For the past decade, rentals have been the clear winner in NJ. Cap rates compressed, rents soared, and the "rentership society" took hold. But with interest rates higher and cap rates expanding, the for-sale condo market is getting a second look.
The Math: Profit Margin vs. Yield
- Condos: Measured by Profit Margin on Cost. Typically, you want a 20-30% margin. If it costs $400k/unit to build, you need to sell for $500k+. The risk is timing—if the market turns while you are building, you are stuck with inventory.
- Rentals: Measured by Yield on Cost (ROC). If it costs $400k/unit to build and rents for $30k/year (NOI), your yield is 7.5%. If market cap rates are 5.5%, you have created massive value (the "development spread").
The Liability Trap
Condo development in NJ comes with a 10-year tail of liability. Condo boards are notorious for suing developers for construction defects (real or imagined) just before the warranty expires. Insurance for condo projects is significantly more expensive than for rentals.
The "Condo-Quality" Rental
The hybrid approach is to build a rental building with "condo finishes" (high-end appliances, stone counters, soundproofing) and a condo legal structure. You rent it out initially, but you retain the option to sell off individual units later if the market shifts. This requires filing a Public Offering Statement (POS) with the state.
Conclusion
Rentals build generational wealth. Condos generate cash to buy the next deal. The right choice depends on your capital partners and your timeline.