A month has passed since Hurricanes Harvey and Irma wreaked havoc along several coastal states. Among all the other uncertainties that have come with these tragic events, many investors are wondering what they should do with their rental properties that were damaged - “Should I keep or sell my damaged rental property?”
There’s no right or wrong answer to this question. One thing is for sure, and that’s the fact that there is a shortage of housing in the areas hit, especially in Houston where this shortage will likely last for quite a few years. Additionally, there is an increase in demand from those displaced as well as the service providers coming in from other areas to help rebuild. This creates a situation where landlords can be very selective with tenants and choose attractive occupants. Plus, with an influx of home owners temporarily relocating while their homes are being renovated, there is an increase in demand for shorter, uncommon lease terms (3/6/9 month leases). Landlords willing to accommodate such needs can charge more for their flexibility.
However, your decision should take into account several other factors. Here are some questions and considerations to guide you in your decision making.
The first and potentially most important question you should ask is whether the surrounding community has been permanently damaged or is likely to redevelop. The answer to this question will give you a good idea of whether you should sell your rental or not. If the value of your community does NOT recover, you probably won’t want to keep your rental property because:
- Rent rates will drop
- The neighborhood will attract lower quality tenants, if any at all
Now, you can’t predict the future, so this can be somewhat difficult to gauge. However, a key factor to help you answer this question is LOCATION. You want to be where the other investors are participating, not where they’re escaping.
- Is the area where your property is located the site of repetitive natural disasters? If so, residents and investors alike will consider how much it costs to “rebuild” each time their property is affected. If it’s so much money that they’ll either never make it back or might make it back after several years (in which time more damage may occur from another event), investors will probably ditch the area. For example, much of Houston experienced flooding. Some of these areas hadn’t flooded in a long time, maybe ever. But others like Meyerland, which has flooded every year for the last three years (only once as a result of a natural disaster), experience damage from inclement weather on a regular basis. Keeping an investment property in this area may not be the best idea. If your property was covered by insurance but is susceptible to future damage, a reasonable option is to sell the house and use your insurance payout to invest in a stabilized area.
- Is the area likely to attract investment capital and government aid to redevelop and upgrade the community? Neighborhoods close to popular/populous areas, like the city, are more likely to attract investors than a community 30+ minutes away from everything. This is because properties close to popular areas will sell or lease quicker and for a better price than those in more rural areas with smaller economies and fewer attractions.
So let’s say you’ve determined that your community will rebuild and maintain or even grow its value. There are still other considerations to account for before deciding to keep your rental.
Proximity to Property
Are you local to the property, or do you live so far away that project management is too much of a hassle?
When repairing, you have two options: hire a contractor or do the work yourself. If you hire a contractor, you need to manage other people. If you do the work yourself you need to have the skills and time to be able to do so. Both require your time and ability to manage a project.
Timeline and Cost
With mass devastation from natural disasters comes a shortage of labor and materials to rebuild. Materials will be expensive. Contractor availability will be virtually nonexistent, meaning you’ll likely wait MONTHS before anything gets done to your property (unless you do the work yourself).
Can you still get your property insured? If your property is in an area that’s prone to damage from hazards (e.g. flooding), insurance companies may decide it’s too risky to cover. If you can’t get insured and your area is likely to flood, you face two issues:
- Lenders won’t lend on your property
- Incurring future potential damage with no coverage