In 2022, real estate investors are facing a very different market than they did in 2020. Where fix-and-flip properties were an appealing draw two years ago, the outlook has changed.
According to ATTOM Data, profit margins for real estate shrank to 33.5% in late 2021, which is the largest dip seen since 2009. Although home prices haven’t dropped, several factors have contributed to the challenge of making a profit, including labor shortages, supply chain issues, inflation’s impact on the cost of materials, and an increasingly competitive sector. Experts predict values will rise more slowly in 2022, supply chain and labor issues will continue to have an impact, and markets will continue to be saturated with individual investors as well as institutional buyers.
All of this has given investors more incentive to hold on to properties for a longer time.
Borrowers are seeing that financial products are also shifting with these trends.
There are more 30-year mortgages for investors than previously. Rental units, particularly single-family homes, are more in demand than ever, with the numbers of renters across price points rising between 2020 and 2021.
A shortage of rental housing across the country is an opportunity for an investor looking to “create” more inventory by renovating property. The National Association of Realtors predicts that rent prices will rise faster than home prices in 2022. With home supply limited and demand rising for the foreseeable future, even those holding short-term leases are expected to become long-term tenants.
If you’re looking to transition from short-term real estate investments to a longer-term strategy, the rental market beckons. Here are some key dos and don’ts to help you get started.
- Do your homework.Before choosing property, research desirable neighborhoods as well as emerging neighborhoods. Be sure to factor in renters’ criteria such as convenience, safety, good schools, walkability, and access to public transport. Understand the local rental laws such as rent control regulations, eviction rules, and lease specifications. Additionally, take the time to learn local tax laws and benefits, including which deductions you can take advantage of.
- Do limit your financial risk.Much as you would for a shorter-term investment, it’s important to be realistic about the time and money involved. Unlike a fix-and-flip, the returns will be slower, so plan accordingly and understand that this investment requires more patience. Even if you are only breaking even for a few years, your property is appreciating in value and should eventually produce passive income as well as profit when you sell it.
- Do it on your own time.Just as the profits will not rush in with a rental, so too will you have the time and flexibility to sell the property when the time is right. The deadline is ultimately of your own making.
- Do look for red flags in a potential property.Red flags could include several price drops, extended time on the market, and businesses in the neighborhood closing. These signal declining desirability or difficulty obtaining needed information from the seller.
- Don’t choose partners such as contractors or building managers with haste.Inquire among your local network to find highly rated professionals.
- Do use discretion when making borrowing decisions.Even if you are able to purchase the property in cash, financing it might be a more attractive proposition, particularly if the lender allows you to finance both the mortgage and the repair funds.
- Do develop a management plan.The plan may include a manager to oversee day-to-day operations, including tenant screening, tenant communications, and repairs.
- Don’t forget to renew your tenant leases.Renewing leases is an ongoing process that must happen on an annual basis. Allowing month-to-month leases can cost you money.
- Do get your financial affairs in order.A lender will want to see your credit score, down payment, debt-to-income ratio, and savings. Purchase landlord insurance to cover loss revenue, liability, and damage. Build an emergency savings account with at least 20% of rental income. Be sure to keep detailed books that account for every tenant and their security deposits, any expenses and repairs, and any other costs you will want to deduct at tax time.
If you are considering a transition from short-term real estate investments to a longer-term strategy, you can be successful, but you must be prudent. Do your due diligence as you would for any investment.