Market Conditions: Landlording Not As Easy As It Seems
All the housing blogs are talking about this article in the Chicago Tribune discussing unintentional landlords.
When Ed Amaya put his Oak Park bungalow up for sale in mid-2007, homes in his neighborhood sold in a matter of days, weeks at the most.
We had some showings; got close to a deal,” recalled Amaya. But as the housing market soured, a sale proved elusive. So Amaya agreed to rent it to a family that was not in a position to buy.
“We stayed in that pattern for a couple of years,” said Amaya, who expected real estate to rebound. “But guess what? The market got worse.”
If you can’t sell, many homeowners are thinking they can become landlords. But the rental market isn’t great either.
So many residences are now for lease that there is “a saturated rental market,” with more available units than potential tenants, said Jeanine McShea, president of brokerage services for @Properties.
“Many people are renting out property, but most are not making money,” said Sara Benson, a principal in Chicago-based Benson Stanley Realty.
And then there are the costs of being a landlord not just in maintenance but in not-so-great tenants who don’t pay their rent.
Owners should assume 1 to 1.5 percent of the sales cost will be necessary to put a home in selling shape when a tenant leaves, said Mario Greco, senior broker and vice president of sales at Prudential Rubloff Properties. Factor in two months of vacancy because “tenants lose their jobs,” he said.
The most important costs for some are also the hardest to quantify: the time and patience necessary to deal with renters.
“Be ready for annoyances you never dreamed of,” said Greco.
Should you be renting out your property in the hopes of the market “coming back” in a few years?
Renting what you can’t sell [Chicago Tribune, Sharon Stangenes, May 16, 2010]
Share this with the sellers I have sent bids into who refuse to lower prices and tell me they prefer to rent.
A lot of these landlords are thinking that we’re going to have a V-shaped recovery in housing prices. That’s a huge gamble and not very realistic.
On the other hand, I keep hearing about how rents have been coming down but show me where I can rent 3000 square feet of living space at close to $3000/month. The rental rate for this kind of space has been at 3500/month in desirable neighborhoods (not in high rises where it’s much higher) for years with no sign of decline.
biggest mistake that I think all these accidental amatuer landlords make is their level of tenant due dilligence. This is their first time leasing anything out. For most its their first time being on the selling side of any transaction. They focus on filling the unit and brining in rental income. Since their main concern is getting someone in they don’t due enough screening. I’m sure a lot haven’t even concidered what an ‘acceptable’ tenant is. What’s an acceptable credit history? income? rental history?
Its easy to take the couple with 720+ scores, who each have worked for the same big company for the past five years, with net income 5x the rental rate, and a glowing referal from their last apartment that they lived in for 3 years. (oh, and they both choir singers).
Sure its easy to choose these softballs. But that’s not most tenants, most tenant fall inbetween good and decent. Figuring out where you draw the line is the crucial task.
Tenant retention is key also. Both to reduce any vacency and reduce cost (and worry and more importantly your wife’s worry). You’d be amazed what a friendly call, a bit of paint, or promptly fixing that dripping faucet will do for tenanat retention. I have 2 single women in 2 units both starting year 3 this summer. Going to do my best to keep them for as long as possible
I would rather lose $2,000 per year than $20,000 at once. If I sell the unit for breakeven in 10 years or less, in theory I would be “making” money on the deal. Also, I will have had an opportunity to earn a return on the $20k that I otherwise would have paid out immediately. Lemons to lemonade.
Think Small:
What happens in 10 years when the accidental landlords put their homes up for sale?
that’s why this bust will continue for years to come.
HD – I advise you to pick up a copy of a Robert Kiyosaki book. The key to building wealth is buying real estate, renting it out and then selling it for big profits down the road. Kiyosaki has made a fortune doing just that, and if you ditch your negative attitude, YOU CAN TOO!!!!!!!!! Your attitude and a $20 outlay at your nearest bookstore are all that is holding you back from being RICH BEYOND YOUR WILDEST DREAMS!!!!!!!
The era of making big gains on real estate is over for a bit. We are in a period of contraction, which will continue through the middle of 2011. The only thing that will eventually save the market is inflation will increase in mid-2011, which will lessen the declines and set the Chicago market back in the positive direction. The only way to make a small fortune in real estate these days is to have a large fortune and invest it in real estate. Returns will be very low for a long time, which means you need to be able to find diamonds in the rough and get lucky in predicting which areas will improve fastest.
Dave M
I strongly disagree on the inflation in 2011. I used to think inflation was coming but I have yet to see it. I don’t see big raises coming for anyone anytime soon to make up for the supposed inflation that’s coming. The amount of money the government prints over a couple of years is not nearly enough to offset the large contraction of credit and debt issued during the last 20.
Mid-2011 is over a year away. I’m predicting 1-2% returns in the green zone for the next 5 years, even with the inflation.
