Rental Market Lags Behind Sales Market

RENTAL MARKET LAGS BEHIND SALES MARKET

Investors may purchase properties for different reasons. One investor may purchase a property and rent it so that it will provide a stream of cash flow, hopefully positive, while another investor may purchase a property with the intention of selling it at a higher value, thereby allowing a profit.

The investor who purchases a property for rental income can keep his rent relatively stable and still maintain a steady and positive flow of income, because the costs will remain relatively stable. Although some costs may increase such as taxes and insurance, the costs of financing can be consistent if the property was purchased with a fixed rate loan. Even if the property was purchased with an adjustable rate loan the rent does not have to increase until the loan adjusts which may be 2 to 5 years out. Over this longer period of time, even in a slow appreciation market, the property will still increase in value, which can allow for the investor to refinance with better terms, due to having more equity in the property. Although the rental investor, also, looks for property appreciation, the main goal is cash flow, which means that if this investor does decide to sell the property, the property can be sold at a lesser amount than other properties as long as it still provides positive cash flow to the next owner.

The terms of a lease can keep the value of a property down. For instance, if today it makes sense to purchase a property for $100,000, which provides $1000 per month in rental income and the lease is for 2 years, then it may not make sense to buy this same property 1.5 years out, if there has been substantial appreciation in the area. Remember the lease conveys with the property, so it may lead to a negative cash flow, at least until a new lease with a higher rent can be made.

Renters are only willing to pay so much in rent, before they decide that it is more beneficial to purchase. A renter does not receive the benefits of tax deductions and increased equity that a purchaser does, so the renter wants the rent to be correspondingly lower. This puts pressure on rental properties to stay lower in value.

Sometimes an investor who is looking to buy and resell for profit, usually to a home which needs to be renovated or rehabbed, has to make a decision as to whether to keep it as a rental property or to change it into a single family property. Generally speaking, for this investor, for the reasons stated above about rental values, it would be better to convert the property into a single family dwelling. This decision can not be made in isolation of other factors. For example, in a neighborhood where 80% of the residents are renters, then it may be difficult to find an owner occupant buyer, so it may make sense to keep this property as a rental or to not invest in it at all.

To help you to determine the correct value for any given property, contact Ron Trzcinski of Zenith Realty at 410-935-5844.