Here is an interesting article written by MICHAEL BRAGA and published in the Herald-Tribune (heraldtribune.com).
Discuss this article at our Sarasota Real Estate Forum !

Is now the time to sell investment properties?

Some investors think so. Their decision could impact home prices and rents

ENGLEWOOD -- Real estate investor Jules Roman thinks it's time to cash out.

He's getting ready to sell the 14 duplex apartments and three single-family homes he has accumulated in Englewood and North Port since 2002.

Roman says there's no advantage holding the properties much longer. He says there is no guarantee real estate values will continue to rise at the same torrid pace in the future.

At the same time, rapidly rising taxes, insurance and maintenance costs are eating into his rental income.

"The market is so hot right now that my returns from selling would definitely be higher than my returns from renting," Roman says. "So there's no reason to keep renting."

Plenty of other investors, especially those who got in on the real estate boom early, are making similar calculations.

They've registered significant paper profits as a result of the amazing run up in real estate prices, and some are thinking it's time to convert those paper profits to hard currency.

If enough of them start selling their rental properties, it could help to slow the rapid rise in real estate prices. It might also allow remaining real estate investors to increase rents, which have been falling over the past few years.

"We've seen rents decline by $200 to $300 a month on single-family houses," says Scott Corbridge, president of Sarasota Management & Leasing. "But they seem to have hit bottom earlier this year and have turned."

Supply and demand

Corbridge, whose company manages the rental of 150 single-family homes for owners, says that the current glut in rental properties began after the stock market plunge in March 2000.

Investors began taking their money out of stocks and used it to buy single-family homes, which they fixed up and rented.

The rush to invest in real estate helped boost housing prices, but it had the opposite effect on rents. It created an oversupply of rental properties, especially at the upper end of the rental market -- properties commanding rents of $900 per month and up.

At the same time, historically low interest rates convinced traditional renters they were better off buying and building equity in their homes, which caused demand for rental properties to fall.

The upshot was that property owners saw properties go empty for longer periods, and they compensated by lowering rents.

Houses that might have leased for $1,500 per month were reduced to $1,200.

"For a long time, more expensive homes couldn't get rented," says Ronnalyn Crain, a real estate agent with Seaside Resort Rentals & Management. "We had to go down on rents."

The drop in rental income came at a bad time for owners, because the costs of ownership were shooting upward.

Not protected by the Save Our Homes amendment, which effectively keeps taxes from rising by more than 3 percent a year, owners of rental properties have seen their annual tax bills increase by 20 percent to 30 percent in some areas.

Double-digit increases in insurance and the rising cost of maintenance have further eroded profit margins.

"Rentals make no sense any more," says Rusty Blix, who owns apartments in the Golden Gate area of Sarasota. "You can't get the rent you need to cover the increase in costs."

Because of the intense speculation in the real estate market, however, many investors have ignored the relationship between money paid for rental properties and the rents obtained from them.

Joe Walsh, for example, is not at all concerned about losing money by renting the Palmetto home he purchased for $135,000 last July.

"Property values have been increasing so fast that in the long term, I'll profit," says Walsh, a physician at Manatee Memorial Hospital.

Crain of Seaside Management said the lack of concern about maintaining profitable rentals is common among investors.

"They just think about the appreciation and don't worry about the rents," Crain says.

But some investors and bankers warn that the lack of equilibrium between real estate values and rents can't persist for long.

Real estate values are going to stop rising at some point, and investors will realize it doesn't make sense to lose money on rentals.

Some investors have already reached that understanding, and that's why they're selling.

"People who own rental property should be in it to make money," says Roman, the owner of rental properties in Englewood and North Port. "They shouldn't be cash-flow negative."

A turn in the market

Investors and mortgage brokers say supply and demand factors in the real estate market began to change this year.

Values of single-family homes got so high in Southwest Florida that buyers were priced out of the market.

"It used to be easy to get someone who was renting for $800 a month into a house with a $600 or $700 mortgage," says Jim Willard, a broker with Mortgage Works in Bradenton. "But now it's much harder to find a house for that person."

As a result, the demand for rentals has stopped falling. At the same time, the supply has stopped rising, which is putting pressure on rents.

Statistics provided in the Sarasota County Comprehensive Plan shows that rents at the lower end of the market shot up this year after remaining relatively flat for the five previous years.

The average rent for efficiency apartments rose 25 percent to $554 in 2005, while average rents for one-bedroom apartments rose 10 percent to $616, county statistics show.

Although the county's study shows that rents of three- and four-bedroom apartments, which correlates to single-family homes, have not taken off yet, experts predict that will change when investors start dumping their properties.

It looks like that's just about to happen.

"I've got a couple of investors wanting to sell," says Corbridge of Sarasota Management and Leasing. "Every month, I'm hearing from someone wondering if it's time to cash in."

Linda Lewis, a real estate agent with Irongate Realty in Manatee County, says, "I have quite a few renters looking to sell. They can get much more for their properties than they could by renting."

End of Article.