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PURCHASING INVESTMENT PROPERTY IN LAKEWOOD, NEW JERSEY: PART II (PRIVATE HOMES AND CONDOMINIUMS)

12/06/2011

   In the first installment of this series we discussed some basic points relating to purchasing investment real estate, specifically one and two-family homes and condominiums.  This article will address several major issues in greater depth, as a starting point for entering into this market niche.

CURRENT MARKET CONDITIONS

   The Lakewood market is in a state of flux.  Many believe that the current marketplace is flooded with too many vacant rental apartments and single-family homes/condominium.  Obviously, the laws of supply and demand even apply to real estate.  If there are too many available homes with available basements or other starter apartments, then the impact will be two sided.  On the one hand, the value of the existing housing stock will go down, at least in the near future, because of the greater supply than the relative demand.  This will mean that less capital is needed to invest.  

   On the flip side, the over supply of apartments will result in lower pricing for rentals, which might be your basis for your mortgage payment.  That may depress the amount of mortgage money that will be available.

   It is a very simple calculation.  If there are 500 apartment rentals available in any given month but only 300 tenants, those 200 excess apartments will go begging for an additional month and maybe even several additional months.  If any particular landlord needs to rent out his apartment quickly, he will have to reduce the price significantly in order to secure a tenant quickly.  This condition will not exist forever.  But it will exist as long as there is an imbalance in the supply and demand ratio  discussed above. The impact of low rentals obviously affects financial possibilities and, specifically, the amount that a “typical” bank is willing to finance in investor homes.

   In Lakewood however, there are certain characteristics atypical to other localities which affect the real estate investment market. Lakewood is blessed, in that it is inundated with young families. The local community boasts a natural growth rate larger than most other communities. Additionally, young couples b’h grow into young families, which require larger residences. This means that fewer houses will be re-circulated on the market as these young families will iy’h grow old and stay in their residence for many decades to come.

   Many investors, who are aware of the Lakewood growth spurts, are holding on to large tracts of land which will increase in value as the housing market dries up, as newcomers and young couples alike will be seeking residences to buy or rent.

   Therefore when prices will fluctuate, some investors will release some of the vacant lots and houses.  These actions may cause a ripple effect on the market. As a large proportion of the new residents in Lakewood are members of our community, when prices fluctuate it causes large scale reactions by several different groups; the buyers who fear that the prices are fluctuating and therefore wish to cash in while the prices are low, the investors who want to rid themselves of stock and reinvest in more lucrative investments, and finally, investors who visualize making some easy money by “flipping” a property as prices rise.

   A prudent investor, however, must factor a three to four-month holding period where no income will be coming in to pay your expenses.  During this time you must carry those lost rentals in your financial analysis that you need to complete before you purchase the property.  Many an investor has overestimated his income and underestimated his expenses.  This is a classic example of overestimating income in a weakening market.  The lesson is simple:  Be realistic, be practical, and be smart.  Factor in a three to six-month holding period of vacancy, no matter what the circumstances appear to be for the next year.

   In our next installment, we will deal with the major differences in purchasing in a new development versus purchasing in an existing neighborhood.
 
 
 

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