It's Almost Impossible To Make Money Buying Rental Properties Right Now

THE RENTAL PROPERTY MARKET IS ABOUT AS BAD AS CAN BE…WITH NO RELIEF IN SIGHT

You are a smart person who is aware of the upsides of rental property ownership and you want to get in the game. You’ve saved 50-75-100 thousand dollars and you either want to buy your first investment property or add to your portfolio. Unfortunately, you’re going to need more than just that money for the down payment. You’re also going to need a time machine…because no matter how prepared and knowledgeable you are about real estate and investment, the market is upside down, the river is polluted, and until either prices or interest rates come down, the smart move is to stay out of the water.

LEARN MORE: WHEN WILL MORTGAGE INTEREST RATES DROP?

CURRENT CONDITIONS AND YOUR OPTIONS

If you own rental property already and were able to refinance prior to the interest rate hikes, you’re in fine shape. If you own property and are looking to sell, you’re still OK but the market still isn’t ideal. Many sellers are stuck on price expectations that just aren’t out there anymore. You, or a friend, might’ve sold recently and received more than listing price, but those days are over. Because of inflated interest rates, buyers have less purchasing power and the math just doesn’t add up if you’re a seller still looking to cash in big. And if you are one of those potential buyers, you’re out of luck. If prices were up and interest rates were down, you’d be OK. If interest rates were up but prices were down, you’d be OK. But both are up…and you’re up against them…you need to fold and wait for a better hand. Based on what we see in the market now, you’ll likely need to be patient.

EXAMPLE TIME

Nexus Property Management® offices operate across the country but it’s in tiny Rhode Island that the company began and it’s still there where corporate headquarters are located. Just miles from that Pawtucket office is the city of Central Falls. CF is one square mile of heavy density…in other words, a perfect place for real estate investors looking to take advantage of the value that exists in three and four-family apartments. The main road that cuts through CF is Dexter Street and there is a multi-use building at 913-915 Dexter Street for sale. If you did locate that time machine, this is the kind of place an aggressive and creative investor might salivate over. It has four apartment units, all with one bedroom, and the ground floor is a commercial space that was most recently, and has traditionally been, a restaurant. Traffic (and eyes) are high as it is located right near a major intersection but parking is limited.

913 Dexter Street Central Falls, RI

Photo Credit: Zillow.com

It’s the summer of 2023 and this property is listed for $850,000! So let’s play this through as if we were going to make that purchase:

Lenders are going to require 25-30% for a downpayment. Let’s assume you found a lenient bank and they’re only asking for 25%. That comes to $212,500 just to get your foot in the door.

That leaves you with a loan of $637,500.

Interest rates are between 7.5 and 8% currently so let’s split the difference and apply a 7.75% interest rate to your loan. That comes out to a mortgage of $4,815.22 a month to pay off that loan.

But, you have other expenses as well:
- Insurance: typically about $100 per unit; we’ll use a low estimate of $400/month
- Taxes: The taxes on this property are $856.08/month
- Utilities: With a restaurant downstairs, water usage is going to be high. $500/month for utilities is a realistic estimate
- Management: This is not a DIY property and you’re going to need a professional on your side. $440/month

Your total for base expenses for the month is $7,011.30 ←keep in mind, this is assuming full vacancy, no maintenance costs, and no evictions. 7K is your best case scenario and thinking of it as $7500 is better in terms of budget, but still cutting it close.

So those are your expenses. Clearly every investment property has expenses and the beauty of rentals is that rent rolls are paid by tenants and should cover what would otherwise be daunting costs. Let’s look more closely at the rent rolls:

Each of the four apartments is getting $1,000/month. That’s about the top of the market for one bedroom in this location.

The restaurant is currently vacant and has been since Covid. Three years of vacancy tells us that demand is low and hopefully you can get $1,500/month.

That gives you $5,500 coming in each month.

Raise the rents to $1,200 for the apartments (which is certainly a stretch) and you get $2000 for the restaurant.

You’re up to $6,800 coming in.

Even if you max out the potential earnings in this scenario, which will very likely increase the likelihood of evictions and maintenance issues, you’re still short of being able to pay your bills. All of the risk falls on the buyer and the rewards are minimal and costly. Unless you are purchasing with cash or through a 1031 exchange, there is no way this makes sense. The market is a mess and typical investors need to be patient.

LEARN MORE: BUYING A RENTAL PROPERTY DOESN’T MEAN YOU’LL AUTOMATICALLY MAKE MONEY

SO WHAT IS AN INVESTOR TO DO?

It’s Nexus Property Management’s goal and responsibility to help educate property owners and prospective property owners for the sake of improving investment opportunities for all. Unfortunately, now is not the time to break into investment. Prices are still elevated and are lagging behind market trends and purchasing power. Air needs to come out of the balloon. The reason interest rates have skyrocketed is to help get inflation down, and while it might be working in some sectors, it has not had that impact on housing. Prices are still skyhigh. And while interest rates aren’t at historical peaks, these rapid increases are currently barring average Americans from participating in the housing market. For example, the $7,000 monthly under current conditions is closer to $5,000 at interest rates of just 3-4%, which was the norm just a couple years ago.

Nexus sees real estate investment as a win-win-win opportunity and right now market conditions just don’t satisfy that claim. If you’ve saved money with the intention of investing, your best bet is to put that money into a high yield savings account until the waters calm down. Take advantage of compounding interest with limited risk until the housing market is navigable. Many estimate that the market could stay here for a year or more. Remember, investment in a long term game and those who think longterm come out ahead. The long term play is to not play right now. Your first purchase needs to be your best purchase and there simply are no “best purchases'' given current conditions.

LEARN MORE: INFLATION IS DOWN: WHAT THAT MEANS FOR INTEREST RATES

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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