It’s a hot question swirling around the minds of homeowners, especially right now. For the last couple of years the housing market took a major upswing and many homeowners jumped at gaining huge instant lump sums. Unaware of the impending interest rate hikes, selling your home seemed like the best bet. Jump to today and the markets shifting.
Hello again! I’m Jordan and if you read my recent article on Wake County Real Estate, you’ll know I bought my Raleigh, NC home in 2018 and sold it in 2021. While I took my lump sum for the sale of my house, I regret it almost every day.
Rental Income is Passive Income
This is pretty obvious, right? And of course, I knew this. Working for a property management company my career revolved around helping other homeowners achieve their investment goals. The rental market was hot and my financial situation was fine. My mortgage payments were low for the area and so was my interest rate. I would’ve seen positive cash flow instantly to the tune of several hundred dollars a month. Why, oh, why did I sell my house?
I’m sure many of you are asking yourselves if you should sell your home too. While its all situational there is a time and a place for everything. In the current housing market we’re in, it may not be the right time to sell. Interest rates just rose another .75 percent this week and if you haven’t seen, mortgage applications are down 23% from last year. The sales market is coming to a grinding halt yet rental properties are still moving.
This could be just what you, a homeowner, didn’t know you were looking for! Your current house could become an investment property and you’ve got the upper hand. It’s likely your mortgage interest rates are below today’s rates meaning your monthly payments are likely below current rental prices. Unlike other investors, you’re not forced to accept higher interest rates to expand your investment portfolio. These investors know they’re not going to see a monthly profit. But you, low mortgage interest rate homeowner, are causing other real estate investors to turn green with envy; including me.
Rental Demand and Potential Profits
Demand for rental homes across the country has spiked. Those unable to afford their dream home purchase found it more feasible to rent for the time being. And out-of-state movers were looking for a temporary home before they made long-term decisions. Late 2021 and in the first half of 2022 the demand for homes was unprecedented. Even property managers saw extreme housing shortages and this natural supply and demand made monthly rents increase. On average, Victory saw nearly a 30% increase in rental rates across the board.
Real estate investors looking to cash in on this almost guaranteed positive income contacted their agents and bought anything they could. What they didn’t expect though was to see a slower market. I’ve seen it happen firsthand. While it’s unfortunate, investors not making wise decisions are now facing monthly losses as rental rates see their usual seasonal decline. Those high-interest mortgage loans are showing their true colors.
However, those investors and homeowners that made informed decisions in 2019 and before refinanced their homes for lower mortgage rates have been cashing in big ever since. As their real estate investments grow with monthly rental rates, the bigger picture -their property value- sky-rocketed.
Take my story for example. I bought my 1400-square foot home in 2018 for $218,000, sold it in 2021 for $315,000 and today Zillow estimates its worth to be over $400,000. My mortgage at the time was $1475 including HOA dues, escrowed property taxes, and insurance. Two months after I sold my home the company I work for rented out a similar home literally around the corner in the same neighborhood for $1925. Even if I used my property as a rental home for just one year, I could have sold that home for at least $50,000 more and had an extra $6,000 in my pocket. It’s still a running joke today with my team.
What’s the point here? Don’t make the same mistake I did. I could have personally generated nearly $6,000 in passive income in one year. Today, that other home is back on the market for rent at a whopping $2100. I won’t do the math because frankly, it’s upsetting.
The concern we hear from property owners is the cost of maintenance and upkeep. “What if my renter destroys my property?” You read about horror stories in the news or from friends with rental properties. Statistically, at least with Victory, the odds of pretty low that that will actually happen. In the time I’ve been here – 4 years now – I’ve seen thousands of leases end with only a small handful of those ending in complete disaster. It typically happens with lower-income rentals where the owners of those properties were more to blame than the tenants. Our resident screening process is so in-depth we practically know each one on a personal level before presenting applications to our homeowners. Trust me, very rarely does something slide by us.
Being a proactive rental property owner is just as important as if the home was still your primary residence. Annual maintenance costs like HVAC tune-ups, gutter cleaning, and yearly power washing are expected additional costs that come whether you live in the home or not. Yes, things still happen and maintenance requests from your tenants will come in. Dishwashers die and toilets leak all the time, its simply part of home ownership. Well-maintained homes though rarely see loads of maintenance requests and with careful planning, many issues can be resolved with preemptive care.
Should I Hire A Property Manager?
Short answer – totally up to you. A property manager’s job is to maintain and grow your investment and oversee the rental process. We also handle all tenant screening, communications between you and your tenant, lease agreements, maintenance, rental payments, legal issues, and so much more. But you can do it yourself. In many states, there is no legal requirement to have any certain license so long as you own the property you’re renting out.
Should I Sell or Rent My House?
Putting your cherished and well-loved home on the rental market is scary. Even I fell into that fear trap and I regret my decision every day. “No one will take care of this place like I did”. But that’s just simply not true. Renters are pickier than ever and they have the right to be! They want a nice home they can be proud of and show off. With many expecting to stay put for several years while the market cools, renters today are looking for a quality place they can call home long-term.
It’s once again more affordable to rent than it is to buy these days so we’re likely to see an influx in renters come 2023. While its unclear that the Fed plans to increase interest rates again, rumors are that it’s likely to happen again around the new year. Home sales will fall stagnant as the pool of qualified buyers dwindles at least for another year. During this flat period, you can expect home sales prices to dip below previously expected.
All in all your personal situation will dictate your next move. It’s always great to have that large lump sum of cash in your account but know the next home you buy will be at today’s mortgage rates. If your financial situation allows, you could use your current home as an investment property and use that extra passive income to cover the high mortgage of your new home until you’re able to refinance at a lower rate. Owning property has always been one of the best investment strategies around so why not cash in on the great thing you already have?