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Week of March 4th-10th
Property Tips and Tricks
Slow Money is the Best Money
Owning real estate over the long-term is perhaps the best "slow money" strategy that exists today for the average person, and it's no secret; many high-net worth individuals attribute a large part of their success to owning real estate. Plus, it's a tangible asset you can derive enjoyment out of, make memories in, and add-value to over time.
No matter where you are in your real estate journey, having multiple exit strategies when purchasing a property is crucial to safeguard against potential losses. One of those strategies includes renting a property out, and below are a few recommendations to consider when assessing a property for rental purposes:
1. Rental Rates: Understand that rental rates can fluctuate. They generally rise over time, but there can be periods when they dip.
2. Market Dynamics: Be cautious of rental rates that have recently soared in value. This could indicate a rental bubble that may lead to a slowdown or drop in rents. Historically, rental rates on the Monterey Peninsula have moved up gradually over time.
3. Geopolitical Factors: Be aware that long-term geopolitical issues can influence rental rates, potentially causing them to decrease.
4. Local Tax Policies: New tax policies can affect profitability and demand. Changes in these policies can compel people to move, thereby reducing demand.
5. Rental Laws: Stay informed about local laws, especially those that restrict rental policies. These can shift property valuations. One example - I've owned properties built pre-1978 and after purchasing and operating them as rentals for years, local laws changed and each property in the jurisdiction needed to have a lead paint inspection and potential abatement. Luckily, my properties were updated and dodged this costly process. This is just one example of something most buyers do not consider when purchasing a potential rental property.
6. Homeowner Association Policies: HOAs can change leasing policies, impacting rental valuations and returns. Be aware that just because the HOA rules dictate a certain minimum rental period when you purchase a property, the rental rules inside the HOA could change over time.
7. Interest Rates: Adjustable interest rates or short-term loans can increase your carrying costs and affect profitability when rates rise or when you need to refinance.
8. Refinancing: Ensure you have sufficient funds when refinancing a property to draw out capital for other investments. Overly ambitious high rental returns can lead to negative equity if things don't go as planned. Also, it never hurts to keep a bit of reserves in an account to be used to spruce up a property before a refinance. Small home improvement projects can yield a significant return on investment, which could bode well for an upcoming appraisal and refinance.
9. Vacancies: Plan for vacancies. A single month of vacancy can cost about 8% of annual gross income, significantly impacting profit. A property with an 8% net return, but an extra two months of unplanned vacancy can put you behind for two to three years as far as generating your expected return on the property.
10. Timing and Projections: The success of real estate investments often depends on timing and the ability to make conservative rental return projections. Don't only assume the best-case scenario. Also, controlling when you sell is one of the most powerful real estate strategies, so don't put yourself in a position where you feel pressured to sell.
Remember, the value of a property as an investment can dip when rental returns diminish or rental rates drop. Always make conservative projections for both rental returns and vacancies to protect your investment.
Real Estate News
Market Movers Heading Into Spring
Mortgage rates edged below 7% this past week, a move in the right direction that was felt by the broader market by way of higher mortgage applications. We still have a ways to go before many buyers and sellers step off the sidelines, in my opinion, but Fed Chair Jerome Powell came out this past week and commented that the Fed is "not far" from cutting rates. If inflation readings keep tracking where they are, we could be just a few months away from the first Fed rate cut in four years.
In other news, quite a few properties within the $2MM to $7MM bracket on the Monterey Peninsula have recently gone under contract. Could it be an early sign of things to come in the Spring? Since we've been seeing a bit more inventory come online as of late, I do not think its unreasonable to expect an uptick in sales. Also, it doesn't hurt that the stock market has been absolutely ripping...for the first time since 1964, the S&P 500 has risen 17 out of the last 19 weeks. For some, selling off stocks, taking the gain, and buying hard assets (real estate) could make sense right now. With most of the year still ahead, there's ample time for strategic tax planning around capital gains.
Lloyd's of London, a leading insurance market, reported this past week that it sees insurance costs leveling out over the next few years, but not falling. If you're considering a property purchase this year, it's advisable to obtain insurance quotes early in the process to accurately calculate potential expenses. Shopping around for quotes could also prove beneficial.
To sum up, the real estate market is demonstrating promising growth indicators, with a decline in mortgage rates and an increase in contracted properties. Our market has traditionally exhibited seasonal fluctuations, so it remains to be seen whether this growth is a standard trend for this time of year as we approach Spring.
Worked with me in the past? Share your experience.
Jonathan Balog
DRE# 01980970
Broker
M: 831.747.0310
[email protected]
Compass is a real estate broker licensed by the State of California operating under multiple entities. License Numbers 01991628, 1527235, 1527365, 1356742, 1443761, 1997075, 1935359, 1961027, 1842987, 1869607, 1866771, 1527205, 1079009, 1272467. All material is intended for informational purposes only and is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to the accuracy of any description or measurements (including square footage). This is not intended to solicit property already listed. No financial or legal advice provided. Equal Housing Opportunity. Photos may be virtually staged or digitally enhanced and may not reflect actual property conditions.
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