluation as a free service to our clients.
It is widely expected that New Jersey rental rates on residential units are going to increase in what could be a substantial amount. We are already seeing this in most of Hudson County, where rental rates have increased anywhere from 3-10% since just last year.
Where do you look for multifamily investments? That depends on what your strategy is, but one determining factor in making a decision is location. Commercial multifamily is broken down into three classes. A, B, and C. Value-Add B and C properties were particularly hit hardest by the credit crisis. Properties with high vacancies, poor management, and deferred maintenance and repairs are considered Value-Add assets. While value-add complexes could make the deal a home run, only cash investors are typically interested in these as financing is near impossible and you will likely be sinking a lot of money into the property during its first year of operation in order to improve occupance and stabilize the property to make it run smoothly. Here is our opinion on the Class designations of multifamily.
Class A properties are well located and your new or newer construction. These will have good infrastructure and good management. Class A commands the highest rents from high quality tenants.
Class B is a little older, but still of decent quality. Often times, investors of Class B assets will buy as a Value-Add play and target these in speculation of returning them to Class A through some renovation such as exterior, facade, and common area improvements.
Class C is your older construction located in less desirable areas that are often in need of some rehab, older technology, etc… As you read the description of Class C, you may think of it as a deterrent. I have found some of my best deals in Class C multifamily. Good management is key.
The good thing about investing in multifamily is that if one of your units go vacant, you still have all of the other units providing income. If you are a single family home investor, if your tenant moves out, so does all of your income until you replace that tenant.
In New Jersey, the upside is what is attractive moreso than the current Cap Rates at what multifamily is currently trading at. In many areas of Northern NJ, this is currently where complexes are trading:
Superior Area: 5-6% Cap Rate
In the middle: 6-7% Cap Rate
Inferior Area: 8-10% Cap Rate
Why such a difference in Cap Rates? Most investors prefer higher yields in higher risk areas, and will accept lower yields in less risky areas. In all areas, the upside is very good considering where the economy is today and where it is expected to be in 3 years. From 2008 to 2009, the average apartment complex saw Cap Rates improve by about 150 bps, or 1.5%, so a complex that was bought performing at a 6% Cap Rate improved to 7.5% in one year. With the correction in the market near a conclusion, we expect those levels to come back in the very near future.
Recent complexes we have looked at have been located in Bloomfield, Montclair, Morristown, Jersey City, Hoboken, Clifton, Nutley, Passaic, East Rutherford, Newark, and Elizabeth. We are seeing a huge increase in inquiries from investors both local, out of town, and internationally.
If you are in the market for multifamily or an apartment complex or would simply like to discuss different options, New Jersey Real Estate Guys has “second to none” experience and a seasoned team of veteran professionals who are invested in this type of asset class personally. We can provide unmatched market knowledge provided with current data, as well as personal experiences to help you in understanding this investment strategy. Please call Scott Allan at 877-688-7582 or e-mail here.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.