Knowing When to Sell your Investment Properties
May 30, 2018 | Dwell JC
Ever since the results of the tax revaluation were released earlier this year, I’ve been busy talking to clients about when they should sell their investment properties in Jersey City. They tell me they are being bombarded with calls from Realtors telling them that they have buyers, sell now, it’s a sellers’ market! In addition to being irritating, these calls are not a good rationale for selling property. After all, this is a business decision, so it should be based on the numbers and market data.
“The cap rate can be a useful tool when comparing investment properties or other investments.” Most real estate investors evaluate their real estate investments based on the “cap rate”. This is the net operating income (NOI) divided by the value of the property or:
NOI/Prop Value = Cap Rate
I have a client who has two investment properties in downtown Jersey City, both of which had a >50% increase in real estate taxes. We’ve had multiple conversations regarding her two buildings, which she relies on for income and wanted to know whether to sell and, if so, which one of them to sell.
One of the homes was a two-family, which we determined was worth about $1.1 million by completing a comparative market analysis (CMA). Her rental income was $1,200 and $2,800 per month for a total of $4,000 per month. And the taxes were $16,500 per year. Therefore, her cap rate on this property was 2.9%. Prior to the reval, her cap rate was about 4% which is better, however, she actually believed her cap rate was much higher (20%) because she was using her purchase price as the valuation which was $210,000.
The other home was a three-family that was worth about $1.45 million and had a net operating income of $62,000. This resulted in a cap rate of 4.5%. We also determined her rents were not at market rate so by slowly increasing the rent to market rate her cap rate could be increased to 4.7%. As a result of this analysis, she decided to sell the two-family with a 2.9% cap rate and buy a new investment property in Bergen-Lafayette through a 1031 exchange.
Another misconception is that the wide-spread development throughout Jersey City is increasing property values. Although property values have increased dramatically, this is due to a combination of economic and market factors. While the redevelopment activities in Jersey City magnify these affects, they are also leading to increased competition in the rental market. Developers are investing significant capital in building over 45,000 new rental units in Jersey City. Many of these units come with amenities like shuttle service, gym facilities, daycare facilities, etc. Although we are not yet seeing rents drop, we are seeing the amount of time to find a tenant almost double in some areas.
Please feel free to contact me if you have any questions about current market conditions, the value of your investment properties, or your cap rates. Evaluating the numbers and market conditions is the best way to consider your options, develop a long-term investment strategy, and shift assets when the time is right.
If you have any questions or just want to discuss your options, please do not hesitate to reach out to me.
Tom Gibbons, PMP – firstname.lastname@example.org or 917.593.4836
This report was prepared by Thomas Gibbons, a licensed Real Estate Agent at Warren G Curtin Realty.