Buying Rentals in Charleston
If you’re looking to purchase rental property in Charleston for an income stream, you’ll need a “buy and hold” strategy and a healthy dose of patience. You’ll only find success with a long game mindset and abandoning expectations of instant income. Based on the rising costs listed below, you’ll only cash flow if you’re paying cash or putting 50%+ down.
Interest rates: Today's mortgage rates are 7%+ for owner-occupants, and non-occupant investor rates are typically 1-1.5% points higher (so 8.5%).
Acquisition costs: The accelerated appreciation we've experienced over the past 18 months has outpaced rental rates.
Property taxes: Not only are higher sales prices limiting ROI, but it’s further compounded by subsequent property tax increases. When a property changes hands, the tax value is automatically reassessed at the sales price. With a 22% increase in our median sales price this trend will continue, even if higher interest rates reduce buyer activity. Remember that without the owner-occupant tax break, property taxes triple for investor owners.
Insurance costs: Even before Hurricane Ian, many providers were already exiting the coastal region and raising existing policy rates year over year. We started seeing rates creep up in 2020, especially condos (both master and owner policies). Following increased construction costs and supply shortages, replacement costs spiked, directly impacting annual insurance expense to the tune of 17-26%+.
Buyer pool: Our former "slam dunk" areas for investment have been snatched up by owner- occupants. There are still 40+ people moving to Charleston every day, and the majority are remote workers who are no longer tethered to expensive urban centers like San Francisco and NYC. Their monthly payments to purchase here are lower than what they were paying in rent, so they're willing to outbid an investor.
Construction costs: There are no longer “deals” for new construction. New builds are too expensive for investor margins and volume builders are not adding the neighborhood amenities that attract renters.
Inventory: There are national rental holding companies (like American Homes for Rent) building entire neighborhoods purely for their own rentals, on top of the hundreds of approved building permits for multi-family apartment complexes.
Regime fees: Master condo policies are the most expensive insurance to obtain and the maintenance costs have risen due to labor shortages and supply chain.
Our teammate Ashley bought a $450k Mt Pleasant rental property this year. The investment made sense when she ran the numbers in January. By the time she found a property and closed in July, the ROI was no longer there. She moved forward because she believes in the long term appreciation and is hopeful it will eventually cash flow once she pays off her 15 year mortgage. Until then, she will be coming out of pocket $300/mo to carry it. See her numbers here:
Teammate Lauren spent the past 3 years looking to purchase a rental. She eventually abandoned the idea because she felt the low/no cash flow was not worth the headache of ownership. She's decided to stick with the stock market and invest as much as she can now to maximize compounding interest. Her investment is more liquid and her dividend payouts can serve as cash flow or be reinvested.
Our clients Eric & Melissa had saved up a 30% down payment for a $400k rental purchase. Vanessa spent hours searching for viable options, but nothing produced cash flow. So they switched gears and looked at spending $600k to buy their next primary residence, intending to turn their current home into a rental. Between the expense to purchase a house big enough for them to both work from home and factoring in the tripled property taxes on their current home, they would lose $9,000 annually.
It was difficult to deliver the message to Melissa & Eric that it would be years before they could produce any income with a rental, but our team's success is built on transparency and direct communication. You can count on us to continue that style, but we can't leave you doomy & gloomy! Check out this follow-up article on where you can invest your money if waiting on the income stream isn’t feasible for you.
