5 Reasons Why Right Now is the Perfect Time to Sell Underperforming Rental Properties
For a long time, Australia's red-hot housing market made the prospect of being a landlord a safe economic bet. By making properties in desirable areas available on the rental market, one could create a steady stream of income with ease. And those who wanted to cash out and sell were certain to make a solid profit on their initial investment. But then the housing market fell into a state of long-term decline, lowering property prices and creating incentives and opportunities for renters to buy, instead.
And landlords were caught in the middle – unable to get top dollar for their properties on either the rental or resale markets. That led many of them to hold on to properties in an attempt to wait for a rebound in one or both parts of the housing market. But there's good reason to believe that waiting is only going to lead to greater losses. In fact, landlords may not get another opportunity to liquidate their holdings for some time, and when they do, are likely to sacrifice a significant part of their equity to do it.
To explain why now's the right time for landlords to sell any underperforming property, here are five reasons that the Australian housing market is likely to continue declining for the foreseeable future and that now's the perfect time for landlords to sell.
1. A Lengthening Recession
It wasn't long ago that Australia enjoyed one of the longest prolonged periods of economic expansion in history. But by the beginning of 2020, it looked like the economy was starting to lose momentum and that a recession was possible. And then the COVID-19 pandemic struck and changed everything. The effect of mitigation tactics forced the economy into its largest contraction in living memory.
And now, a recession that many hoped would be short-lived looks like it's here to stay. And that's causing experts to predict that the worst of the pain in the Australian housing market is yet to come, predicting a crash in the coming months that might wipe out any gains property owners have made in the last decade.
2. Weakening Rental Demand
In Australia, the rental market is historically smaller than it is in other developed nations. But there's been a noticeable increase in the number of renters here in recent years. A closer look at the data reveals that the gains have come from two major sources: young people and international arrivals. And those are the two groups getting squeezed by the effects of the COVID-19 pandemic, with international travel restricted and the greatest number of job losses falling on younger workers. This is creating the conditions for a prolonged period of weakening rental demand. And that's exactly what the latest data demonstrates. Given that experts still predict that the lingering economic effects of the pandemic might stretch into 2022 and beyond, it's a situation that won't improve soon.
3. Plunging Rents
Right now, the declining demand in most major rental markets in Australia is exerting sharp downward pressure on rents almost across the board. This means landlords will not only struggle to find tenants but will be forced to charge less even if they manage to find a qualified renter. That adds up to declining returns for existing rental stock. When you add in the ongoing costs involved in maintaining a rental property, landlords may be one or two repairs away from operating at a loss. Once that happens, they may be forced to sell anyway – and perhaps not in the best of circumstances.
4. Declining Supply on Resale Market
Under normal circumstances, poor economic conditions might force homeowners to sell their homes just to stay afloat. But because of the nature of the current Australian recession, that's not happening this time around. The pandemic isn't affecting homeowners as much as it is renters, and that means the housing market is paradoxically showing signs of low supply. And that's keeping sale prices either stable or rising in most markets. But as the recession continues, that's not expected to hold. At some point, the prospect of making a solid profit will induce more homeowners to consider selling. But until that happens, the market conditions are perfect for landlords to reduce their property portfolios.
5. Rise of Self-Listing Sale Options
For most people in Australia, selling a home means engaging the services of a real estate agent to handle the process from start to finish. But landlords, having direct experience in the market, don't need the help in most cases. And right now, because of the development of internet platforms dedicated to helping homeowners sell without agents, they can take a do-it-yourself approach and won't have to hand over as much of their sale proceeds as they used to. That means they can offset some of the equity losses created by the recession and reduce their holdings without as much financial pain.
Striking While Conditions Permit
No matter how you look at it, Australia's housing market is at an inflection point. The ongoing recession seems to point toward further weakening of the housing market. But the fact that sale prices seem to be holding their ground is giving landlords a rare opportunity to reassess their holdings and act to preserve their bottom lines before things can deteriorate any further.
The problem is, nobody can know when that's going to happen. So, the bottom line is that there may not be a better time for landlords to sell their underperforming rental properties. If they wait much longer, they might be forced to decide between anaemic rental rates or big losses relative to their initial investments. And that's not a position that anyone would want to find themselves in.