Flipping houses is a type of investing that involves purchasing a revenue-generating asset and quickly reselling it for a quick and lucrative profit, referred to as capital gains.
Generally, how it works is that investors purchase a house on the market that needs renovations or significant upgrades and will turn around and sell the home for a profit once the work is finished.
Despite the excellent potential for a significant ROI, the investor should have access to cash since it’s not always a quick and straightforward process to get approved for a short-term real estate loan.
Moreover, when there is a hot real estate deal on the market, often, it will attract flocks of investors who are financially prepared to bid the highest price. Therefore, being financially prepared by having the funds readily available at a moment’s notice is the smartest approach.
The New Jersey real estate market can be quite lucrative regarding earning potential on flipping houses. Still, it can be a long and complicated process, especially if you plan on tackling more than one at a time, so we recommend that anybody interested in real estate does thorough research before jumping into it.
To help get you started, we created a guide to flipping houses in New Jersey.
Who Can Flip Houses in New Jersey?
In the State of New Jersey, anyone can purchase a property with the intent to flip it shortly after. So long as the taxed amount on capital gains is being paid to the State of New Jersey, there are no restrictions on who can and cannot purchase homes with the intent of earning a short-term profit.
The process itself is relatively simple. There are several investors and resources available to help you get started. Additionally, the laws and regulations regarding flipping homes are generally favorable in New Jersey.
What Do I Need to Start Flipping Houses in New Jersey?
If you have access to cash and your finances allow, the best way to start flipping is to invest with cash. Using cash will enable you to avoid paying any interest that accrues from taking out a loan.
If this isn’t an option, you can attempt to take out a traditional home loan. But something to keep in mind is that a home loan can take a while to close, and you will be required to pay closing costs. The longer a loan takes, the less likely your bid on the property will be completed and accepted.
If you don’t have the cash on hand, the safest and most reliable option would be to save enough money to fund the flip.
Why Should You Be Flipping Houses in New Jersey?
Suppose you’re wondering why one would invest in a state like New Jersey. There are a few excellent and lucrative reasons you should consider it.
Currently, New Jersey is a very strong buyer’s market, making it competitive for real estate investors who have access to cash and other capital assets. So, if you’re a real estate investor or looking to maneuver into the house flipping industry, here are a few compelling reasons you should consider New Jersey.
Significant population growth in recent years
There is a lot of potential in the New Jersey housing market. The state has experienced a significant amount of population growth in recent years, and this is expected to continue. This population growth will increase the demand for housing, which will drive up prices.
Great real estate deals
Real estate in New Jersey is generally cheaper than real estate in other states, so this allows you to shop for multiple deals and potentially flip two or three properties when you would otherwise only be able to flip one. By doing so, you spread your risk over a few different projects rather than just one.
Lucrative loan prospects
In general, private lenders are known to adjust their loan boundaries accordingly.
In the flipping business, a greater loan amount typically translates to higher profits for flippers. So, despite the high cost of housing, if you have intact credit and reliable income, you can cash in on the market when most other potential buyers can’t or are too risk-averse to try.
A buildup of foreclosures
The federal government put a program in place during the onset of the Covid-19 pandemic to pause millions of homeowners’ mortgage payments.
And since that program was lifted in late September 2021, there has been and is an anticipated wave of foreclosures across the nation due to homeowners lacking the ability to get caught up on bills.
As a result, many foreclosure properties are set to become available throughout New Jersey, and investors are lining up for the best deals.
A Buyer’s market
No matter how expensive it is to purchase a home, there will always be a backlog of homebuyers due to the beautiful life the state has to offer. And generally speaking, when the housing market increases, investors who have access to cash will always keep the investments flowing.
Is Now a Good Time to Flip Houses in New Jersey?
When it comes to flipping houses in New Jersey, the current market provides an excellent opportunity to start flipping. Despite the fact that the housing market average price is increasing, experts anticipate a flood of repossessed homes to saturate the market. If you have access to cash or can get approved for a home loan, you can join the many investors currently scouring the state for the best deals.
How To Flip Houses in New Jersey Using The 70% ARV Rule
For anyone unfamiliar with the 70% rule, let us break it down for you.
The 70% rule is a guide to help home flippers determine the maximum cost they should pay for a real estate investment property. As it states, investors should never spend more than 70% of the home’s after-repair value minus the costs of renovating the property.
The equation looks like this:
After-Repair Value (ARV) x (0.7) − Estimated Repair Costs = Maximum Buying Cost
Experts recommend that you never go over the maximum buying cost because anything over could threaten your profits.
If you’re an investor in New Jersey, the same rule applies if you’re interested in staying within the 70% margin of safety.
A Real-Life Example of The ARV Rule
Suppose you’re in the market right now and unsure of the maximum price you should pay for an investment property you intend on renovating and then reselling; here is an example to help you decide.
