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Rent Growth Is Slowing. Is Home Flipping a Better Option?

Jun 02, 2020 by Aly J. Yale

The latest data on rents isn't too promising for investors.

According to Zillow's (NASDAQ: Z) (NASDAQ: ZG) recently released market report, the COVID-19 pandemic caused rent growth to drop half a percentage point between March and April -- the single biggest monthly decline in five years.

Here's what Zillow's senior principal economist Skylar Olsen said about it in the report: "Rent growth had been chugging along at a remarkably stable pace since 2018, with the growth rate rarely rising or falling much from one month to the next. That changed in April, the first full monthly reading since the coronavirus pandemic struck the U.S."

At the market level, rent appreciation slowed down in 33 out of 35 of the country's biggest metros. It practically ground to a halt in Baltimore (where rents were up just 0.4% over the year), with New York, Houston, and San Jose, California, following close behind. Month over month, San Jose, Austin, and Los Angeles actually saw rents decrease.

Columbus and Cleveland, Ohio, were the only major cities to see rent growth rise for the month.

Are there other options?

Obviously, if rentals are your bread and butter, the data can look a little depressing. Fortunately, if you have single-family properties in your portfolio, you have other options for generating income.

Namely? Selling or flipping the properties.

Despite the ongoing pandemic (not to mention the economic uncertainty that has come with it), the home purchase market is still going pretty strong.

In fact, according to the Mortgage Bankers Association, last week saw a 9% uptick in purchase loan applications. It was the sixth straight week that purchase activity had increased.

Zillow's data also shows a growing interest in homebuying. Pending home sales were up 50% between April and May, and in places like Cleveland, Cincinnati, Houston, and Dallas, they were actually up over 2019, when the coronavirus was nowhere in sight.

Even better? Prices are still strong, too, meaning you're likely to turn a profit if you've kept your property in good repair. The latest Home Price Index from CoreLogic (NYSE: CLGX) has home prices up 5.4% over April 2019.

Just be ready to act fast to take advantage of those prices. According to CoreLogic's chief economist, Frank Nothaft, the tides may change soon -- especially if the economy doesn't improve.

"The very low inventory of homes for sale, coupled with homebuyers' spur of record-low mortgage rates, will likely continue to support home price growth during the spring," Nothaft said. "If unemployment remains elevated in early 2021, then we can expect home prices to soften. Our forecast has home prices down in 12 months across 41 states."

Making it work

If you do pivot to flipping or selling your properties, make sure you keep the current climate in mind as you do so. Work with a real estate agent who can offer virtual tours, and make sure your listings are thorough and detailed.

Many buyers are looking for a more hands-off experience these days, and 3D walkthroughs, interactive floor plans, and video tours are hugely helpful in this regard. Proper sanitization and cleaning practices are also important -- especially if you're hosting an open house.

The bottom line? Slowing rent growth doesn't have to get in the way of strong returns this year. Be willing to change your strategy and adapt to the ever-changing economic climate, and the returns on investment (ROIs) will follow.

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Aly Yale has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.

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