Tuesday, July 17th, 2012

Real Estate Investor Update – Income Property

After scouring a few submarkets for quality investment property, I came up with a conclusion that has been in my business concepts for awhile in the past.  It doesn’t matter what market it’s in.  It’s about the numbers and the mitigating / offsetting factors of risk.  For instance, I looked at 2 buildings today.  One building was in the West Bergen section of Jersey City.  Decent area, convenient, and affordable.  Based on the income / expense numbers, I was able to determine that the property was offered at a 9.2% Capitalization Rate (Cap Rate).

The second property I looked at was a comparable building in Hoboken on Monroe Street.  Great area, super convenient, reputable tenant class, but a bit pricey.  Based on the numbers, this building offered a 5.4% Cap Rate.  Why the difference?  Well first, Hoboken is in a different class geographically.  Hoboken is the anchor of the Gold Coast and historically commands higher rents, higher quality everything, and sellers who base their asking prices on that.

The connection between buyers and sellers is different in each submarket.  The building in Jersey City has a market value of about 8-9% Cap Rate.  The building in Hoboken has a market value of around a 6% Cap Rate at most.  If you are looking to get a 8-9% Cap Rate in Hoboken, you will have a severe disconnect from sellers.  It just won’t happen.   Knowledge in the submarkets and how each area is local in nature is the first thing you should take into account.

So getting back to offsetting my risk as mentioned in the first paragraph…… Do you take a 9.2% Cap Rate in West Bergen Jersey City, or do you take a 5.4% Cap Rate in Hoboken.  Well Hoboken has an overall better Occupancy Rate than West Bergen JC.  Evictions are also far greater in West Bergen JC.  Just because you have a higher Cap Rate, doesn’t mean that will stay consistent.  It could, and in fact very well may improve.  But the risk is in the historic statistics of renter performance.  Hoboken has a far better eviction history and is arguably in one of the best NY Metro markets around.  If you are going with the lower Cap Rate in Hoboken, you are likely hedging your investment on long term potential.  If you are a believer in history, it is Hoboken that has greater value improvements than West Bergen JC so the speculative investor could do better in Hoboken if you are ok with the lower Cap Rate, ROI, whatever you want to call it.

If you go with the higher Cap Rate in West Bergen JC, if for some reason the area deteriorates for whatever reason, value may not go up, but at least you have a good positive cash flow.  Some investors are fundamentally old-school.  That is 0% Speculative, and all Cash Flow driven.  Put yourself in between, and you could find yourself in a lucrative situation.

There has been a lot of ink on rental properties.  They are HOT with a capital H.  Rental rates are increasing like crazy and vacancy rates are dropping like its hot.

If you are looking to learn more about investing in Commercial or Multi-unit buildings, give me a call.  We are one of Northern NJ’s leading real estate investment specialists.  We represent you so that you can get the best deal and the greatest peace of mind.  Call me, Scott Allan, at 877-688-7582 or e-mail me here.  Make an appointment and stop by our office in Hoboken next to the PATH station.  Happy Investing!




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