Hornung: Rent instead of selling

Highlights:

  • Monthly Q&A with Lane Hornung.
  • Thesis: Rent your home, instead of owning.
  • A Collector can be a long-term wealth-building strategy.
Lane Hornung

Lane Hornung

Residential real estate brokers are united on one issue: the need for more homes on the market.

Realtors are scrambling to find more listings and homes for their clients, with demand far outstripping the supply.

It is frustrating for buyers who have been outbid numerous times, even after having offered far above the listing price in some cases.­­­­

Having a home snapped up in weeks, days or sometimes even hours, can be a scary situation for the home seller, too. A home can sell so quickly that some homeowners are worried about not having a place to live after their home is sold.

For some people, who don’t need to sell their home to buy another, an alternative could be renting their current home.

This is the topic of the monthly conversation between Lane Hornung, founder and CEO of 8z Real Estate, and John Rebchook, of InsideRealEstateNews.com.

John: Lane, are people reluctant to sell their homes, because they fear they will have no place to move to?

Lane: First, I would say that even in this market where demand far outstrips supply, a good Realtor can make sure that a seller will not be “homeless”when they sell their home.   On the other hand, that is a real concern of some homeowners and clearly it is contributing to the lack of inventory in today’s market.

John: Obviously, some people need to use the equity of their current homes in order to get a down payment to buy another. But is selling your own home always the only option?

Lane: Not always. Maybe you can take some profits off the table in your stock portfolio for all or part of the down payment. Plus, if you can afford to put down more than the required down payment amount, your loan will be smaller and more manageable.

Given the volatility of the stock market, taking some stock profits off the table for a home that you can enjoy, might provide you some peace of mind.

John: Then, you can rent out your home.

Lane: Yes. I call these people Collectors, because they collect homes, rather than sell them, as their life situation changes and they buy an additional home.  Being a Collector is not a short-term reaction to the housing inventory shortage, but a long-term financial strategy.

John: In some parts of the Denver area, for example, the rental vacancy rate for houses is basically zero. That would seem to be a good incentive to keep your existing home and rent it out.

Lane: Absolutely. It’s a good time to take advantage of an incredibly strong rental market. Vacancies are at historically low levels and rents are at historically high levels. It’s the so-called Perfect Storm.

John: Why don’t you elaborate on why it pays to be a Collector, Lane.

Lane: Studies have shown that one of the key factors of long-term financial health is owning a home and how early in life you purchased your first piece of real estate. Often, that is more important than your income and your education. A Collector takes homeownership to the next step.

John: Give us an example of a Collector, Lane?

Lane: Imagine you were a Millennial (generally described as someone born between 1980 and 2000, a generation bigger than Baby Boomers) and you bought your first home five or seven years ago.

John: And now you are ready to move-up?

Lane: Exactly. You probably have quite a bit of equity in your home and there is a good chance that you have refinanced your mortgage at least once. Given how low mortgage rates were, you can almost certainly rent your home for far more than your monthly payment.

You may have refinanced into a 15-year mortgage, for example. Believe me, 15 years will fly by fast and you will be very happy to own your first home free and clear after renting it out to pay the mortgage.

John: And this is something that can be repeated, isn’t it?

Lane: For many people, who plan ahead, yes. The great thing is when you get ready to retire, and you have collected several rental properties, some of them free and clear, you have built yourself a nice little annuity.

When you think about it, home ownership is a zero-sum game. It is either owner-occupied, or it is rented. Why not take advantage of a growing rental market?

The other thing is that in some parts of the country, big Wall Street firms are buying up hundreds of homes to rent. That is not happening in Denver, so you are competing with other mom and pop owners, not big Wall Street institutions.

John: But being a landlord isn’t a solution for everybody, is it?

Lane: No, it is not. For one thing, you have to consider your own financial situation and prospects. You should also talk to a financial advisor about things such as the tax consequences of renting your home as opposed to selling it.

Also, if you lost one or two months of rental income between tenants, and have struggled to pay two mortgages – one for your rental and the other of the home you are living in – you probably are living too close to the edge to be a Collector.  And frankly, some people just don’t have the temperament to be a landlord. In that case, it makes sense to hire a property management company like 8z Rentals.

John: And you have to realize that the rental market, like the stock market, is cyclical, don’t you?

Lane: Yes. But think about it. If you bought a home at the previous peak of the market in 2006 and you went to sleep and never read a newspaper or saw a news report, and woke up today, it would be like the Great Recession never happened. Your home would be worth more than what you paid for it.

The point is over time, homeownership holds its own as an investment. I believe Millennials who become Collectors today, will be in a very good place financially in 20 or 30 years.

John: Thanks, Lane.

8z Real Estate is a sponsor of InsideRealEstateNews.com along with Universal Lending Corp. and Land Title Guarantee Co. A monthly Q&A with Lane Hornung is a feature of IREN. Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.

