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Hornung: Rent instead of selling

Highlights:

  • Monthly Q&A with Lane Hornung.
  • Thesis: Rent your home, instead of owning.
  • A Collector can be a long-term wealth-building strategy.
Lane Hornung

Lane Hornung

Residential real estate brokers are united on one issue: the need for more homes on the market.

Realtors are scrambling to find more listings and homes for their clients, with demand far outstripping the supply.

It is frustrating for buyers who have been outbid numerous times, even after having offered far above the listing price in some cases.­­­­

Having a home snapped up in weeks, days or sometimes even hours, can be a scary situation for the home seller, too. A home can sell so quickly that some homeowners are worried about not having a place to live after their home is sold.

For some people, who don’t need to sell their home to buy another, an alternative could be renting their current home.

This is the topic of the monthly conversation between Lane Hornung, founder and CEO of 8z Real Estate, and John Rebchook, of InsideRealEstateNews.com.

John: Lane, are people reluctant to sell their homes, because they fear they will have no place to move to?

Lane: First, I would say that even in this market where demand far outstrips supply, a good Realtor can make sure that a seller will not be “homeless”when they sell their home.   On the other hand, that is a real concern of some homeowners and clearly it is contributing to the lack of inventory in today’s market.

John: Obviously, some people need to use the equity of their current homes in order to get a down payment to buy another. But is selling your own home always the only option?

Lane: Not always. Maybe you can take some profits off the table in your stock portfolio for all or part of the down payment. Plus, if you can afford to put down more than the required down payment amount, your loan will be smaller and more manageable.

Given the volatility of the stock market, taking some stock profits off the table for a home that you can enjoy, might provide you some peace of mind.

John: Then, you can rent out your home.

Lane: Yes. I call these people Collectors, because they collect homes, rather than sell them, as their life situation changes and they buy an additional home.  Being a Collector is not a short-term reaction to the housing inventory shortage, but a long-term financial strategy.

John: In some parts of the Denver area, for example, the rental vacancy rate for houses is basically zero. That would seem to be a good incentive to keep your existing home and rent it out.

Lane: Absolutely. It’s a good time to take advantage of an incredibly strong rental market. Vacancies are at historically low levels and rents are at historically high levels. It’s the so-called Perfect Storm.

John: Why don’t you elaborate on why it pays to be a Collector, Lane.

Lane: Studies have shown that one of the key factors of long-term financial health is owning a home and how early in life you purchased your first piece of real estate. Often, that is more important than your income and your education. A Collector takes homeownership to the next step.

John: Give us an example of a Collector, Lane?

Lane: Imagine you were a Millennial (generally described as someone born between 1980 and 2000, a generation bigger than Baby Boomers) and you bought your first home five or seven years ago.

John: And now you are ready to move-up?

Lane: Exactly. You probably have quite a bit of equity in your home and there is a good chance that you have refinanced your mortgage at least once. Given how low mortgage rates were, you can almost certainly rent your home for far more than your monthly payment.

You may have refinanced into a 15-year mortgage, for example. Believe me, 15 years will fly by fast and you will be very happy to own your first home free and clear after renting it out to pay the mortgage.

John: And this is something that can be repeated, isn’t it?

Lane: For many people, who plan ahead, yes. The great thing is when you get ready to retire, and you have collected several rental properties, some of them free and clear, you have built yourself a nice little annuity.

When you think about it, home ownership is a zero-sum game. It is either owner-occupied, or it is rented. Why not take advantage of a growing rental market?

The other thing is that in some parts of the country, big Wall Street firms are buying up hundreds of homes to rent. That is not happening in Denver, so you are competing with other mom and pop owners, not big Wall Street institutions.

John: But being a landlord isn’t a solution for everybody, is it?

Lane: No, it is not. For one thing, you have to consider your own financial situation and prospects. You should also talk to a financial advisor about things such as the tax consequences of renting your home as opposed to selling it.

Also, if you lost one or two months of rental income between tenants, and have struggled to pay two mortgages – one for your rental and the other of the home you are living in – you probably are living too close to the edge to be a Collector.  And frankly, some people just don’t have the temperament to be a landlord. In that case, it makes sense to hire a property management company like 8z Rentals.

John: And you have to realize that the rental market, like the stock market, is cyclical, don’t you?

Lane: Yes. But think about it. If you bought a home at the previous peak of the market in 2006 and you went to sleep and never read a newspaper or saw a news report, and woke up today, it would be like the Great Recession never happened. Your home would be worth more than what you paid for it.

The point is over time, homeownership holds its own as an investment. I believe Millennials who become Collectors today, will be in a very good place financially in 20 or 30 years.

John: Thanks, Lane.

8z Real Estate is a sponsor of InsideRealEstateNews.com along with Universal Lending Corp. and Land Title Guarantee Co. A monthly Q&A with Lane Hornung is a feature of IREN. Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.