Whether you were affected by the 2008 housing crash and still are recovering from that loss or you are a new JAX homeowner, the chance we will see another housing slump in the next 12-24 months is real.
Just this last Wednesday, DOW tanked 800 points. The markers are indicating that we are looking to revisit a drop in housing prices.
How will that change the housing market and in turn, the rental market?
In this two-part series we are going to look at the options, opportunities, and break down the costs and help you wade through the doomsday predictions to show you how you could possibly not just survive but potentially profit from renting your home even if the market takes a turn for the worse.
Do rental rates drop during an economic downturn?
“ATTOM data also show that rents are even less impacted by a recession. During the housing bust in 2008, the average fair market rent for a three-bedroom property, as calculated by the U.S. Department of Housing and Urban Development, rose at a steady clip even as home prices cratered. Rents likely rose as homeowners who had to go into foreclosure during the crisis added new demand for rental housing.”
One good thing that can come from a bad situation is that when the housing market drops the rental market can grow. If fewer people qualify for loans or worse, default on their current mortgage they still need a place to live.
There is always the possibility that the rental market will soften too. With a typical recession, you may see some job loss. In Jacksonville, we do not expect to see a huge hit to the job market with this dip in the housing market. Being a military town there is consistent turn over for the JAX rental market. But if you can keep your rental filled you can keep paying your mortgage with those payments.
Planning ahead, having a team like Navy To Navy Homes help you price your rental, finding quality applicants, and being aware that there is a possibility of the market softening will set you ahead of many other landlords.
What happens when the seller's market crashes?
“June-July, 2018: Average housing demand in the US was reported to have fallen 9.6 percent in June, while the number of listings increased. Overall, 15% fewer offers were made on homes, which is probably why the inventory grew.
Prices continued to climb or remained high because sales have to slump a lot before sellers become willing to accept the harsh reality that their homes, in which they have so much of their wealth invested, are not worth as much as they were.”
We often see emotional pricing in a seller's market. Because the market has been so hot recently sellers expect to get top dollar. This can cause some of them to overprice their homes because they “think” the house is worth more because to them it is.
This kind of pricing might work here and there in a booming seller's market, but in a recession, you’ll want to price your home according to the market. If you can’t stomach, or can’t afford, a lower-priced offer, renting out your home is a terrific solution to keep your mortgage paid if and when you want to move.
Choosing to keep your home and rent it out, or having multiple income properties can seem scary with these slips in the market, but real estate can still be a solid investment. Now is not the time to jump into the sale of your property just hoping for a quick buck. As sales shift and potentially slump, you need to be prepared and make unemotional decisions.
A well-priced rental in a decent neighborhood will get the attention of courteous and respectful renters. In a military dominant town like Jacksonville, one thing you can count on is a steady stream of people coming into the area needing rental homes.
Renting out your home instead of selling it can also be a good long term investment strategy.
Knowing the numbers will help you make an informed decision. Investing is typically not a short term plan no matter what the market.
Should you sell now?
“One of the smartest things you can do as a real estate investor is to get into the habit of periodically evaluating your options: buy, hold or sell. This is especially true if you’re building your real estate portfolio as a primary investment vehicle that you’re hoping will fuel your children’s education or your retirement.”
Real estate is not typically a get rich quick investment. When you looked at a property as a possible investment you were not expecting a quick return.
Just because the market is changing does not mean you should change your long term plan and liquidate your portfolio. Using a good property manager like Navy to Navy Homes to keep your investments full of quality renters can mean years of hands-off real estate investing and potentially positive ROI.
You can keep moving forward with your investment plan and the properties will continue to work for you well into the future and into the next seller's market.
It is good to regularly evaluate your investments and how they are serving you.
According to Owen Malcolm, a certified financial planner and managing director at United Capital in Atlanta, “For most people quarterly is more than enough, and for some people, even that could be too much. What you want to avoid is making knee-jerk decisions because of one good quarter or one bad quarter.”.”
Just like with the stock market, it is typically not a good idea to react emotionally to what could be a temporary change in the market.
