After a years-long stretch of low interest rates, it’s hard to let go, but some homebuyers have figured out they don’t have to. Instead of selling one home, where their mortgage has an interest rate around 3%, so they can buy another one with a rate above 6%, they’re opting to hang onto the old address and rent it out.
“People who are hesitant to close out that 3% mortgage see that rents are going through the roof, and they see a possibility to make some money” on the spread between the mortgage payment and the monthly rent, said John Irwin, a Baird & Warner agent.
“We have a unique opportunity right now for people to hang onto their tiny, tiny interest rate and their equity,” said Carmen Rodriguez, a Coldwell Banker agent. It’s fueled by the fact that “we have a lot of people renting because they can’t afford to buy at the higher rates,” which creates demand for the homes their former occupants don’t want to cut loose.
Irwin said three of his clients went this route in recent months. They were all people who could afford to buy the next home without pulling all their equity out of the last one for a down payment, which is the primary obstacle lying in the path of using this strategy, Irwin said.
There’s no data available on how many people have done the same, but in gathering information for this story, Crain’s learned of 16 recent Chicago-area deals that involved renting the old place. It’s admittedly a small number, but every agent interviewed said the strategy is catching on.
“It’s their opportunity to add real estate to diversify their investment portfolio,” said Jessica Coulson, a Compass agent. “They might not have been expecting to.”
Earlier this month, a pair of Coulson’s clients bought a house in Northbrook and rented out their two-bedroom West Town condo. The two properties are about 22 miles apart, and their mortgage rates are more than 2.5 percentage points apart. Coulson did not disclose her clients’ personal financial details, but said the condo rented quickly at a number that will be profitable for them.
In November, Bekah and Dan Carlson moved from an Andersonville two-flat where their mortgage, taken out in 2015, was at 3.75%. They bought a few blocks away in Ravenswood, at 6.5%.
Since 2015, it had been their goal to keep the two-flat after eventually moving, Dan Carlson said, and preserving the low payment that the two-flat’s mortgage has was a key part of making it work. But with home prices rising quickly last year, it looked like they might have to offload the two-flat in order to have enough cash for a purchase.
“If it had come down to leaving the neighborhood or selling the two-flat, we’d have sold the two-flat,” Carlson said. Ultimately, they were able to make the purchase and keep the two-flat, which “is a good source of extra income, a good use of our money,” he said.
There can be reasons other than money to take this route, Rodriguez said. Her client who has a child with specific needs at school is moving to a school district that suits those needs, but hopes to move back to the house she loves after the child finishes school.
The combination of a sweet mortgage rate and a hot rental market meant “she can hold onto it until she’s ready to move back,” Rodriguez said.
Besides needing the equity from one home to afford buying the next one, many people wouldn’t want to rent out the old address for a simple reason: They don’t want to be landlords.
Coulson said she suggested the rental plan to a pair of physicians who have a very low mortgage rate, but they said with busy jobs and little kids, “they weren’t interested in being property managers. They wanted to focus on their own home.”
It’s not only the unwillingness to take 2 a.m. calls about a broken furnace, Irwin said, but “there’s always the possibility that the renter might not take care of the home like you do, and when you go to sell that (home), the wear and tear may cost you.”
One big obstacle for people who need a mortgage on the new home is that without a history of rental income, the old property might get in the way of obtaining a mortgage for the new property, according to Jim Tausche, senior vice president of residential lending at Draper & Kramer Mortgage.
Despite the heat in the rental market, there’s no guarantee that the old property will land renters or that rental income won’t be interrupted by vacancy or by renters failing to pay.
Tausche said mortgage lenders would likely examine all the details of each scenario individually, making it as important as ever to talk to a mortgage broker before going house hunting.
If the property is a condo, it’s also important to check whether the homeowners association limits the number of rentals in the building.
Source: chicagobusiness.com