More than 35% of New Jersey residents are renters, so buying a rental property can be a way to increase income. However, buying property for any purpose requires due diligence, knowledge of real estate and zoning laws, and practical considerations such as financing. Conducting real estate transactions in New Jersey can be complex, as the laws and requirements are not always straightforward, so it is best to be represented by an experienced real estate attorney when buying or selling rental property. Crucial mistakes can cost thousands or even prevent the purchase altogether.
Critical Factors to Consider Before Purchasing a New Jersey Investment Property
Before delving into an investment as substantial as the purchase of property, it is crucial to define the investment objectives. Investment real estate is usually bought to renovate and flip quickly, kept as part of an estate in a plan of long-term appreciation, and used as collateral for other purchases. Some purchases are made for tax reasons.
Financial Planning
Financial planning is an integral part of buying real estate. When purchasing a property, it is beneficial to get pre-approved, but doing so is different from a primary home purchase. If the property is for personal use, obtaining financing is similar to that of a primary home. In contrast, an investment property will have higher interest rates and other specific conditions. Banks will typically request a higher credit score than a primary home purchase. Some lenders require a down payment from 15% to 25% and a Debt-To-Income (DTI) requirement of between 35% to 45%, which means the buyer’s total formal debts cannot exceed that percentage of their income and assets. In any event, closing costs, title insurance, homeowners insurance, and property taxes should also be considered when calculating the costs.
Market Research
Conducting market research is key before purchasing property as an investment for rental purposes. The housing market in New Jersey is not stagnant and prices vary according to the neighborhood and house’s age, so thorough research on the market in a particular geographic area is critical to make a good investment decision. Potential rental property owners should consider rental rates, vacancy rates, and property values that best fit their financial expectations.
Types of Rental Properties
The different types of rental properties have their own benefits and drawbacks.
- Single-family homes have more conventional loan requirements and require a 20% down payment. An FHA loan, with lower interest rates and a lower down payment, is possible, but only if the owner lives on the property for a period.
- Condos and townhomes for investment properties usually require a down payment of 25%, and buying criteria may be more challenging. Condos don’t require yard maintenance but typically have HOAs, and tenants who don’t follow the rules can rack up hefty fines that the owner is responsible for (unless otherwise stated in the lease.) Townhomes are better for families, have a small yard, and may not have an HOA.
- Multi-family properties such as duplexes or apartment buildings offer more income sources than one family of renters. Smaller properties, with fewer than four units, can be financed with basic financing, but larger properties may require commercial financing. The responsibilities of renting multiple units are greater, and this kind of investment is not for the inexperienced.
Ongoing Costs and Upkeep
A property owner’s upkeep and ongoing costs can become burdensome without proper planning. Some upkeep is usually required between tenants. Unfortunately, not everyone treats the property they are renting as if it were their own. Putting on a fresh coat of paint, getting the residence deep-cleaned, and conducting minor repairs are usually enough to prepare for the next tenant. Patching holes, replacing carpets, fixing or replacing appliances, etc., may be necessary for properties that were not handled with care. Repairs may also be necessary while the property is occupied. Depending upon the lease, utilities could be an expense for the owner. Managerial responsibilities such as collecting rent and interviewing tenants are essential. Something else to consider is that the property may sit vacant for several months, which can overburden the finances of an unprepared property owner.
Taxes
Understanding New Jersey’s tax system is vital for the purchase of investment properties. The seller pays a transfer tax, which varies according to the property’s sale price. Apart from transfer taxes, capital gains taxes must be paid at the state and federal level if and when applicable. Also, property taxes vary by municipality, county, and city, so the property’s location may increase investment liabilities.
Ensuring Smart Property Investments With Legal Due Diligence
By working with a real estate agent and perusing listing sites, you may find a list of properties you are interested in researching further. You can never have too much information about an investment, especially something as substantial as real estate. Your real estate lawyer can conduct a title search to identify encumbrances and review any existing leases. Your real estate agent can advise you regarding inspections, the fair market value of the property you want to buy, and any red flags regarding the transaction.
