Eleonor, this is a great post. I have talked to a lot of property owners that do not want to sell at today’s market value and think renting might be a solution. Unfortunately for luxury or waterfront homes or condos the rental numbers just do not make sense.
Sometimes I feel like counseling my clients with higher-end homes is like counseling my single girlfriends in their late 30s.
Her: I have a great job (Viking stove).
Me: Yes, I know you have a great job (Viking stove).
Her: Do you have any idea how much I spent on my new new blonde highlights (radiant heat floors)?
Me: Your highlights (radiant heat floors) are very warm and inviting… and I know how much you love them, but suddenly every single gal (new property on the rental market) has gorgeous blonde highlights (radiant heat floors).
Her: I’m the total package! (My house would go for $1.3m on the sales market!)
Me: Oh sweetie, I know you are– let’s go to Ray’s for Happy Hour to watch the sunset and have a cocktail. (Yes, it really is a gorgeous home. Let’s sit down and pencil out cash flows.)
It’s no wonder there are so many luxury rentals on the market. Last summer I put my Ballard Cape Cod on the rental market because the thought of losing $60k in cold, hard cash was unbearable to me. I can’t imagine the thought of losing several hundred thousand!
Pulling your property off the sales market in favor of the rental market shows a great deal of moxy and resolve. Your sensibilities tell you that you can ride out “today’s market challenges” (my go-to euphemism) if you make some adjustments to your plans and don’t lose your head. You’d rather see some cash flow on the property than not. Excellent– all makes great sense.
And now for the math…
I wish the math looked like this: House A has an approx sale value of $500k and House B has an approx sale of three times that amount. House A’s rental value is $1800 and therefore House B’s rental value is also three times that amount. If only! Recently, we’ve been finding that House B’s rental value is more around $2800 (NOT always- it greatly depends on a lot of factors, which is why you should always consult a professional)… and about the same as House C’s rental value, although House C would fetch around $1.0m.
Rental values just don’t take the same exponential trajectory, which is very difficult to reconcile for owners of higher end homes. The tiny nuances that edge up the value of your home on the sales market, don’t mean as much on the rental market. Have a kitchenette in the basment? Interesting feature, but doesn’t move the needle much. Double lot? Great- let’s make sure we allow provisions to allow dogs, but again… the needle’s not impressed.
I frequently hear that owners are doing research on craigslist or otherwise perusing rental ads to try to get an idea of the rental value of their home. Here in Seattle, Craigslist is populated with great houses posted for rent by their owners. The owners of these waterfront homes think, “Hey, my mortgage payment is $4800, I need to come close that!” so they list their house for $3995, which they think is a steal. And it sits. And sits. And sits. But, if you’re just popping on to Craigslist to do some recon on the value of your home, you don’t know that this is week 34 on the rental market for that house down the street.
Here’s some more math:
House A lists Jan 1, 2009 on the rental market for $4000/mo. House B, with somewhat similar features down the street lists for $2800/mo. Feb 1, House B is rented at $2800/month. After two months, House A lowers the asking price to $3500 and then two months later on May 1 rents for $3300. By Feb 1, 2010 House A has generated $33,600 and House B has generated $29,700. Not to mention the fact that House A’s owner didn’t have the headache and heartache of having a house sit empty for a few months. Now, if you were a landlord with the long-term in mind, then maybe waiting for $3300/mo makes sense. But MOST OWNERS WITH LUXURY HOMES ON THE RENTAL MARKET DON’T INTEND TO BE LONG-TERM LUXURY LANDLORDS! It just doesn’t pencil out to be a long-term luxury landlord.
I came to my own painful realization in this market. I’m going to lose money. I had to ask myself whether I wanted to hemorrhage or bleed slowly. And then I figured out a timeline… and within that timeline formulated a plan to mitigate those losses.
If you’re smart enough to sit out the market by renting a property you own, be smart enough to have a plan with a timeline that pencils out! And for Pete’s sake, this is a lot of money we’re talking about– and probably an asset that probably represents a substantial portion of your net worth– don’t go it alone and don’t rely on a Craigslist market analysis to be your guide.