Sometimes I feel like counseling my clients with higher-end homes is like counseling my single girlfriends in their late 30s.
Her: I have a great job (Viking stove).
Me: Yes, I know you have a great job (Viking stove).
Her: Do you have any idea how much I spent on my new new blonde highlights (radiant heat floors)?
Me: Your highlights (radiant heat floors) are very warm and inviting... and I know how much you love them, but suddenly every single gal (new property on the rental market) has gorgeous blonde highlights (radiant heat floors).
Her: I'm the total package! (My house would go for $1.3m on the sales market!)
Me: Oh sweetie, I know you are-- let's go to Ray's for Happy Hour to watch the sunset and have a cocktail. (Yes, it really is a gorgeous home. Let's sit down and pencil out cash flows.)
It's no wonder there are so many luxury rentals on the market. Last summer I put my Ballard Cape Cod on the rental market because the thought of losing $60k in cold, hard cash was unbearable to me. I can't imagine the thought of losing several hundred thousand!
Pulling your property off the sales market in favor of the rental market shows a great deal of moxy and resolve. Your sensibilities tell you that you can ride out "today's market challenges" (my go-to euphemism) if you make some adjustments to your plans and don't lose your head. You'd rather see some cash flow on the property than not. Excellent-- all makes great sense.
And now for the math...
I wish the math looked like this: House A has an approx sale value of $500k and House B has an approx sale value of three times that amount. House A's rental value is $1800 and therefore House B's rental value is also three times that amount. If only! Recently, we've been finding that House B's rental value is more around $2800 (NOT always- it greatly depends on a lot of factors, which is why you should always consult a professional)... and about the same as House C's rental value, although House C would fetch around $1.0m on the sales market.
Rental values just don't take the same exponential trajectory, which is very difficult to reconcile for owners of higher-end homes.
Here's some more math:
House A lists Jan 1, 2009 on the rental market for $4000/mo. House B, with somewhat similar features down the street lists for $2800/mo. Feb 1, House B is rented at $2800/month. After two months, House A lowers the asking price to $3500 and then two months later on May 1 rents for $3300. By Feb 1, 2010 House A has generated $33,600 and House B has generated $29,700. Not to mention the fact that House A's owner didn't have the headache and heartache of having a house sit empty for a few months. Now, if you were a landlord with the long-term in mind, then maybe waiting for $3300/mo makes sense. But MOST OWNERS WITH LUXURY HOMES ON THE RENTAL MARKET DON'T INTEND TO BE LONG-TERM LUXURY LANDLORDS! It just doesn't pencil out to be a long-term luxury landlord.
I came to my own painful realization in this market. I'm going to lose money. I had to ask myself whether I wanted to hemorrhage or bleed slowly. And then I figured out a timeline... and within that timeline formulated a plan to mitigate those losses.
There still is a luxury rental market and a good deal of people who want and need to live in larger homes with more features. However, the supply has far out-paced the demand recently and those consumers have a great deal of choices. Make sure consumers will be "into you" by setting the price appropriately.
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