Can a House Have “Too Much Equity” to Be a Rental?
One of the advantages of a rental house is that it builds its own equity. Rental payments cover mortgage payments and you gain equity over time. However, when it comes to market conditions, sometimes the most profitable choice is not to continue renting a property. You may find yourself in a situation where properties in your rental regions are seeing a significant incrase in property values but a lag in rental rates.
This means rental properties in the area could make you significantly greater profits if listed for sale compared to the slow pace of local rental income. How can you best use your properties for the overall benefit of your portfolio and rental business? As an experienced property management team, Leaf Management can help by sharing a few insights we’ve learned from seeing these market conditions before.
Equity and Profit Potential
Equity plays an important role when deciding what to do in a high property value market environment. The more equity you have in a home, the more profit you can make from a sale because you have less of the remaining mortgage to pay back from the sale price. While you rent a house, it build equity through paid mortgage payments and when the mortgage is fully paid, 100% of the profits from rent goes to you instead.
However, it’s also important to consider your greater rental business strategy. High equity spells opportunity if you know how to use it. This is especially true with homes where the property value is outstripping the potential for rental income.
Investing in Portfolio Growth
Another important consideration is that a sudden influx of profit from a home sale can make it possible to grow your portfolio. Landlords use a number of equity-related strategies to create the resources to buy new rental properties. This can increase your overall rental income and potential for long-term profits.
You could sell the high-equity home while property values are high and use the proceeds to buy a house in a neighborhood with higher rental rates, or invest in two starter homes instead for double income at a lower rate. You could also reclaim the equity itself through a HELOC or equity-based loan for the same effect while holding onto the original property and growing your portfolio at the same time.
Sell the Home: Buy Low, Sell High
One way to look at rental homes is like any other investment, where the goal is to buy low and sell high. Rental homes make money while in your portfolio, but you can also maximize your profits by selling a home when it’s value peaks in the local market. Just as it is more profitable to buy homes at their lowest sale value and spruce them up for a good rental income, selling high is equally strategic.
Cash-Out Refinancing
Cash-out refinancing is when you borrow more money than you currently own on the property and take the excess in cash. It’s a way to access your equity without significantly changing the terms of your mortgage.
For example, if you started with a $300,000 mortgage and paid it down to $100,000 left with $200,000 in equity, you could then take cash-out refinance mortgage of $150,000 and get $50,000 in cash from your equity to use as a downpayment on your next portfolio property.
The smaller mortgage would likely come with significantly lower monthly payments meaning more profit per month and/or a shorter repayment period and better terms.
HELOC Improvements to Raise the Rent
You could also use the equity to reinvest in the house. Rather than letting the lagging rental rates slow your roll, access your equity with a HELOC and make improvements. The right strategic renovations can help the house step up into a higher rental rate bracket, attracting more upscale and luxury renters willing to pay more for the home.
Keep Renting for the Long Game
Your final option is to hold position anticipating that market conditions are always changing. If this property has been steadily profitable and/or you have reliable long-term tenants who you don’t want to displace, then you don’t have to make a change. That equity will still be there when you need it and home prices rarely drop significantly after they rise. Holding steady is often the right answer when managing rental properties where long-term strategies tend to provide reliable returns.
Strategize Your Portfolio with Leaf Management
Knowing the right strategy to optimize your portfolio is not always clear. When market conditions leave you wondering about the best way to improve your rental home profits, Leaf Management can help. Contact us today to talk portfolio strategy any time.