Market fluctuations happen and chances are good that the market will recover after a few years and you can still reap the benefits of your initial rental home investment in the next seller's market.
According to Curbed.com it isn’t all doom and gloom, “Just last month, Realtor.com predicted the resurgence of national inventory declines, which in just a few months would lead buyers to see a drop in the number of homes for sale that could “lead to the return of bidding wars, stronger price appreciation, and quicker home sales.”
How long will you have to wait to sell after the market recovers?
You bought that rental property as an investment. No matter what the stock market and housing market is doing you were already in for the long haul. Unless you are into flipping foreclosures, real estate is typically a long term plan, not the short sell.
By keeping your rentals full of high-quality tenants you can ensure that your mortgage on that property will continue to get paid down. Utilizing a property manager who knows the Jacksonville market will ensure that you can rest easy letting them handle the details.
If you are looking to flip houses, that is a completely different investment strategy.
You could end up with you needing a quality property manager if the sale you were hoping for does not come quickly.
Keeping your options open to rent out that home you had hoped to flip could save your assets!
Remaining flexible is one of the keys to real estate investment success. Another key is having a great team behind you and your investment. The staff at Navy to Navy Homes have your best interests at heart. They want to see your rental full and will work hard to be sure you can rest easy knowing your property is being looked after.
What will renting my home cost me?
“If you have no intention or need to sell the properties anytime soon, are making a positive cash flow with enough to cover a reduced rent amount if the recession causes a soft rental market, and you have enough reserves to pay the mortgage if you hit a multi-month vacancy then you are good.”
A savvy investor knows that you should always have some cash in reserve for unexpected expenses. Things break, maintenance has to be done, you don’t want to be caught off guard.
According to Mario of Navy To Navy Homes, “The average property in Jacksonville sold last year was $225,000. So that would be $2250 a year that you should put in your mind for annual expenses. You annualize that and break it down per month and you are at about $187 per month. Nobody thinks about that. They think they can just keep $500 bucks aside. Well, sure, you could...but the general rule of thumb is 1%.”
That 1% is different for a 1000 sf condo vs. a 3000 sf house on the water. They will require different maintenance and the bigger home will require higher priced repairs. As you might expect, you need two completely different priced air conditioning units for those properties. Along the same lines, painting or roofing one will be significantly cheaper if those maintenance items come up.
Using a property manager is not free, but it will free you up for other things in your life and a reduction in stress. Having someone you trust to take the late-night calls and collect the payments can save you some sleepless nights.
Let's look at the example below.
With the services of a company like Navy to Navy Homes, you can keep your investment while increasing the equity in a rental property.
In this case, if you did not need to liquidate for cash, you would be ahead at the end of the year even with the property management fees.
A $200k home now sells for $230k. (see attachment image from Zillow below)
That’s 30k profit!
If you chose not to sell that property but rented it out, the home could currently rent for $1650/mo (per Zillow) assuming a monthly PITI payment of around $1300/month.
Assuming a 10% fee for the property manager ($165/month), the net profit becomes $185.
Now, assume we need to save $2k for maintenance/repairs each year.
That would take 11 months of profits to accumulate.
Meaning, the property only profits $185 for the year. ($2k/185 month profit)
Unless the rental market goes up, then you could potentially profit more.
But, at the same time, you, the homeowner are building equity. That is $15,600 of mortgage that was paid down by your renters. I don't know about you, but that is a little more than pocket change for most folks.
Keeping a level head and sticking with your long term real estate investment plan will be key to riding out the change in the market with little to no stress.
If you are on the fence you can always reach out to your financial advisor and take a look at your entire portfolio to get a second opinion about changing your plan.
That would allow you to discuss and adjust your portfolio if needed.
In the next part of this two-part series, we will address the things you can put into play now to protect yourself from this potential real estate downturn and make money in that economy.
We will break down the math on how to possibly make money on your rental property during a recession.
We will also show the advantages of using a property management company like Navy to Navy Homes to reduce your stress, keep your rental filled and allow your renters to pay down that mortgage for you.
Navy to Navy Homes
4540 Southside Blvd, Suite 702
Jacksonville, FL 32216