Nathan Colmer | Van Dyk Group
C: 609.290.4293 | O: 609.492.1511
A shifting or falling real estate market can be a scary thing. The good news is Long Beach Island offers a unique opportunity due to the summer rental market. This insulator helps to keep property values on LBI strong compared to a primary market and can avoid having to sell for a loss.
Tracking prices of homes on Long Beach Island shows that long term investment makes a lot of sense. If at all possible it is best to hold your property and NOT sell. Using some of the alternative strategies below can help you to retain your property and wait for a stronger market.
The summer rental market is the "secret weapon" of the LBI real estate market. Unlike a primary market which gives sellers few options, the income generated by renting your home can cover most or all of your expenses and avoid the need to sell. In doing so, you can wait for the market to recover and regain any lost equity. Over the last 20% years we have seen an average rate of appreciation of between 5.5% and 6%. When this simple math is applied to a home purchase it is easy to see how waiting out the market and benefiting from summer rentals can make sense
To give some quick numbers I have made some assumptions below:
Purchase Price: $800,000
Depreciated Home's Value: $700,000 (after closing costs)
Annual Expenses: $50,000
Estimated Rental Income: $45,000
Annual Appreciation 4% (I am using a lower number than the average to be conservative)
Year 1: -$5,000 expenses +$28,000 in value = New value: $723,000
Year 2: -$5,000 expenses +$28,920 in value = New value: $746,920
Year 3: -$5,000 expenses +$29,876 in value = New value: $771,796
Year 4: -$5,000 expenses +$30,871 in value = New value: $797,668
Year 5: -$5,000 expenses +$31,906 in value = New value: $824,575
As you can see from the simple example above you can recover equity with minimal or no out of pocket expense an avoid having to sell for a loss. I can provide a detailed accounting for any home on LBI and help you understand how the market will impact your home.
The negative often associated with real estate investment is lack of liquidity . This can easily be overcome with a home equity line of credit, the cost of which can be offset by summer rental income.
Let's say you own a home on LBI and you need to free up capital. Rather than selling your home at a loss, you may be able to access part of your cash in the house by utilizing a home equity line of credit or similar product. While this will add to your annual cost of ownership, by renting out the house you may be able to cover the added expense. Even if you do not rent, the financing costs may be lower than the loss suffered by selling in a down real estate market on Long Beach Island.
While not always easy to accomplish, trading or swapping your property for another home on or off of Long Beach Island may be an option. The major issue here is that it does very little to offset a falling market. The only real advantage is that the property you are trading for will also be at a depreciated value presumably so you may be able to leverage one equity position against the other. The following example will highlight this possibility:
Let's make some assumptions.
The entire market has fallen 10%
Your home was purchased for $800,000 and the new value is $720,000
The house you are looking to buy and/or trade for was valued at $1,000,000 and is now priced at $900,000
While you "lost" $80,000 in the sale or trade of your home you "saved" $100,000 off the price of the new home so you technically "made" $20,000.
Obviously a careful examination of the properties in question needs to be conducted but under the right conditions trading or swapping your LBI property could be an excellent alternative to selling in the Long Beach Island real estate market.