Revenue and Expenses of a Rental Property in Bluffton / Hilton Head
2022 has seen a change in the housing market in the Lowcountry and across the nation. In our final article for 2022 we will be looking at the real estate and rental market in the region and what 2023 may have in-store.
The first big change seen this year was the cooling-off of the real estate market. At the final Federal Reserve meeting for the year the federal funds rate was increased by 0.5% to 4.25-4.5% to combat inflation and this put upward pressure on mortgage rates. At the beginning of 2022 it was possible to get a 30 year fixed rate home mortgage for around 3.5%. Currently, that same mortgage has a rate of around 6.5%. Now that debt has become more expensive to use, the sky-rocketing rate of home prices seen since 2020 has slowed down and in some cases home prices have declined. According to realtor.com, the median list price for homes in Beaufort County started out at $511,500 in January of 2022 and in November the median list price was $654,500 (Down from a peak of $675,933 in May). Homes are also staying on the market for longer.
Rents have had a big year in the Lowcountry. According to our rental data, an average size 3 bed 2 bath home was renting for around $1,850 at the beginning of 2022. Now that same house is renting for around $2,300.
So what will 2023 bring? Nobody has a crystal ball, but the Federal Reserve reiterated their commitment to a restrictive interest rate policy through 2023, which should cause real estate prices to increase at a slower rate, or even decline a bit. This can create wonderful buying opportunities as the demand for real estate cools off. Our expectation for rents next year is that they will not increase anywhere near as fast as they did in 2022 and should return to the normal trend of slower, but more sustainable growth. This is based on our rent analysis of properties we have recently rented out and the Fed stating that one of their goals with higher interest rates is to slow down the rate of rent increases. Of course, nothing is set in stone. Rates may have to be cut if some unforeseen negative economic event occurs. Thankfully, qualifications for lending have become much more stringent compared to pre-2007 and so a huge decline in real estate, as seen in the late 2000’s is very unlikely.
How to invest in a stagnant or declining real estate market
No matter if the market is up or down it is important to buy real estate correctly. This means knowing your numbers, having adequate cash reserves, a long-term view on real estate investing, and properly screening your tenants Check out our articles on How to Choose a Good Tenant for your Bluffton/ Hilton Head Rental Property and Revenue and Expenses of Your Rental Property or more info.
Rates increasing can cause property values to decline, but if using debt to purchase the property this can translate to higher monthly payments, which more than cancels out the lower purchase price. One way to get around this issue is to make all cash offers, or put more money down than the required 20% down. Yes, this will lower your ROI, but you can always refinance or put debt on the property if rates drop, and if rates continue to increase then you will be glad that you bought at such a “low” rate.
This higher rate environment opens up new methods of purchasing properties that didn’t make sense in a low rate environment. For instance, there are many property owners with 3.5% mortgages, and you as the buyer can assume their low interest rate mortgage. This negates the need to acquire a new mortgage at a 6-7% interest rate. However, if the home has a lot of equity in it then you will have to buy out the seller’s equity outright, get a second mortgage, or see if the seller would be open to seller financing. In addition, the seller will have to talk to their lender to see if this is permitted.
Another benefit to buyers in a stagnant or declining market is that as homes sit on the market for longer periods of time the seller is more likely to negotiate on the price. For the past few years the seller has had all of the leverage in negotiations and if you tried to haggle on the price then they could accept an offer from 10 other people who were willing to bid over asking. Now with less buyers, the seller will feel much more pressure to negotiate on the price and work with you. So if you see a home has been sitting on the market for a month, but the numbers don’t work at the current price, then make an offer with a purchase price that does work for you. The worst that could happen is that the seller rejects the offer. If the house is still on the market a few weeks later then make the same offer. You might find that the seller is more motivated to sell.
The next tactic for buying in a stagnant or declining market is to buy in areas that have great prospects for an influx in population. Bluffton, Hilton Head, Okatie, and the surrounding areas have many diverse sectors of employment and growing economies, which should translate to an influx of people and a more robust job market. To find out what makes the Lowcountry a great place to live and invest in check out our article on why you should invest in Beaufort County.
From everyone at Realty Management Advisors: Happy Holidays and see you in 2023!
(1) https://www.realtor.com/research/data/
This article is not investment, legal, or tax advice and is for informational purposes only