This spring I met a young man looking for alternate housing. He was, as of May of 2021, living in a large house in Sunnyvale, which he was splitting with several other young men. It was a 6/3 on a large (over 10K sq ft) lot on a quiet street. For this, they were paying $6300, which just about covered the annual taxes of $6800, a legacy of its 300K purchase price in 1986.
Instead of
renewing their lease 2021, the owners decided it was time to sell.
The tenants moved out, they painted and staged the place, and put it on the market.
It sold in mid-July for 3.4 million.
The home was
originally listed for rent in April of 2019. Since then, Redfin has predicted
prices have risen 33%. If this is true, then the value of the place around the
inception of the lease was 2.244 million.
Assuming the
home is paid off, the yield for the property to begin with would be:
6300 X 12 –
taxes and expense (roughly 5100 per month)
In 2019 the
owner was using the 2.244 million in equity to bring in approximately 61K a
year, or a yield of 2.7%.
However,
with the rapidly rising home values this yield falls precipitously.
When you
make 61K a year using 3.4 million of equity your return drops to 1.8%.
Likewise, a home
I looked at for a client, a crumbling heap with tons of ‘potential’, was on the
market because it’s tenant of 10 years had finally vacated. Instead of spend a
solid 4, perhaps 5, figures to bring it up to a standard likely to rent swiftly
and at a good price, they put it on the market without so much as sweeping the
floor. Listed at 975K, it sold for 1.075. Given the previous rent was less than
3K, the argument to sell is persuasive.
Stagnant
rents combined with robust sale prices incentivizes landlords to reposition
their capital for better returns or more liquidity.
