The slump in the housing market coupled with low interest rates make the current rental market very attractive for investors that are interested in upgrading their portfolios. The investors need to be thinking long-term when analyzing the existing market. In most areas, there is a healthy supply of rental units on the market resulting in a “renter’s market” with lower rents in view of the higher inventory. Some owners have put their homes on the rental market vice selling thereby increasing the number of rental units. Add to that, job losses and credit issues which prompt some renters to go back home to live with parents or relatives or to share homes with other tenants in order to reduce living expenses.
Stott Property Management manages some 400 rental properties island-wide on Oahu. The current downturn in the economy has created longer vacancies, higher delinquencies, lower rental rates and fewer qualified renters. Evictions have increased as many tenants living paycheck-to-paycheck have lost their jobs or had their salaries reduced similar to the forced furloughs state workers are now experiencing. Some tenants find themselves living on credit cards that eventually end up creating poor credit ratings coupled with lack of income. Many of today’s tenants could not qualify to rent their current homes as both their financial situation and credit have deteriorated since they were originally qualified.
So, with all these problems, why on earth do I say that this is an attractive market for owners interested in upgrading their portfolios? That’s because you should always try to make an upward move in a down or depressed market if you have the funds to do so. Experienced investors try to take advantage of downturns to strengthen their competitive position for the next upturn by investing capital where it can achieve the most benefit to them. Their investments are often made with cash vice additional mortgage leverage. This may be the time for some owners to reallocate some of their investment resources.
Granted the home you sell will net you less; however, the replacement property will cost you less and with all our problems, there are still some good buys available, particularly if you project into the future when rents once again will rise. Assume you own a one-bedroom unit or studio unit in Salt Lake and want to upgrade to something larger or closer to town that will provide you more rental income and/or higher quality tenants. If your unit was worth $250,000 and prices declined by 30%, it would only be worth $175,000. Assume the replacement property had been worth $400,000 and also declined by 30% to $280,000, the difference between the two would be $105,000 ($280,000 less $175,000) compared to $150,000 ($400,000 less $250,000) with no market decline.
The vehicle that enables you to conduct such upgrades and avoid capital gains taxes is a 1031 exchange. We have seen a significant increase over the past year in owners using 1031 exchanges; it is an area where we specialize in providing assistance to owners. The first step is to ask yourself some simple questions: Are you happy with your investment; is it working for you or is there a way to trade it for something better? If a change might be in order, then it is time to talk to my son-in-law and Property Manager, Tim Kelley, about rental properties on Oahu and rental rates versus property costs. I’m available at the same time to talk to you about 1031 exchanges. Demand at the lower end is currently much stronger than at the upper end with prices at the lower end seeming to level out which is another reason for a move-up now, positioning yourself for the future.
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Rental Market Comments
The slump in the housing market coupled with low interest rates make the current rental market very attractive for investors that are interested in upgrading their portfolios. The investors need to be thinking long-term when analyzing the existing market. In most areas, there is a healthy supply of rental units on the market resulting in a “renter’s market” with lower rents in view of the higher inventory. Some owners have put their homes on the rental market vice selling thereby increasing the number of rental units. Add to that, job losses and credit issues which prompt some renters to go back home to live with parents or relatives or to share homes with other tenants in order to reduce living expenses.
Stott Property Management manages some 400 rental properties island-wide on Oahu. The current downturn in the economy has created longer vacancies, higher delinquencies, lower rental rates and fewer qualified renters. Evictions have increased as many tenants living paycheck-to-paycheck have lost their jobs or had their salaries reduced similar to the forced furloughs state workers are now experiencing. Some tenants find themselves living on credit cards that eventually end up creating poor credit ratings coupled with lack of income. Many of today’s tenants could not qualify to rent their current homes as both their financial situation and credit have deteriorated since they were originally qualified.
So, with all these problems, why on earth do I say that this is an attractive market for owners interested in upgrading their portfolios? That’s because you should always try to make an upward move in a down or depressed market if you have the funds to do so. Experienced investors try to take advantage of downturns to strengthen their competitive position for the next upturn by investing capital where it can achieve the most benefit to them. Their investments are often made with cash vice additional mortgage leverage. This may be the time for some owners to reallocate some of their investment resources.
Granted the home you sell will net you less; however, the replacement property will cost you less and with all our problems, there are still some good buys available, particularly if you project into the future when rents once again will rise. Assume you own a one-bedroom unit or studio unit in Salt Lake and want to upgrade to something larger or closer to town that will provide you more rental income and/or higher quality tenants. If your unit was worth $250,000 and prices declined by 30%, it would only be worth $175,000. Assume the replacement property had been worth $400,000 and also declined by 30% to $280,000, the difference between the two would be $105,000 ($280,000 less $175,000) compared to $150,000 ($400,000 less $250,000) with no market decline.
The vehicle that enables you to conduct such upgrades and avoid capital gains taxes is a 1031 exchange. We have seen a significant increase over the past year in owners using 1031 exchanges; it is an area where we specialize in providing assistance to owners. The first step is to ask yourself some simple questions: Are you happy with your investment; is it working for you or is there a way to trade it for something better? If a change might be in order, then it is time to talk to my son-in-law and Property Manager, Tim Kelley, about rental properties on Oahu and rental rates versus property costs. I’m available at the same time to talk to you about 1031 exchanges. Demand at the lower end is currently much stronger than at the upper end with prices at the lower end seeming to level out which is another reason for a move-up now, positioning yourself for the future.
Back to Useful Newsletter Articles