A purchasing agreement is a contract with the purchase price, property description, buyer and seller names, inspection results, approved financing, and closing date. It provides an outline of the transaction, giving the steps to be followed and the responsibilities of each party. It allows buyers and sellers to protect their interests and investments. Parties must adhere to the contract details once they have signed it. It is essential to have a real estate attorney review the agreement before signing to ensure there are no hidden unfavorable terms. At closing, a real estate attorney can review the title and ensure no liens or encumbrances exist. They can also prepare the deed for transfer. They can check that all local, state, and federal property laws are followed and provide information regarding zoning restrictions and agreement terms that may impact your ability to use the property for rental purposes.
Complications of Buying and Selling Tenant-Occupied Properties in NJ
Myriad issues can make buying a property occupied by tenants challenging. New Jersey affords certain protections to renters that prevent owners from simply conducting an immediate eviction. The first step is to decide if the property must be vacant to complete the sale. Some prospective buyers prefer keeping the tenants because their rent payments provide immediate income. Tenants who are good neighbors, care for the property, and pay on time are the kind of renters building owners look for.
Tenants can only be forced to vacate when the property comprises one to three residential units, must be sold vacant, and the buyer wants to occupy a unit. Showings and inspections of the property are much easier when the lease includes provisions for that situation. Tenants with a month-to-month lease are given 60 days from signing the purchase agreement to vacate the property. Tenants with a valid lease cannot be evicted until the lease has expired.
Security deposits are put into a trust until the new owner takes possession of the property. The deposits are returned to the tenants when they vacate the property, minus any damage to the unit beyond regular wear and tear. Having tenants while selling a property may not be ideal for some buyers, which can restrict the number of offers. Fewer buyers means less competition, and a bidding war is less likely.
When tenants refuse to leave, sometimes the seller can offer a financial incentive known as “cash for keys.” The tenant’s moving costs and additional expenses are covered, and the property owner can complete the sale. The landlord’s real estate attorney must draw up an agreement that includes the date the property will be surrendered, the amount to be paid to the tenant, the condition the unit must be left in, a waiver of rights to the property by the tenant, and the return of the keys.
Crucial Legal Protections for NJ Landlords in Real Estate Contract Drafting
A seasoned real estate attorney can draw up protections in the purchase and sale contract, such as an obligation on the part of the seller to hand over the vacant property. Contrarily, the agreement can also include a limit on what the buyer can do if the seller has exerted their best efforts and the tenants refuse to leave. The contract can also require the owner to issue a letter of attornment to the tenants indicating that the rent should be paid to the new owner. Also, the assignment of the leases requires that they be transferred from the landlord to the new owner with the same obligations and privileges therein until the lease expires and a new one is drawn up.
Start Your New Jersey Rental Property Purchasing Journey with the Experienced Legal Guidance from a Real Estate Lawyer
Buying real estate is a multi-step process and even more challenging when it is a rental property. The laws for buyers, sellers, and tenants are complex. New Jersey is a tenant-friendly state, and improper evictions can lead to more extended waiting periods, fines, and lawsuits, which could cost you thousands. Whether you are buying or selling a rental property, the real estate lawyers at Chamlin, Uliano, and Walsh can guide you through the process while protecting your interests. Our seasoned real estate attorneys have helped many clients like you who are ready to invest in or sell a rental property in Freehold, Long Branch, Asbury Park, Belmar, Manasquan, Red Bank, Toms River, Point Pleasant, Seaside Heights, Lavallette, Howell, Neptune, Wall Township, and across Monmouth and Ocean County. If you have questions about selling or acquiring a rental property and would like assistance from a knowledgeable real estate lawyer, call us today at 732-440-3950. You can also complete our online form and ask us to reach out to you to learn more.