How To Play The Game When Supply Is So Low And Prices Are So High
Let’s go ahead and bring a couple things to the surface: First of all, real estate is still about as reliable a way there is to invest your money...if you do it right. Secondly, these are some strange times we’re in. Between everything from extremely low interest rates, super low housing supply and the elevated prices that come with that, government intervention in restricting evictions, and the myriad of effects Covid has had on employment, renters, and the markets, it’s safe to say that the same old playbook is much less applicable these days.
THE SINGLE FAMILY HOME: WHY IT ISN’T A TRADITIONAL MONEY MAKER
As The Property Management Authority® we adhere to a model that most commonly maximizes profits around three and four unit buildings. We do have clients that own and rent single family homes but typically these are people who fell into a property or circumstances have led them into a situation where they know they can make some money, but it wasn’t their original intention and they aren’t looking to invest further with other properties. Single family homes can be reliable sources of income but the margins are not great. With only one stream for rent there is less opportunity for profit...it’s really that simple. We also find that maintenance issues can balloon because tenants expect a higher standard (due to the higher rent they’re paying) and inexperienced owners are commonly tight pursed because they’re not viewing these costs through the investment lens.
CAN YOU MAKE MONEY BUYING SINGLE FAMILY HOMES AS INVESTMENT PROPERTIES?
Can you make money buying single family homes as investment properties? Short answer: yes (and we’re not talking about renovating and flipping here). Typically, as investors, Nexus wouldn’t recommend investing in a single family home but here’s the reality: the supply is so low right now that there really are no other options in Southern New England...or in most of the country for that matter. Multi-unit residential rental properties simply do not exist. So if there is no gold, who are we to reject silver?
The reason this isn't a great strategy (under normal circumstances) is that returns are minimal. They’re not sexy but they’re certainly not terrible either. Let’s provide a concrete example to help make the point:
Purchasing a single family home for $200,000 with $1500/month rent, combined with currently favorable interest rates and a couple other variables should yield about $500/month profit. Extend out for the year and you’re looking at around $6,000 and a 3% return. Again, not incredible, but a safe and reliable investment. Couple that with the fact that you’re paying down your balance with the tenant’s money and it looks that much more attractive. You love lobster but all you see on the menu is crab...you could do worse. You can successfully put your money to work and acquire an additional asset. All in all, it’s a pretty good move if you’ve got the money to invest with.
YOU DON’T HAVE TO SELL YOUR SINGLE FAMILY HOME TO GET THE CASH OUT OF IT
It’s tough not to notice that real estate prices across the board are through the roof. As mentioned above, there is so little supply, so demand is high and prices skyrocket. With prices at record highs we’re seeing more and more homeowners selling their homes just to capture the earnings. They don’t necessarily want to move (if they’re occupying the home) or move their assets but they also don’t want to miss this “huge opportunity”, as they see it. It is normal for buyers to offer up to $40,000 over asking price these days, depending where you are, and that can be extremely attractive.
But what are you going to do once you’ve sold? If you occupied the home, now you’ve gotta buy something to live in...and guess what, those exorbitant prices are waiting for you? As an investor you might have some more flexibility, but you’re still beholden to this market. As much as selling seems like a smart move, it’s not the smartest.
CASH OUT REFINANCING:
With sale prices up so are appraisals. So you could have your property appraised to take advantage of the market and then work with a lender to retain that asset and also tap into that equity. For example, Nexus has a client who refinanced back in 2019 at an appraisal value of $300,000. Right now, his property is valued at $400,000. He can refinance, add a couple hundred bucks to his monthly mortgage, and pocket up to 80% loan to value. That cash, which is tax free) can be used to add value to that property or to put money down on an additional property once prices/demand changes or could be invested elsewhere.
THINK LONG TERM:
When you go on Zillow and see that your property is magically valued at $400,000 avoid the impulse to go all in. We can all picture the Scrooge McDuck cartoon dollar signs that might cloud your vision. Slow down!!! Instead, consider cash out refinancing. With cash in your pocket and a roof over your head, you can best take advantage of the current market. If you’re in New England, reach out to us as we have several lenders we trust and can recommend.
Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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