Flipping houses is a common way to invest in real estate, and is one that has the potential to be quite lucrative in New Jersey. The state has many metros and older towns with existing housing stock could benefit from renovations and repairs. For folks who know how to add value to a home, this could turn a tidy profit.
However, real estate markets can change and timing can create issues when flipping houses. If you don’t have the cash or finances to quickly turn around and investment, you can quickly miss out on a substantial profit.
2019 New Jersey Housing Market Analysis
Home prices in New Jersey have risen here by 5% in the past year, and should continue to see growth around 4% in the coming year. Economic growth is also good in New Jersey. Unemployment is at a 20-year low of around 4%, and the state grew by about 45,000 jobs in the past year. This growth will continue to upward pressure on real estate.
However, actual home prices can value drastically across the state. While the statewide average is around $326,000, homes in expensive metros like Palisades Park go well over $600,000. In rural locations home values can be much lower, like Bridgeton, which currently sees listings at around $100,000.
To fully understand what is happening in these local markets, get the latest inventory reports, and to uncover investment opportunities you should always partner with an experienced, local real estate agent. They will know the local market inside and out, and be able to walk you every step of the way through the transaction.
How to Tell if a New Jersey Property is a Good Investment
After considering the overall economic and housing market trends of New Jersey, and of more specific regions, you can begin to focus on what makes a specific property a good investment to flip. This can depend on several factors.
First, local markets with lots of inventory, and listings on the market for a long time, are going to take more time to flip. You will need to be sure you are prepared for the costs of holding a property until it is finally sold.
However, even in the slowest of markets there are things that can be done to make an investment property sell faster. Start by looking for homes that are significantly priced below recent sales in the neighborhood. You will likely need to do a quick comparative market analysis to get a good idea of what these properties are.
Once you understand how to identify these properties you can start to evaluate neighborhoods and identify which ones are ripe for investment. The golden rule of house flipping is finding a good neighborhood. It doesn’t always have to be the best in the city, but it needs to be desirable and attracting buyers. Quality schools are always a good indicator.
Another key skill in this process is being able to quickly identify how much you will need to spend on improvements and renovations, and how long they will take. Learn to know what type of work adds the most value and how likely it is to attract buyers. For example, basic energy efficient upgrades can be highly desirable to buyers in a state with harsh winters and hot summers like New Jersey.
Lastly, finding a trusted contractor or repairman can be difficult if you are new to the area, local zoning code and regulations vary from city to city, and local market trends are constantly shifting. Working with an agent, or contractor, you trust can help you be prepared for problems that may arise.
How to Turn a Profit When Flipping a New Jersey House
Making a good profit flipping homes can still be quite lucrative, but in today’s maturing housing market it can be much harder than it looks. Identifying the right property, and having a solid grasp of how much money you will need to invest in repairs and renovations, is much more crucial.
For example, the median listing price in Newark is around $250,000. Working backwards, we can figure out the purchase price we should be looking at to get market value for our flip. The general rule of thumb is that you should never pay more than 70% of the after repair value for a home.
So, if we expect we can get the market price of $250,000 for our flipped home, we shouldn’t pay more than $175,000 for our initial acquisition. But, how do we factor in the costs associated with improving the homes value?
To maintain our margin on the flip, we need to also account for the costs of the repairs. If we assume our home needs $50,000 in repairs we should also subtract that from the purchase price; leaving us at $125,000. Checking the current listings, there are only 24 houses in Newark currently listed within $10,000 of that range.
Just because a home is being sold for rock bottom prices, doesn’t mean it will make a good flip. Having a good idea of which repairs add value, and which are a more substantial undertaking is important. Avoid houses with mold or that need substantial electrical, roofing, or foundation work, as these repairs can be quite expensive.
A few other tips to be aware of include properly accounting for permitting and building costs in the city you invest in. These can be expensive and could take time to obtain.
Paying Cash vs. Taking Out a Loan
Having access to cash will also help you maintain the 70% cushion on your investment. If you are financing the purchase and repairs, the interest on a short term loan can quickly eat away any profit. Having cash allows you to avoid those unnecessary costs, and to purchase with a substantial down payment to avoid mortgage insurance.
If we consider our $125,000 purchase price, and assume it was financed, your margin will quickly go away. Consider you put down a minimal 5% on the home, or $6,250, thus paying interest on the remaining balance during renovations.
If it takes four months to do all the renovations, and those are financed too, you are going to pay almost $900 a month in interest on a standard loan. That is $3,600 of your margin gone. Unfortunately, repairs never seem to get done on time or under budget, so that $50,000 is also likely to go up another 20%.
Once you factor in property taxes, utilities, building permits, and other payments associated with flipping a home in New Jersey. Closing costs on both transactions, home insurance, realtor commissions, and taxes will take another $20,000 out of your profit.
Making it even worse is that because renovations took longer than expected you may have missed the spring buying season, when prices were at their peak. The price you expected to get ($250,000) has now dropped to $225,000 due to the market.
Now all of a sudden that return on investment has shrunk by over $55,000. That is a hefty chunk of the $75,000 in expected profit you were counting on. For most investors losing 75% of your expected return is a quick incentive to exit the flipping business.
If you don’t have access to all cash to flip homes, there are still some alternative ways to finance your flip. A home equity line of credit (HELOC), or home equity loan, is one popular way to get access to finance at an affordable interest rate.
This is essentially a line of credit taken out on the home, or sometimes another property, you already own. However, you need to do your due diligence on your flip, because the credit on a HELOC is limited and if you exceed your budget you will need to find other financing.
5 Best Cities in New Jersey for House Flippers in 2019
Asbury Park has seen a revitalization and influx of millennial and young professionals moving here over the last several years. The average home is currently valued at $363,000 and increased over 12% in 2018.
Weehawken is one of the New Jersey cities in the metro New York City area that is still seeing continued growth. While property values are quite high, prices increased here by over 6% in the previous year.
Cherry Hill is in the Philadelphia metro area and is a place that home flippers can take advantage of bargain prices. Foreclosures are still relatively high, and while this isn’t exactly the sign of a good neighborhood, Cherry Hill is an up and coming destination for those fleeing more expensive suburbs across the river.
Stone Harbor is a more affluent coastal community that currently has an average home value of $1.6 million. However, homes in this community truly span a wide range. Smaller bungalows and condos can be found at less than half this price and make great flips or investment properties.
Sparta Township is one of those communities in northeast New Jersey that is home to a mix of retirees and those willing to trade a much more suburban lifestyle for a longer commute into New York City. Homes increased in value over 6% in the previous year and will continue to appreciate.
Next Steps for New Jersey House Flippers
To get started flipping homes in New Jersey you should first contact a local, experienced real estate agent. They will be able to help you identify investment properties to flip that fit your budget and preferences. An expert agent will have the latest trends on local markets, be able to update you on the current home inventory, and be able to connect you with quality contractors and home repair services.
Clever Partner Agents are from major name brand brokerages (RE/MAX, Keller Williams, and Century 21) and are experts in their local market. A Clever Partner Agent will not only support and advise you during your transaction — they’ll guide you through the entire investment process, from identifying properties to closing on your final sale.