Summer Craze of New Jersey Real Estate
As I continue my quest for buying a house in New Jersey, curious things appear before me. A legal 3-family house on the 22nd st of Union City, NJ is one example. Fully rented at $4,650 per month, located in a reasonably convenient place and not seeming too shabby on the photos, it got my attention. It also wasn’t on the market for too long: 12 days before I noticed. I thought: all right, $629,000 is surely too much, and under 2 weeks on the market is relatively low, so let’s check out the property and, if it doesn’t reveal any obvious problems, submit a bid of $575,000 and see what happens.
Alas, this plan was never realized: when my agent got back to me the next day, he told me the owner of the house was about to accept an offer for $689,000 he had just received.
Mortgage calculations: investment property
Let’s do some simple math, shall we. Let’s assume that we want this 3-family house as an investment property. Furthermore, let’s assume that we have a credit score of 760+ which would qualify as for the rate of 4.625% on a 30-year mortgage (one of the best possible as of 7/4/2018). We need to come up with $172,500 for a 25% down payment, and our monthly mortgage payment would be $2,774. With annual taxes of $9,720 ($810 monthly), $210 for home insurance, $75 for the Internet, $100 for electricity and $292 for the other utilities (indicated as $3,500 per year) each month, the Gross Monthly Rent of $4650 leaves but $389 in monthly income, or $4,672 annually.
On the investment of $172,500, that’s 2.71% ROI.
Owner-occupied investment property
- our monthly mortgage payment goes up to $3,514 (we borrowed more money than in the previous scenario)
- we have to pay mortgage insurance now, which is about 0.06% of the amount borrowed monthly, or $393 in this case
- we have to reduce our rent by at least $1,300 because that is what the cheapest unit in that house was rented for
Assuming the utilities expenses remain the same, we now have to pay $2,043 each month for the honor of owning this particular 3-family house in Union City.
Who’s in, folks?
Another housing bubble?
I already hear the skeptics screaming: don’t you know the real estate taxes, interest payments and mortgage insurance are tax-deductible? what about the equity you are building in the house with each monthly payment? and appreciation of that house’s price? not to mention the joy of being a property owner as opposed to a tenant?
I know about all that. The problem is: this doesn’t suffice. And not merely because of the numbers.
Let’s take a step back and ask ourselves: when was the last time that we saw this happen? That a 3-family house in Union City, NJ pulling in $4,650 in Gross Monthly Rent was listed for $629,000 and got the best offer of $689,000 within two weeks? An offer, of which the Gross Monthly Rent is but 0.67%?
You guessed it right: in 2006, 2007 and 2008.
Shortage of inventory, abundance of buyers, competing offers easily exceeding the ask price by 10% … This was the housing bubble, and when it burst a lot of those people found themselves owing 1.5 times more to the bank than their properties were worth.
Is it happening again?
I am not suggesting that we are in a real estate bubble like we were before the recession of 2008-2009, but it is quite clear that we are in a bubble of some sort. With the stock market trading around 24,000 (per the DOW), with unemployment sitting under 3.8%, with corporate tax cuts provided by President Trump, it seems there’s just too many people with enough money (or available credit) to make a bid on the house they want, which drives the prices up, up, up. And, if you think Northern Jersey is bad, take a look at Los Angeles, CA. There, the prices on some types of properties grew by more than 100% in the last couple of years alone.
Unsurprisingly, I passed on that house, but I am still puzzled as to what to do. One of the annoying properties of a bubble is that it can persist for a long time, all while growing. If that becomes the case, the same owner who offered $689,000 for this house could be looking at folks offering him $800,000 for the same house one year down the road, and close to a million a year later…
There’s one thing I’m sure about, though. It’s that I wouldn’t mind considering making a $400,000 offer on that house if around the next Christmas that house comes back to the market with the ask price of $465,000.