NJ Rental Property Decision to Sell

[Kyle Wefler]

Hi All,

I'm in a spot with a property in Morristown, NJ. I bought this property as a 2nd flip after a very successful first flip in the Columbus, OH market. This 2nd flip is a whole different story. 

Its in a great spot about a 1/2 mile off the square. High rent area with loads of young professionals. I started by paying too much for the property. Paid $350k when it needed a complete rehab. I hired some contractors that came to me as a referral and sunk about $100k+ into it which dried up all of the proceeds that I received from the first flip into this new flip. To make things worse, the first contractors did not get permits and the town now knows. 

So after a year of debating and the top unit lease coming due and the town telling me I cannot rent this thing out again without the issues resolved, I'm left with two options:

1. I have a buyer that has given me the run around for the past year but he's offering a cash price of $450k with no issues resolved. I would still lose money on this but not as much money.

2. I recently got laid off with 10 weeks of severance. I have a home equity line on another property with about $90k available. I have some contractors lined up. I've never used them before but they are giving me a ballpark estimate of $25k to bring this thing up to code. I could drive out and sit with the property, oversee everything, kiss the butt of the construction official (he's not too pleased with me) and put it on the market. The unknown is what I could list it for. I think rents would fetch $2,300 for the upstairs (has been consistently rented out for $2,300/month so thats not a big guess), but an estimated $1,200 for the downstairs without the basement finished or $2,000 for the downstairs with the basement finished.

Would I be able to list it for a price that would make it worth it? The town is going to try to give me as much trouble as possible and I anticipate I'll have to have about 4 inspections for it to pass everything. If I redid the basement I would be in about another $50k on top of the $25k. But I've been dealing with a reputable real estate agent that is telling me that a cap rate of 5% is not unreasonable... I don't believe it necessarily. I think a cap rate of 8% would be pushing it. I think somewhere between and 8% and 9% is about right.

Any help would be greatly appreciated.

Kyle