Buying a house in NJ is a great move now, especially for real estate investors looking for a rental property. Learn what you should know here.
If you are looking into buying property in New Jersey as a rental investment, now is the best time to do so. Compared to last month, the number of homes for sale in New Jersey is down by 14%. Meanwhile, median property prices remained the same. Because of these, aspiring homebuyers who are priced out by intense competition are choosing to rent instead.
Short-term rental investors would find the state lucrative as well. Although the Omicron variant had Americans less interested in traveling right now, 76% of them are still in a ready-to-travel state of mind. And with the US allowing fully vaccinated foreign tourists to enter the country, vacation homes in popular destinations including New Jersey will see more bookings soon.
In this blog post, we laid out the eight steps in buying a house in NJ. We also listed the five best cities in New Jersey to invest in next year, based on your preferred rental strategy. If you are looking for a real estate investment in the Garden State, this guide is for you.
Buying a House in NJ in 8 Steps
The NJ home buying process is similar to other states, though certain steps have requirements that are specific to this area. So make sure you read through each step carefully else you miss a crucial detail.
Step 1: Evaluate Your Finances
Unless you are buying a house in NJ with cash, you need to take inventory of your finances so you can have an idea of whether you will be able to take out a mortgage. Doing this will also help you determine how much money you can borrow and how it will impact your finances afterward. Before you go ahead and buy an income property, consider the following:
Credit Score
You need to have at least a score of 620 to qualify for most conventional loans.
Future Mortgage Payments
Even before you shop around for a mortgage, you can estimate how much you will have to pay each month. Ideally, it should not exceed 28% of your monthly income.
Debt-to-income Ratio
If your outstanding debt is already at or above 36% of your income before applying for a new loan, you may have a hard time qualifying for a mortgage.
Other Running Expenses
Even if you can afford your estimated mortgage payments on paper, think about how much you will have to spend on top of your already-existing expenses such as groceries, utilities, etc. If you can, open a separate bank account for your investments so these will not mix up with your personal expenses.
Down Payment
Conventional loans usually require a 20% down payment. If you cannot afford this, you will have to buy private mortgage insurance, which you will have to pay for until you have reached 20% equity in your property.
Closing Costs
This is usually equivalent to 2% to 5% of the property price, which buyers have to pay for out of pocket.
Homeownership Costs
As an investor, you might end up buying a house as is in NJ because of the lower price. Thus, you need to set aside 1% of your property’s value each year for repairs and upgrades.
When calculating your expenses, you will have an easier time if you use a tool like Mashvisor’s investment property calculator. We have already estimated the rental income and related expenses based on the average amounts in New Jersey, but you can edit the figures to match your situation. By providing your own figures, you can accurately calculate your investment payback.
To learn about your options for signing up for our services, click here.
Step 2: Choose an Investment-Worthy Neighborhood
Even though New Jersey ranks 47th in terms of the total area that it occupies, it is still a big place for a property search. It is divided into 21 counties and contains 565 municipalities, from cities to townships. So before you start house hunting, you need to narrow down your search to a maximum of five neighborhoods.
When selecting which neighborhoods to consider, you need to look at the following factors:
Home Values
Aside from making sure that you can afford the house in a neighborhood, you would also want to invest in an area where properties have historically appreciated in value.
Rental Income
Traditional rental prices in New Jersey can range from under $1,000 to almost $6,000 per month. Meanwhile, short-term rental income can go from $600 to over $11,000 a month.
Cash on Cash Returns
While a high rental income would be amazing, it would not matter if you are getting less than 1% of your investment back. This metric calculates how much you are earning for every dollar you spend on mortgage payments. You use the formula: Total income for the year / Total mortgage payments for the same year.
Price-to-rent Ratio
If you are planning to buy a property and rent it out traditionally or for at least six months, then you would want to be in an area that has a high price-to-rent ratio. A high ratio means that property prices are high compared to rent prices, so aspiring homebuyers are more likely to rent instead.
Days on Market
This is one of the indicators of what market cycle an area is in. If houses in the neighborhood have been on the market for at least six weeks, you are likely to have leverage on negotiations.
Local Lifestyle
Aspiring landlords also need to put themselves in their tenants’ shoes. Tenants would want to live in an area with good school districts, easy access to restaurants and amenities, low crime rates, and more.
Tourism Potential
But if you are thinking of putting up a short-term rental, then you need to think about why guests would want to stay there. The most obvious would be the access to tourist attractions, but there are vacation homes that get booked because they are near the airport. Short-term rentals in certain areas have also had guests who are just making an overnight stop during their road trip or inter-state relocation.
