The ongoing homebuying spree driven by current low mortgage rates has made up for multiple times over the drops in real estate sales at the height of the pandemic. Home sales now show a quick turnover of 17 days from the time of listing, a far cry from the typical 38 days back in 2019.
Some homeowners took advantage of the red-hot market and sold their properties, leaving those with rental investments wondering if they should follow suit. So what’s the best approach for your rental property investment in the light of unpredictable market conditions?
We asked our COO, Travis Buchanan, for his insights, pulling from his long professional experience in the single-family rental space as a former SVP of American Homes 4 Rent, the publicly traded REIT with over 50,000 homes in its portfolio.
Deciding to Keep or Sell
In the past year or so, you may have experienced income loss due to non-payment of rent, and the impact is huge and painful when you have several properties in your portfolio. Despite the rental assistance for homeowners or mortgage forbearance, some homeowners may take a long time to recoup their losses. The rising home prices make cashing in seem like a better option than rebuilding your rental business from pandemic-related losses.
“Investments should help you achieve your goals in life and the decision whether to sell or keep an asset should be driven by that,” said Travis. Before you make the final decision, here are a few things that Travis recommends doing.
Revisit Your Life Goal
It’s possible that at the beginning of your investment journey you had goals such as creating a passive income stream for retirement or leaving an income-generating estate to your heirs. But changes in circumstances may also make you want to change your goals and adjust your investment strategies. Selling your property is as big of a step as buying one, so you need to think it over and ask yourself important questions like:
“Do I really need the money?”
“Do I have a strategy in place to reinvest the proceeds from the sale of my home?”
“Am I comfortable losing a chunk of my predictable income from rent?”
Carefully weigh your responses and choices, and see how financially practical they are in the short, medium, and long term.
Determine the ROI
If you plan to sell your property, find out ahead if you’re going to make money from the proceeds of the sale. Calculate your overall capital expense against the potential price you could sell it for. Also, consider taking advantage of the 1031 exchange rule and reinvest in another property to avoid high capital gains taxes if your property has appreciated. If the profit margin looks good or it’s something you’ll be satisfied with, then selling may be the better option to take.
However, consider also the costs involved in selling like commissions, tax transfers, loan payoff, title insurance, and legal fees. If you want to upgrade your home to increase its market value before you sell it, you need to also add that cost to your capital investment. Once you have estimated your net income, determine if that figure is what you have hoped, and see how that ties to your personal goals.
Talk With Financial Professionals
To gain clarity on whether you should sell or retain your property, seek the guidance of personal financial planners, investment planners, as well as real estate professionals. They are in the best position to help you layout a good plan that supports your investment goals and personal priorities.
Consider Leveraging Your Equity
If you’re bent on keeping your property yet need access to some cash, taking out a home equity loan may be a sound option. If you have built enough equity on your property or have paid off your mortgage, it may be worth refinancing your property with the current low-interest rates. You won’t even incur extra costs on mortgage insurance given the property’s high market value. You can then use that capital on other investment opportunities, or upgrade your home to further increase its market value as a rental asset, or gain more profit when you sell it in the future.
Competing in the Current Market
Investors with a handful of rental properties face tough competition against institutional investors buying large portfolios. The latter is given incentives by home builders with cash sale discounts, by lenders with lower mortgage rates, and by the federal government with tax credits on housing modification projects. These allow their capitalization to go a long way and increase their ability to provide better rental options in the market.
So how do individual investors compete?
‘’Investors, in general, have their set investment criteria. You also need to decide where you want to compete,” says Travis. For instance, if your home is catering to the roommate household types (Gen Z and millennials), then you need to study their behaviors as renters—where are they living, what do they look for in a home, what technologies they prefer to communicate, or what methods are convenient to them when paying rent. Knowing the influences that shape the decision of renters in choosing a home will make your business more competitive in the new normal.
On the upside, investors with a smaller portfolio have lower operating costs. So if you’re willing to accept a yield lower than the 5% that institutional investors target, then you could count on your business to be in a stable position. Otherwise, and if your risk appetite can handle it, consider investing in lower-quality assets in fringe areas. Try to reach out to your property manager and ask if they have off-market deals you can invest in to avoid the competition of large companies.
If you want to expand your portfolio but have limited capital at your disposal, you might want to check out the various government real estate grants that you can apply for. The federal government provides these grants to any investor that supports them in allotting homes to the people. But unlike a loan, you don’t have to pay back a grant as long as you fulfill all the conditions in the program.
A shortlist of these real estate grants include, but is not limited to:
- Emergency Capital Repair Grant
- Home Investment Partnership Program
- Good Neighbor Next Door Program
- First-time Homebuyer Grants
Taking advantage of these grants is a good way to grow your portfolio and at the same time make housing available to those who need it.
Look Toward Renting’s Bullish Outlook
The dynamics in the rental market are rapidly changing and may not always be favorable to rental homeowners. If you want to keep your portfolio for the long haul, it’s wise to know the viability of your rental business in three, five, or ten years and see how your long-term goals fit into the future of real estate.
Real estate trends anchor on supply and demand. Homebuilders have not been able to keep up with the buyer demand for years now. According to Harvard’s Joint Center for Housing Studies, home sales shrunk by 30% in March 2021 compared to the same period last year because there was not enough supply. Experts see that the housing shortage will continue for years to come.
Travis believes that all these information out there suggest that we will continue to have a massive housing shortage for the next 5 to 10 years. ‘’So from a macroeconomic standpoint, I think the viability of rental homes is great,” he said, adding that this situation is considered a strong trigger for the continuous growth of the rental market.
The benefit of being a rental property investor is that you provide an important basic human need—a place to live. With the challenges faced by homebuyers like low supply, rising home prices, and high cost of down payment, they continue to look at renting as the easiest and most economical option available to them.
The United States Census Bureau reported that from the total housing units recorded by the second quarter of 2021, 30.8% are renter-occupied. A similar report by Apartment List showed a 16.4% increase in the national median rent since January of this year. These data indicate that the rental market is still an industry worth banking on.
Whatever choice you end up with, be sure to tie it all together with your personal or business goals and the circumstances you are in. If you feel that keeping your property is a better choice, then know that there is a large rental market that needs your property and offers a lot of room for your business to grow.
Your route to getting ahead in the market and enjoying higher investment yields can be as simple as partnering with a tech-driven property manager like Poplar Homes. With expert insights on the industry, dedicated professionals, and an efficient platform, tech-enabled property managers are able to provide high-value services that extend to your renters. With this strategy, you have a better chance of getting the results you’re looking for—high-quality tenants, efficient management, and a profitable investment property that can sustain your goals in the years to come.