 

 

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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Comments

    • DJ- I assume we can both agree, condos do not make good long term investments ….. The HOA fee and risk of special assessment and lawsuits never make 1 off condos worth owning.

  1. Good advice, however, much more difficult than pre recession. Before 2009, lenders would allow rental income to be counted immediately. All a borrower would need to do is show a lease. The rent amount would offset the payment of the current home and lower the DTI ratio on the new home. Also, pre 2009 people were able to pull cash out using a HELOC up to 100%CLTV. So basically, you could pull your next down payment out of you current home and qualify for the next home with a lease(many people just provided a fake lease and used this process as a bridge loan strategy.) Current underwriting guidelines will usually require 1 year of seasoned rent (verified by a tax return). So, if you want to purchase a home and keep the current, you will need high enough income to qualify for both payments. Easier said then done. Also, if you have a good deal of cap gain built into the house you might be better off selling and buying a new rental. This way you can exclude the gain on the sale and the new home will have a higher basis. In order to keep your $250k($500k married) exclusion, the home needs to be a primary resident for 2 out of the last 5 years.

    • There’s lots of private money and seller carry out there. You can either give up when someone says no or you can make it happen. Who knows, you just might find you enjoy the work and go from a “collector” to a millionaire real estate investor.

      • in this type of market when homes are selling in a days, it’s rare, if not impossible to find an owner carry unless the terms are outrageous for the buyer. The easiest time to complete a owner carry in a buyers market when homes are not selling. I can’t think of any reason a seller would take on credit or duration risk in a seller’s market(other than a buyer paying an very high interest rate.) Also, I’m sure the owner will require a low LTV(very high down payment.) DJ, give me a reason an owner would benefit from seller carry?

        • As for private money, you are looking at 60-70% LTV, 7%+ on the rate with a 3 year balloon. I guess if you really want to be a landlord that badly, keep your current home, come up with 30% down pay 7% rate and have a plan for what you’re going to do in 3 year when the loan is due. After you figure it out, sign on the dotted line.

          • I just checked one of my hard money sources and it was worse than I thought…… A borrower with “A” credit can get: MAX LTV 65%, 9% rate, 2-3pts, balloon, and they still might look at the property you own(proposed rental) for potential DTI issues.

          • Keep telling yourself it can’t be done. I’ve done dozens of deals pre and post recession without using a bank loan. If it’s a good deal you can easily afford to pay a point or two above bank rates.

        • You’re not looking hard enough. There a lots of individuals out there who want (and need) income for retirement. They can stick their money in the bank and earn nothing, get a little more than nothing in 10 yr treasuries, or receive 5-8% secured by real estate. That’s a good enough reason, right?

          • I agree with you as long as they keep the LTV under 65%, it’s fine for the retired couple. But we started this conversation talking about a person who is using seller financing because they don’t have a down payment or have debt to income issues. I consider it risky for a retired couple to extend credit to someone not able to qualify for conventional financing. Also, it’s much more tax efficient to own dividend paying stocks.

          • Also, why would the retired couple sell the property if they want income. Just hold it as a rental home and use the rent payment as income? That way you have an cap rate around 7% you still control the asset(no need for a costly foreclosure). Now you have income and asset appreciation and don’t pay a broker 6%. Yes, would would loose you primary resident tax exemption, but just keep the house until you die and your estate gets a stepped up basis. So, I still can’t think of a good reason someone would want to do an owner carry in this market.

          • There are plenty of folks who fall outside the commercial lending guidelines but are still low risk. There are also many retired folks who want steady income but refuse to be landlords or assume the risk of owning the asset. The point is there are many options out there available for those who are willing to look and put forth effort beyond what the average person is willing to do. If you can’t figure it out then I suppose you don’t deserve it.

          • When you say “plenty of folks”, what percentage of the 6,000 active SFH listed on the MLS would be willing to accept seller financing? Of those, how many would go above 90% LTV? If you’re a buyer having issues finding the right house with such low inventory and then competing with all cash buyers, try sending the next offer as an owner carry. Write a letter to the seller explaining how you’re putting forth effort beyond what an average person is willing to do and you deserve it…. See what that gets you. DJ, you personally might spend 7 days a week looking for a an investment property that could come in many shapes and sizes. Most home buyers have a full time job and a specific home type/neighborhood they want. I would put the odds under 1/8 of 1% an average buyer would be able to complete this type of transaction finding a home and neighborhood they want to live in.

          • You’d probably be surprised by the number of personal residences that are financed by friends and family. I personally know of several. Happens a lot. Many are close to 100% financing.

          • Wow! We have we moved from arms length seller financing/hard money to mom and dad helping out their kids. I completely agree, many family members would help their children buy/finance homes. I would not think many people are shocked by your revelation. Is this in the curriculum for DJ’s seminar on buying homes with no money down?

          • Just one example. There are hundreds of ways. Read one of Dave Lindahl’s books if you want a good understanding. I would agree that the majority are too lazy to even ask for advice on how to be creative with financing.

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