‘Most economists are predicting a recession in 2023’: I own a rental property. Is it a good time to take out a bank loan and renovate — or should I wait?

Please advise and thanks.

Signed,

Ready to Make a Move

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

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Dear Ready,

Nice job on maintaining and running this 40-room short-term rental. With the worst days of COVID behind us — I hope — travel is booming and people are going crazy exploring all parts of this planet. So proceed only if the demand for bookings is there. 

I don’t know what lenders are offering where you are located, so take a couple of weeks to approach a bunch of lenders to see what rate they’re offering, and if that interest rate is trending downwards or upwards.

In the U.S., there has been some respite. The average 30-year fixed mortgage rate fell to 6.67% last week from 6.9%, according to the latest data from the Mortgage Bankers Association. But that’s roughly twice the rate for the same time last year.

Obviously, the faster you repair this property and spruce it up, the sooner you’ll increase its value. And you can likely up the daily rate you charge. But I advise you to proceed cautiously, and only if your rental projections make sense.

There are other considerations: You may have to keep some of the rooms out of the roster when they’re going go through a facelift, but at the end of the day, you should see more money once it’s done. Put your financial plan through a rigorous risk-assessment, and account for all eventualities — existing demand, expected increase in demand post-renovations, and a drop in demand due to a possible recession.

You will need to have enough financial support to weather all three outcomes. With the help of an accountant and/or financial adviser, make sure you have the cash flow, rental projections — including the assumed increase in rent post-renovation — to survive the next 12 months, particularly if there is a slowdown in the market.

Given that inflation is slowly coming under control, as per the federal government’s report on Nov. 10, the way the 10-year Treasury is moving down, and mortgage rates are falling again, you may be approaching a window of opportunity open up in the near-term.

“The decrease in mortgage rates should improve the purchasing power of prospective homebuyers, who have been largely sidelined as mortgage rates have more than doubled in the past year,” Joel Kan, vice president and deputy chief economist of the Mortgage Bankers Association, said earlier this week.

“As a result of the drop in mortgage rates, both purchase and refinance applications picked up slightly last week,” he added. “However, refinance activity is still more than 80% below last year’s pace.”

Another option: Do the renovations during the off-peak season when foot traffic will likely be lower. Guests obviously won’t appreciate hammering and drilling, and you don’t want to end up with a spate of negative reviews on Airbnb
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or Yelp.

You also mentioned being open to changing your business model. If you’ve got an appetite for it, consider converting some of the rooms into long-term rentals. If you get a good mix of short- and long-term renters, you will have a more secure balance in terms of cash flow.

You appear to have done an amazing job weathering the two years of COVID, where you likely saw bookings fall off a cliff.

Now that the industry is in recovery mode, it’s an opportune time to make sure you get the most out of your property. But again make sure you can afford it, especially if business slows down, and factor in any delays due to shortage of labor and/or materials. Ask your builder for references from recent clients, so you can get more details on what challenges they faced.

Most economists are predicting a recession in 2023. As with everything in business, there are no guarantees.

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