All good things must come to an end, including the tenure of one’s rental property ownership. The circumstances that prompt a sale decision will vary from owner to owner, but often include such factors as: IS IT TIME TO LET GO OF YOUR RENTAL?
• Maintenance hassles • Looming capital expenditures • Screening and selection regulations
• Rent caps • Eviction nightmares • “Just cause” tenant removal
• Rising insurance costs • Higher state/local taxes • Increasing legal liability • Deposit restrictions
But for rental housing providers who own single family rentals (SFRs), condos and townhomes, there is arguably a more compelling impetus to sell than any of the above issues: your yield as a percentage of your equity may have fallen to unjustifiably low levels. In virtually all other sectors of investment real estate, property values are tied very closely to net operating income. For example, assuming little change in capitalization rates over time, a light-industrial property whose net operating income doubles over 10 years will likely appreciate nearly 100%. In commercial real estate, income drives value. With homes, however, other forces besides rental income drive resale prices. This is because every SFR, condo or townhouse rental is always a potential owner-occupied property. The supply/ demand, macroeconomic, and demographic factors driving owner-occupied home prices
obviously have little correlation to what the rental rates would be for those same properties. The chart on page 27 shows quarterly Fed data for three metrics since Q1 of 1963: home price increases, rent increases, and inflation increases. Note that average rents in the United States have increased at nearly the exact rate as overall inflation, just edging out the CPI in the last few years. Home prices are a different story. Over 60 years, the average U.S. home price has increased by 2,262%, roughly 2.4 times the rate of rent growth (955%).
IN COMMERCIAL REAL ESTATE, INCOME DRIVES VALUE.
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