“Most economists predict a recession in 2023”: I own a rental property.  Is it the right time to take out a bank loan and renovate or should I wait?

“Most economists predict a recession in 2023”: I own a rental property. Is it the right time to take out a bank loan and renovate or should I wait?

Dear MarketWatch,

Along with a sibling, I own a 40+ bedroom rental property in the Caribbean, where we do weekly rentals.

It is near the city center but needs repairs and renovations.

Is it a good time to go to the bank for a renovation loan? We are also open to changing our business model.

Please advise and thank you.


ready to move

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Dear Loan,

Good maintenance and management work for this short-term rental of 40 rooms. With the worst days of COVID behind us – I hope – travel is booming and people are going crazy exploring every part of this planet. So only proceed if the reservation request is there.

I don’t know what lenders are offering where you are, so take a few weeks to approach a group of lenders to see what rate they are offering, and if that interest rate is trending up or down.

In the United States, 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 about double the rate of the same period last year.

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

There are other considerations: you may need to keep some rooms off the list when they get a facelift, but ultimately you should see more money once it’s done. Subject your financial plan to a rigorous risk assessment and consider all contingencies – existing demand, expected increase in demand after renovations and decrease in demand due to a possible recession.

You will need sufficient financial support to overcome all three outcomes. With the help of an accountant and/or financial advisor, ensure you have the cash flow, rental projections – including the assumed rent increase after renovations – to survive the next 12 months , especially during a market downturn.

With inflation slowly coming under control, according to the Nov. 10 federal government report, the 10-year Treasury cut and lower mortgage rates, you may be approaching a window of opportunity that is opening. in the short term.

“Lower mortgage rates should improve the purchasing power of potential home buyers, who have been largely sidelined as mortgage rates have more than doubled over the past year,” Vice President Joel Kan said earlier. -President and Deputy Chief Economist of the Mortgage Bankers Association. this week.

“Due to lower mortgage rates, purchase and refinance requests increased slightly last week,” he added. “However, refinancing activity is still more than 80% below last year’s pace.”

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

You also mentioned being open to changing your business model. If you feel like it, consider converting some rooms to long-term rentals. If you get a good mix of short-term and long-term tenants, you’ll have a more secure balance in terms of cash flow.

You seem to have done an amazing job going through the two years of COVID, where you’ve probably seen bookings fall off a cliff.

Now that the industry is in recovery mode, now is the time to make sure you get the most out of your property. But again, make sure you can afford it, especially if business is slow, and factor in any delays due to labor and/or material shortages. Ask your builder for references from recent customers, to get more details on the challenges they faced.

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

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