I have always been a data analytics person. Studying data not only tells you what has happened in the past but it helps you predict what will happen in the future, that is if you know what to look for. Two years ago, I wrote an article about the Hoboken and Jersey City Real Estate landscape and predicted that landlords would be selling their investments in the near future. The approval of 45,000 new condos in Jersey City alone placed the basic laws of supply and demand right into the laps of local landlords. Well, the data is in and landlords are selling their assets at record speed as predicted.
The data speaks for itself
Three years ago, Hoboken’s real estate market was very active; 1,024 condos sold with 17% (169) of those sales belonging to landlords. Within the past year, investment properties rose to 44% of overall sales (327). The question is, “Why are landlords selling now?”
A reduction in inventory creates a Seller’s Market:
The nation has seen an overall reduction of homes available for sale and the Hoboken Real Estate market is no different. When there is a strong economy and low unemployment, people tend to stay put. From May ’15 – May ’16, Hoboken sold 1,024 condos. However, within the last year that number dropped by 30%, reducing the available properties for sale to 735. When you reduce the supply of homes that are for sale, the demand and value inevitably increases and landlords are taking advantage of a sellers-market.
With an increase in competition concessions will follow
With 9,000 new apartment and condo units under construction in Jersey City and 37,000 more on the way, developers are offering 1 to 3 months free rent and waiving the brokers fee to get tenants into their new buildings. The local landlord is clearly feeling that pinch. In year May’15 – May’16, landlords paid the brokers fee 96 times to get their condo occupied, in the past year that increased to 324. This statistic was interesting to me as when landlords were faced with a loss of revenue in a sellers-market, they sold their asset. With this current development boom, this trend will undoubtedly change the landscape in the rental market.
The increase of property tax
Property taxes in Jersey City have seen a significant increase these past few months. While new developments are receiving lucrative 20 year-long tax abatements, individual landlords are seeing property taxes virtually double. As Jersey City goes through its highest property tax adjustment in over a decade, Hoboken’s six-year re-valuation cycle is right around the corner. This adjustment is on everyone’s mind and it has become the primary discussion I have with investors.
Capitalization Rates are dropping
Think of your cap rate as your net rental yield on your investment. The Capitalization Rate is calculated as Net Operating Income / Value of Property. NOI is calculated by subtracting all expenses from gross rental income. When investing in Real Estate, consider this Rule of Thumb in investing:
“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.”.
Basically, your cap rate is your primary indicator of how to calculate income for your investment. And unlike a Treasury bond where the principle remains the same as you earn interest, your Real Estate investment is very much at risk of losing its earned equity if property sales start to drop in value.
Being a Real Estate investor in Hoboken and Jersey City can be a challenging task especially if you don’t have the data to help you make decisions. It can also be a powerful way to earn income when you have the right decision making tools in your hand. The concept of “Buy Low / Sell High” is completely lost when your agent has a feeling that the “Time is right” but can’t articulate the reasons why. Or worse, they are simply reading from a script.
The investor community that I represent receives quarterly investment reports on their portfolio showing individual cap rates, recent sales in their buildings and an overall picture of what is happening in the market. Your decisions are made as part of a team with the right data in hand. While for some, the decision to sell their investments can become painfully obvious, other investments often deserve several more years of playing the market.
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