You can get this done by using Mashvisor’s Property Search. It features a heatmap that you can use to find neighborhoods that meet your criteria. Just set it to highlight which parts of a city have the highest (green) or lowest (red) of the following metrics:
- Cash on cash return (traditional or Airbnb)
- Rental income (traditional or Airbnb)
- Listing price
- Airbnb occupancy rate
The heatmap also automatically updates as you move to other parts of the map, so you do not have to type every city one by one.
Step 3: Find a Real Estate Agent (Optional)
If this is your first time buying a house in NJ, a real estate agent would make a great ally in your home buying process. Not only will they help you find houses, but they can also recommend other services such as lawyers, lenders, and escrow companies. They will also help you get a great deal on the property you want to buy.
When finding a real estate agent to hire, you need to consider the following qualities:
- Years of experience
- Number of transactions in the last 12 months
- Experience in your price range and chosen neighborhood
- Overall review score
- Individual reviews and complaints
Mashvisor offers a comprehensive directory of real estate agents. Just filter your search by which state they work in (for example, New Jersey real estate agents) and the city where you want to search, and you will find a list of agents in that area. Included on their pages are their specialties, experience, and contact information.
Step 4: Get Mortgage Pre-approval
When buying a house in NJ, the seller would take your offer seriously if you show them a letter of pre-approval from a mortgage lender. Some would not even show you their home unless you have one.
Getting pre-approved for a mortgage shows that you are serious about buying a property and that you can afford it. This is also your chance to shop around for a mortgage lender that will work with you to close the deal. This means that they will process your application quickly and give you all of the needed paperwork on time. You would also want to find one that will give you good loan terms.
Once you get pre-approved, do not make financial decisions that can affect your credit score. Avoid opening new credit accounts or closing any accounts that have been open for a long time. And make sure to pay your credit card bills and other loan repayments before they are due.
If you want to see how your mortgage will affect your income and investment returns, you can use Mashvisor’s mortgage calculator. Found in the same section as our investment property calculator, it lets you input the following:
- Property price
- Down payment
- Mortgage type
- Loan term
- Interest rate
It will then update the calculator to show the adjusted cash flow based on the property’s rental income, mortgage, and other expenses.
Step 5: Start Searching for a Property in New Jersey
It is interesting that buying a house in NJ involves several steps before you actually start looking for a property. Depending on the current inventory in the area of your choice, you might have a difficult time finding the perfect property. Fortunately, you are going to rent out the place instead of living in it, so there is no need to be picky.
Using Mashvisor’s Rental Property Finder, you can find houses with the highest profit potential in up to five cities of your choice. There is no need to open several browser tabs to search in different areas. You will also be able to filter your search results by property type, optimal rental strategy, return on investment, listing price, and market availability.
Step 6: Place an Offer
Once you have the requirements to buy a house in NJ and find a property you are interested in, it is time to place an offer. Because it takes around 13 weeks for a house in NJ to sell as of December, you have more time to do your due diligence before making an offer. You still have to sweeten the deal, however, or else the seller might still decline your proposal.
Writing the perfect offer does not exclusively involve offering to purchase at a higher price. You can also make other compromises, such as:
- Asking for seller concessions instead of haggling on the price
- Requesting repair credits instead of asking the seller to make the necessary repairs
- Forgoing inspection contingency to close the deal faster
- Writing a personal letter to the seller
Be careful with removing the inspection contingency from your contract. New Jersey is a buyer beware state, meaning it is up to you to discover any issues with the property. The seller may not be required to tell you about any problems with their house except if it has lead paint.
Step 7: Order the Inspection and Appraisal
When the seller accepts your offer, you need to make sure that you are buying a house in NJ that is in the condition that you can afford to manage. Through inspection, a licensed inspector checks the house for any unseen, unexpected, or potential problems. New Jersey may also require you to ask for radon and termite inspections. Meanwhile, an appraisal is required by mortgage lenders to determine that the house is worth the price.
In case either of them finds problems that you do not want to deal with, then you can negotiate again or–if you have an inspection or appraisal contingency in place–back out of the sale.
Step 8: Close the Deal
On closing the sale, you can do a final walkthrough of the property to make sure that it is still in the same condition as it was during the most recent inspection. Since this is the final step in buying a house in NJ, do your best to focus and double-check the following areas of the house:
- The ceilings, walls, and floors for any cracks, any chipped or peeling paint, and any other imperfections
- Light switches and electrical outlets are working properly
- Water pressure and temperature, and if there are any leaks
- Toilets are flushing properly
- Keys for all the doors as well as combinations for the garage door opener or any smart locks
- Appliances included in the sale
- Heating and air conditioning
- Windows lock correctly and there are no unexpected drafts
- All trash and any belongings by the owner have been removed
You will also sign a lot of paperwork on this day. Make sure to have your agent or lawyer explain the documents to you, and ask any questions you may still have before signing.
