Why It Makes More Sense Than Ever To Rent Out Your Single Family Home Rather Than Sell It

RENTAL MARKET CONDITIONS ARE ON YOUR SIDE WHILE THE SALES MARKET IS STUCK IN THE MUD

It’s not even worth beginning with an introduction and overview of how the real estate market is a bit “off” right now. You already know that interest rates are higher than they’ve been in decades and housing prices have not come down in the least. Supply simply is not there and housing market trends are seemingly frozen.

But the sales market and rental market are very different animals…or plants I suppose. Picture “sales” as that palm tree on a desert oasis and “rentals” as a cactus. When the water source dries up, like it has in the sales market, that palm tree is in trouble…but the cactus survives and learns to weather the harshest and most unpredictable conditions. While thousands of Americans are unable to sell their homes, and so many more are unable to buy something that’s affordable, the rental market is in full bloom.

LEARN MORE: IS IT A HOUSING CRISIS? … OR A DEMAND CRISIS???

TOP FIVE REASONS TO RENT YOUR SINGLE FAMILY HOME (INSTEAD OF SELLING IT):

1. RENTAL PRICES HAVE SKYROCKETED (AS WELL)

It’s certainly not ideal for tenants but the elevated prices from the sales market ultimately trickle down and it all lands at the tenants’ feet. There are two primary pieces at play here pulling and pushing from the top and bottom of the market. At the top, those buyers who do purchase in this market need to offset their exorbitant costs (mortgage, taxes, utilities, and insurance) and they’ll do so by passing them down to tenants in the form of elevated rents. This is recognized by those in the market and they subsequently raise their rents. RENT PRICES ARE DIRECTLY CORRELATED TO THE RECURRING EXPENSES OF THE PROPERTY. Yes, some landlords are greedy, but most are just getting by. The free market is a great thing typically, but when vacancies are so low (as they are currently), landlords can raise prices and there’s no counterbalance pulling them back down…so here we are.

At the bottom, where perhaps there could be that counterbalance, there is the opposite. Fair Housing prices are set by Housing and Urban Development (HUD) to ensure affordable options for low-income earners but instead have an inflationary effect in the current market. For example, HUD might offer rental assistance up to $1500 for a two-bedroom apartment in a given area for the benefit of those who can’t afford that rent on their own, but that then sets an artificial floor and higher quality rental units subsequently charge more, and the game of cat and mouse continues with ever increasing rental prices year over year.

HUD fair housing pricing is not all that likely to affect you and your single family home directly, but the same process leads to higher rents all the way up the scale. Single-family homes that would’ve rented for $2,000 before the pandemic are easily getting $2,750/month today in many areas.

LEARN MORE: HOW ELEVATED PROPERTY SALES PRICES ARE AFFECTING RENTAL AFFORDABILITY FOR TENANTS

2. THE TENANT POOL HAS NEVER BEEN MORE HIGHLY QUALIFIED

A monthly payment, for someone buying a house today, is about 3 to 4 times more than it would be if they’d bought before 2019. That is a wild reality and it speaks to how impactful the rapid interest rate hikes have been. If paying $2,750 to rent a single family home sounds crazy to you, it’s likely because you’re looking through the lens of your pre-pandemic mortgage…and also, because it’s crazy!

For those reasons, today’s pool of potential buyers is extremely limited, but very strong. There are plenty of young professionals that by any other metric would be highly-qualified to own a home. But lenders are asking for roughly 30% down on homes that are already overpriced and these homeowners would be paying more than anyone in a generation to simply borrow that money for their mortgage. The math just doesn’t add up..so if you can’t (or don’t want to) buy, you rent. This provides this professional class with some much sought after flexibility to buy when conditions warrant it, while living in a home that meets their expectations.

To put some numbers to this: one of our offices just began working with an older couple who own a house valued around $565,000 in a nice coastal town. They’ll likely be able to rent it for between $3,700 and $4,000 a month in the current rental market. That amount sounds unreasonable, but if the same person wanted to buy this property instead, they’d first need $169,500 for a downpayment. Then they’re looking at paying the remaining $395,500 at a 7% interest rate!!! Neither option is a good one…but renting is far more realistic for the majority of Americans.

Subsequently, the tenant pool has never been more highly qualified and it is evidenced by the amount of single family homes Nexus Property Management® (and other property management companies) are adding to their client roles.

LEARN MORE: THE TENANT POOL HAS NEVER BEEN DEEPER OR STRONGER

3. TURNING TAXES INTO A BENEFIT RATHER THAN A PUNCH TO THE GUT

If you rent your home you’ll be using it as an investment, and as such, you’ll be able to take advantage of some tax advantages that come with turning your home into a business. For one, you’ll be able to write-off the interest on your mortgage (if you have one). You’ll also be able to write-off any expenses that go toward maintenance and management of the property. If you hire a landscaper, it’s now a business expense. In fact, hiring a professional property manager will also be entirely deductible.

If you were to sell, you’d want to make sure you’re fully informed and have consulted a tax professional to map out your best strategy and timetable. Because appreciation has been so rapid in recent years, we’ve seen more and more people selling high in this market only to fork over much of that added profit as capital gains.

LEARN MORE: HOW DOES REAL ESTATE DEPRECIATION WORK?

4. INTEREST RATES

Let’s be short and to the point. Once you sell your home, you need to live somewhere else. After taxes, do you have a plan and enough cash in your pocket to allow you to avoid getting sucked into the current interest rate tornado? Are your profits simply going to be recycled and fed to a lender if you need to borrow on your next home? Interest rates have been flat for a while and are beginning to come down, albeit slowly. Do the costs of jumping into this environment outweigh the benefits of waiting until the cloud settles a bit?

LEARN MORE: FLASHBACK VIDEO!!! THE IMPORTANCE OF INTEREST RATES (December 2020)

5. THERE ARE PROFESSIONALS THAT CAN MAKE RENTING AS PASSIVE AS YOU’D LIKE

It’s important to realize that the choice to rent your property is a much easier one if you reach out and consult with a reputable property manager in your area. Most property management companies are designed to cover all leasing, maintenance, and management issues that will arise. At Nexus, we pride ourselves on “handling clients’ headaches” so they don’t have to. If your aim is to vacation or take any other time away from where your home is, we’re here to pick up the reins.

If you’re interested in learning more about Nexus’ services and you're in one of our many territories, contact any of our teams across Arizona, Connecticut, Massachusetts, and Rhode Island.

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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and 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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