Today’s housing market is so competitive and pricey that even those homeowners who might want to move up to a larger home are staying put. They either can’t find or can’t afford what they want. A new strategy, however, is becoming increasingly popular — in order to afford that new home, keep the old one.
The number of investor-owned properties continues to rise, but the "investors" are not all big companies or landlords with multiple properties. More and more, they are just current owners using today’s very lucrative rental rates to pay for a bigger home.
Liz and Kevin Chamberlain, both in their mid-30s, needed more space than their Washington, D.C., home could offer, after the birth of their first child. They thought about renovating, but the cost to expand was incredibly high, and the footprint of their Capitol Hill row house was limited anyway. Their neighborhood, however, is commanding very high rents.
“We ran the numbers. I literally made a spreadsheet and ran all the different options,” said Liz, who purchased the Capitol Hill home several years ago, before she was married. “It made the most financial sense for us to keep our house in D.C., rent it out and buy here.”
Liz and Kevin bought a larger home with a big yard just outside D.C. in Cheverly, Maryland. She says many of their friends are doing the same thing as their families expand.
“It was great for us because we were going to be happier here in a bigger space,” she added.
Liz and Kevin had already saved money for a potential renovation, so they just used that for the down payment on the second home, and lenders today are becoming increasingly flexible with investment home mortgages. They have to be, because higher interest rates have left them with much less refinancing business. They need to make that up somewhere.
“They're looking at the possibility of making more loans,” said Lawrence Yun, chief economist at the National Association of Realtors. “Several years ago, during the depths of the housing crisis, they would have been extremely strict, but now they are looking at the rental income as a mitigating factor for carrying two mortgages.”
Some Realtors are actually recommending the strategy to their clients, as the housing market becomes increasingly competitive and more and more potential move-up buyers feel priced out.
Not only do homeowners like Liz and Kevin get the rental income to help cover both mortgages, they will also continue to see price appreciation on their old home, which they would have lost had they sold it. Demand for rental homes is so strong in their neighborhood, and in most urban areas today, that they were not at all concerned with finding a renter.
The median price of a home sold in June hit another new high, according to the National Association of Realtors, and the supply of listings available continues to hover near record lows. Demand for housing, both owned and rented, is extremely high, given the improvement in the economy and the job market. That means both rents and home values are unlikely to falter.
Millennials, the largest generation, are finally forming households at an ever-increasing rate, moving out of their parents’ basements or out of shared living situations. Because they were delayed by the recession, many looking for single-family homes are older and married, but there are precious few starter homes for sale. Single-family rentals are therefore a hot commodity.
Of course, for current homeowners, becoming a landlord does add both liability, risk and potential headaches. Some may opt to use a rental company to handle the management of the property, including collecting rent and doing repairs, but that cuts into monthly profits.
“Certainly having an umbrella policy is a really good idea to make sure you're covered insurance-wise," advised Liz. “And then I do think living in the house, and really knowing it and making sure it's in good shape before you leave and rent it out, is probably one of the best things you can do.”