Trading Up


by Jeff Pepperney, Real Property Management

P rofitable single-family rental properties take many different forms from simple, affordable homes, to high-end properties that allow you to charge an equally high-end rental rate. But profitability in rental homes has less to do with the price of the property itself and far more to do with how high your net profit is. At some point, most investors entertain the idea of trading up a small rental home for something bigger and nicer, but is it worth it? Before deciding to trade up your rental properties, it is important to first be sure you aren’t killing your profits in the process. One of the biggest mistakes investors make when trading up a rental property is assuming that a more expensive property will automatically be a better value. Such an assumption is often based on the concept of appreciation. As this line of reasoning goes, the

more expensive a rental property is, the more it will appreciate, thus offering a higher return in the end. It sounds reasonable, and it might even be true in some cases. The problem is that basing a decision to trade up a rental property entirely on hopes of future increases in property values leaves several important aspects out of the equation. For example, the costs required to sell your current rental property can take a big chunk out of your expected profits. Real estate fees, lender fees, and the cost of preparing the property for sale can add up quickly. On the other hand, buying a property is much the same, with long lists of associated costs that have nothing to do with the mortgage payment. On top of the higher loan payment a more expensive property will require, you can expect higher property taxes, more expensive insurance

54 | think realty magazine :: april 2020

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