70% Rule Example
Let’s take a look at a property in Salem, New Jersey, with an After Repair Value (ARV) of $280,000 and an expected renovation cost of $20,000.
- ARV = $280,000
- Expected Renovation Costs: $20,000
- Maximum price = ARV x (0.70) – Repair Costs
- Maximum price = $280,000 x (0.70) – $20,000
- Maximum price = $176,000
In this example, the maximum allowable offer should be no more than $176,000, based on the expected ARV of $280,000 and the anticipated repair cost of $20,000.
Something to keep in mind is that the 70% rule assumes the property’s current value from a house flipping perspective.
The home could be listed at a much higher value, which means it will be your job to negotiate with the homeowner to reduce it to the maximum price you’re willing to pay. Not all prospective buyers are looking to flip properties, so they view the home expecting to put in a bid much closer to the asking price.
How To Secure Financing for Flipping Houses
While flipping properties can be lucrative, it takes much more money than what is required when purchasing a home to live in.
You need to secure a loan that covers the cost of the house, funds for renovations, property tax, utilities, and homeowner’s insurance from the day the sale closes until the day it sells. It can get costly very fast.
So how do you secure these funds? Well, if you don’t have access to this kind of cash, your next resort would be to apply for a loan.
Before we dive deeper into the types of loans you can get, we want to point out something important. Banks will not loan you money if you do not have a down deposit or existing home equity.
And if you’re an inexperienced flipper with little to no track record, you might face challenges that require you to present a larger down deposit.
Here are a few types of loans you should consider for flipping houses:
Hard Money Loan
Generally speaking, hard money loans have terms of less than one year, making them quite appealing to house flipping investors. Because the term is so short, they typically come with a higher interest rate than a standard home loan.
Hard money lenders specialize in lending money for the purpose of flipping, so they know precisely how to factor in the home’s ARV. If, for example, you and the lender determine the ARV is $320,000, chances are you’ll be applying for a maximum loan amount of $320,000, despite the actual asking price of the home likely being much greater than that.
Home Equity Line of Credit
A home equity line of credit (HELOC) is considered a second mortgage that allows you to borrow money against the equity you’ve accumulated in your current home. If you have equity built up, you have the option to acquire access to that money in the form of a line of credit.
Suppose your home equity has a balance equivalent to or greater than the ARV of the home you intend to flip; taking out a HELOC is a viable option.
Simply put, a cash-out refinance allows a homeowner to refinance their current mortgage to be replaced with a new one. The point of this is to get a larger second mortgage than what is owed on the current one.
The homeowner will then have access to excess funds, which can be withdrawn for use toward the purchase of a home they intend to flip.
Keep in mind that a cash-out refinance can potentially come with a higher interest rate than a traditional home mortgage loan.
How To Find Cheap Houses to Flip in New Jersey?
When looking for cheap properties to flip in New Jersey, you’ll want to find very inexpensive houses in attractive neighborhoods. The best way to do this is to narrow your search for flip properties located in cheaper areas.
Visit real estate listing websites and refine your search to flip properties with a maximum selling price.
Another option is to look for Real Estate Owned (REO) properties, which the lenders own because the borrowers have defaulted on their mortgage payments.
Best cities to flip houses in New Jersey
Newark is close to New York City. This means that you’ll have a ready pool of buyers when it comes time to sell your flipped house. And, with the right property, you can even tap into the NYC market. There are a lot of houses to choose from in this city, whether it be a fixer-upper or a turn-key property. If you’re looking for a city with plenty of opportunity and potential, Newark is a great choice.
Jersey City has a lot to offer investors. It’s also conveniently located near New York City, making it easy to find buyers for your flipped houses. One of the unique benefits of flipping houses in Jersey City is that you can take advantage of the city’s Tax Abatement Program. This program allows eligible investors to receive a tax break on the value of their improvements. If you’re looking to save some money on your investment, strongly consider Jersey City.
The reason why Paterson is a great city to flip houses is that there are a lot of affordable homes that need work. There are plenty of properties to choose from and a wide variety of neighborhoods to explore. Paterson is also close to New York City (see a pattern yet?), making it easy to attract buyers looking to secure more affordable housing.
Avoid flipping houses in these New Jersey cities
We recommend not flipping in these following cities:
- Camden City
- Passaic City
- Atlantic City
Generally, cities with higher-than-average poverty than the rest of the state, coupled with lagging economies in those cities that still need to recover, makes it harder to invest in house flips.
You’ll have trouble finding buyers that are looking for a home when what many residents in those cities truly need are more affordable rents.
Final Thoughts on Flipping Houses in New Jersey
While flipping houses is an excellent entry point for any real estate investor, it comes with challenges and significant risks. But with the proper preparation, anyone can get into house flipping and start building wealth. The biggest takeaway here is that New Jersey, while having recent significant growth in population, also has tons of opportunities to get great deals in attractive neighborhoods, making it a real estate investor’s paradise.