Happy Thanksgiving and please excuse my metaphor! But, sometimes these timely metaphors can really help capture what is going on with ones portfolio of investments, especially with Real Estate. The real question becomes, when do I know I own a turkey and how do I “set it free?”
- Does it take longer to rent out?
- Is the rent price stagnant or dropping?
- Does the house need major upgrades?
- Are the repairs more frequent and more expensive?
- Would you or have a family member live there?
Extended days on the market for a rental means vacancy and lost rents. It also means that the property is overpriced for what it offers in comparison to other rentals. The key statement is “what it offers in comparison to other rentals,” meaning is it big enough, offers the same amount of rooms and bathrooms or even the overall condition like paint, flooring/carpets, cabinets, appliances and so forth. Of course the time of the season and location of the property are factors, but again, even with these factors it comes down to price. And, if the price is set accurately for these factors and the house is still not renting, well, I’m not saying anything yet, so read on!
This is a big indicator that something is wrong with either pricing or the house itself. Generally speaking, rent prices move upward as the demand for housing increases or, in other words, when consumers can’t buy or aren’t buying homes, they rent! Of course, on the flip side, if there is an excess of rentals, the price will drop, but just the same, there is something wrong, because the price will reflect this. The major focus should remain on if the price is dropping or remaining stagnant from year to year as you change tenants? If you’re finding that fixing up and updating the house doesn’t help in getting it rented at a higher price, well… you may have a turkey on your hands!
Upgrading the house, changing out the carpet, putting on a new coat of paint and repairing minor things around an investment house is not uncommon. And as implied above, may be necessary to recapture a greater rent price and to get a tenant. The “turkey” factor enters the equation when upgrading and repairing becomes a regular occurance OR you’re about to do a major overhaul to the property and just don’t want to have to do it again! If you have had a long term tenant who is used to the old appliances and the way house is, then they move out and you have to invest into bringing the property back up to par with the competition, this may be a great time to “cook that turkey” and move on. Now, do keep in mind, the major overhaul may or may not “pay off” in the sale of the home, but it will definitely help move the property faster. And, if you change your mind and want to hold on, they to will help rent the place quicker.
Would you live there?
Or have your son or daughter live in the house? If the answer is no, you may want to consider selling it off, it’s a turkey! Sure, you may have outgrown a property, but if you can’t see yourself moving back in or being able to put family members into the house to live, others are going to feel the same way. And if that is true, you’re not truly maximizing your investment potential because you are losing opportunity in rental income. And, losing money during vacancies and repairs.
Once you’ve realized you have a turkey, my best suggestion is find a nice tender duckling to trade it for! Okay, enough thanksgiving talk… 1031 tax exchange. Check with your accountant on more details, but simply put, sell the turkey and take the proceeds to upgrade to a duckling and save on paying capital gains. The 1031 Exchange is pretty simple, finding the replacement house in the given time frame may be hectic, so shop smart. We do these transactions frequently and I’ve had a few creative investors able to take the proceeds and buy two homes. I can’t promise that will happen all the time, but it was certainly a nice deal for the investor!
If you need help with leasing or selling your
turkey, investment home, let me know. We are experts at selling tenant occupied homes and reducing vacancies between tenants. Happy Thanksgiving!