Once both walkthrough and signing are complete, the house is yours.
5 Cities in New Jersey to Invest in
Now you know the eight steps to buying a house in NJ. However, you might feel overwhelmed where in New Jersey you should start looking. After all, the Garden State has over 500 municipalities. To help you get started, we consulted Mashvisor’s latest data to find the five best cities to invest in.
While we tried to find the best markets based on either rental strategy, we discovered that a majority of them are more lucrative for short-term rentals than traditional ones. Because of this, the five cities mentioned in this list are optimal for short-term rentals, but those looking for a traditional rental market may start here as well.
Disclaimer: At the time of writing, short-term rentals like Airbnbs are legal in the cities mentioned below. But we encourage you to contact the municipality to clarify any ordinances they may have surrounding this issue.
#1: Westville, Gloucester County
- Median Property Price: $168,633
- Average Price per Square Foot: $151
- Days on Market: 84
- Traditional Rental Income: $1,611
- Traditional Cash on Cash Return: 6.02%
- Price to Rent Ratio: 9 (low)
- Airbnb Rental Income: $1,992
- Airbnb Cash on Cash Return: 9.98%
- Airbnb Daily Rate: $76
- Airbnb Occupancy Rate: 83%
- Walk Score: 45
#2: Hillside, Union County
- Median Property Price: $408,000
- Average Price per Square Foot: $213
- Days on Market: 62
- Traditional Rental Income: $1,954
- Traditional Cash on Cash Return: 1.40%
- Price to Rent Ratio: 17 (medium)
- Airbnb Rental Income: $1,923
- Airbnb Cash on Cash Return: 9.36%
- Airbnb Daily Rate: $297
- Airbnb Occupancy Rate: 58%
- Walk Score: 76
#3: Camden, Camden County
- Median Property Price: $128,997
- Average Price per Square Foot: $105
- Days on Market: 62
- Traditional Rental Income: $1,246
- Traditional Cash on Cash Return: 7.15%
- Price to Rent Ratio: 9 (low)
- Airbnb Rental Income: $2,063
- Airbnb Cash on Cash Return: 8.52%
- Airbnb Daily Rate: $214
- Airbnb Occupancy Rate: 51%
- Walk Score: 61
#4: Manchester, Ocean County
- Median Property Price: $359,988
- Average Price per Square Foot: $193
- Days on Market: 64
- Traditional Rental Income: $1,678
- Traditional Cash on Cash Return: 2.53%
- Price to Rent Ratio: 18 (medium)
- Airbnb Rental Income: $4,746
- Airbnb Cash on Cash Return: 8.34%
- Airbnb Daily Rate: $340
- Airbnb Occupancy Rate: 77%
- Walk Score: 7
#5: Newton, Sussex County
- Median Property Price: $507,750
- Average Price per Square Foot: $194
- Days on Market: 134
- Traditional Rental Income: $1,686
- Traditional Cash on Cash Return: 0.47%
- Price to Rent Ratio: 25 (high)
- Airbnb Rental Income: $6,722
- Airbnb Cash on Cash Return: 8.06%
- Airbnb Daily Rate: $286
- Airbnb Occupancy Rate: 62%
- Walk Score: 87
Find Your Next Profitable Investment in New Jersey With Mashvisor
Buying a house in NJ especially as an income property is a time-consuming process, but beginner real estate investors do not have to feel intimidated or overwhelmed by it. As long as you follow these eight steps, in New Jersey or elsewhere, you will have an easier time acquiring a new rental home:
- Evaluate your finances.
- Choose an investment-worthy neighborhood.
- Find a real estate agent (optional).
- Get pre-approved for a mortgage.
- Start searching for a property in New Jersey.
- Place an offer.
- Order the inspection and appraisal.
- Close the deal.
If you are not sure where to start your search, here are five cities in New Jersey with high profitability based on Mashvisor’s latest data:
- Westville, Gloucester County
- Hillside, Union County
- Camden, Camden County
- Manchester, Ocean County
- Newton, Sussex County
As a real estate investor, you will be dealing with a lot of acquisitions as you build your investment portfolio. Thus, you would want to have a tool that helps you find lucrative properties and calculate your projected returns. Mashvisor can help you with these. Instead of spending a lot of time researching a local market, you can look it up on our platform, check out the comps, and estimate your rental income and expenses in 15 minutes.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.