• SOFTER DEMAND FOR RENTAL PROPERTIES
A glut of newly built apartments is depressing rent growth . And according to the St . Louis Federal Reserve , an additional one million units currently under construction will hit the market soon . Fannie Mae predicts vacancy rates in multifamily buildings will reach 6.25 % in 2024 , which exceeds the 15year average of 5.8 %. Apartment stocks are underperforming . To avoid vacancies , apartments lower the rent which depresses rental income for landlords .
• CREDIT AVAILABILITY
Underwriting standards have changed drastically because of the covid pandemic . Traditional lenders are now hurting from over two million delinquent home loans . Money from banks and mortgage companies has gotten tighter and tighter , putting eager buyers — even ones with steady jobs and solid credit — in the penalty box . The mortgage credit availability index stood at 96.3 in October , 2023 , which is about half what it was three years ago . Wellqualified homebuyers are getting turned down by traditional lenders ; driving them right into the arms of seller financing .
• TAX ADVANTAGES
When you sell a rental property that has greatly appreciated , you ’ ll owe a bundle in capital gains taxes . But if you take the profit over time through seller financing , the Internal Revenue Service allows you to spread out the gains using the “ Installment Sales Method .” This technique has allowed countless sellers to pay no capital gains taxes at all . Of course , there ’ s always the possibility the IRS could close this loophole in the future , so better take advantage of it now .
YOU CAN MAKE MORE THAN DOUBLE THE MONTHLY INCOME FROM SELLER FINANCING THAN LANDLORDING
Today ’ s home prices and interest rates are both elevated . So when you sell your rental with seller financing , the monthly mortgage payment you receive will be much larger than your monthly rent check .
In the rental world , there ’ s the “ 50 % Rule ” ( also what they call “ The Magic Number ”). It means 50 % of rental income goes toward expenses . If the rent checks you get don ’ t surpass the 50 % Rule — after paying taxes , repairs , and insurance — you ’ ll lose money . But as a note owner in today ’ s market — who DOESN ’ T pay taxes , repairs , and insurance — even a mediocre note would easily beat the 50 % Rule of Profitability . And with today ’ s high interest rates being paid TO you instead of BY you , the checks you get every month could be lots more than you get from rent .
• HOME APPRECIATION HAS LEVELED OFF
Even though home prices shot up during the pandemic , prices aren ’ t maintaining the same trajectory . They ’ ve hit a plateau . Goldman Sachs expects home prices and mortgage rates to increase only 1.7 % in the next year . That ’ s not just flat , that ’ s “ stand on a brick and see fifty miles flat .” Now ’ s the time to sell your rental portfolio at top dollar and cash out before home prices stagnate .
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