Landlording sucks… shit I even rented out my no maintenance parking space to a person who wouldn’t appear to be a deadbeat, yet this clown bounced 3 checks on me! I think I’d go crazy trying to collect on rent and maintain a properrty with someone else living in there. No freakin way would I ever do this
“I would rather lose $2,000 per year than $20,000 at once.”
I would say that is a classic behavioral economics error. Loss aversion. You don’t want to lock in a loss even though that loss could be in all probability better the losses realized over time. If you look at the uncertainties and potential price paths over the next 10 years, you might not come up with the same conclusion.
“I used to think inflation was coming but I have yet to see it. I don’t see big raises coming for anyone anytime soon to make up for the supposed inflation that’s coming.”
Deflation would imply we are going to reduce spending and investment. This could happen but this would mean China and the rest of the world is going to cut off the spigot because I don’t see how the US govt (or the consumer) is going to reign in spending otherwise.
China’s stock market is down over 20pc in the last few days/weeks. They might cut off some money. sometimes the decision to spend less is made for you.
IDK if my situation would be different or worse. We still may rent our house out but it will be to family, my cousin his wife and 2 kids. It won’t be to Make money (will only be cash positive like $100 a month) but as to ride out the house market and help family out.
Groove77 – One of the things I said in the interview for the article above (but it hit the cutting room floor) was that no matter who you have rent it (brother, aunt, best man in your wedding, etc.), one of the biggest costs associated with this “temp rent” scenario is that the tenants 1) won’t keep it in showing shape (think of how you or I live in a hotel for the short time we’re there – we’re not pigs but we’re not trying to sell it either); 2) will deny showings unless it’s 100% convenient no matter what day/time or how much notice you give them; 3) won’t leave the place unless it’s 75 and sunny and they have somewhere to go (even if there is a starbucks next door) – and all of the above gets worse within the last 60-90 days of the lease… right when you’re trying to list it for sale again resulting in having to let it go vacant and then paint/stage/repair to actually sell it. And add to all of the above that you can rent to a monk who travels for business 25 days/month and “is never there” but you don’t know who his friends are or who’s crashing there. All of the above comes from experiences that my sellers have had.
To be clear, I’m not saying don’t rent to delay the pain (it’s a personal decision that must be made with all of the facts in front of the seller), but be aware of the real issues that were mentioned in the article and the points I bring up above.
think Small
“I would rather lose $2,000 per year than $20,000 at once. ”
you are assuming you can get rent anywhere near what your monthly nut is, let alone the additional costs of maintenance and landlording. Rents are also soft and have gone down in alot of nice areas (Lincoln Square, Lakeview, North Center)
Also you assume 10 years from now the price will be more then what you paid for it in the bubble which it probably wont be for alot of people
I’ve seen a lot of accidental landlords just give up after they realize that they’re not going to make any money whatsoever if and when they try to sell. Every accidental landlord’s rental home is ‘special’ but not special enough to lose money every month with no end in sight.
Landlording seems awesome. Even if stuck with a property that I cannot sell that isn’t cash flow positive I can gloss over such trivial minutae and really brag to my friends at keggers what a big RE owner I am and also an up-an-up entrepreneur as evidenced by my landlord status. And no they don’t need to know my landlord status was accidental, either.
People will think I’m so responsible and I will have entered a new social stratification in adulthood by being a landlord. It just screams big city baller, especially when that tenant’s furnace craps out on Christmas day. Big City Landlord Baller to the rescue.
“A lot of these landlords are thinking that we’re going to have a V-shaped recovery in housing prices. That’s a huge gamble and not very realistic.”
I’ve found often people justify their own personal decisions with regard to real estate by stating that their unit is unique and special and isn’t correlated with the overall market.
In some instances this justification _may_ be true. In most its definitely not.
Nice piece. The Sun-Times ran the same piece back in November:
http://searchchicago.suntimes.com/homes/news/1878253,rookie_landlords-111109.article
Landlording is definately NOT for an inexperienced in EVERY aspect of RE ownership individual. It is hard work to place an asset in someone elses hands, trusting them to care for your property as though it was theirs.
A few thing that makes life easier for me is 1) never rent to acquiantances or relatives as they expect more than you are willing or can give them. 2) Make them believe they are getting a deal even when they are not 3) Keep high deposits in place regardless of who your tenants are, but on occasion throw in an item of value showing your appreciation for keeping the property in good shape…I got a fantastic deal on Weber grilles and that kept many of my FL places in spotless condition. 4) Rent decreases for the same reason as #3. 5) Let them know how much you value and appreciate them maintaining your place. Nothing like a shitty/cheap landlord (slumlord) to guarantee you having to rebuild your units every time a tenant vacates.
More later….gotta run to a showing @ 15 USW…check out the website…..fantastic places!!
MG,
Good heads up on some valid points people miss. (me especially).
I wouldnt have my place listed when i rent it, so showings and showing “clean” wont be an issue. Maintenance/fixing shyt is no problem is i do it myself already. (the inconvience of getting called to do stuff will be the headache for me) I also plan two-three months of work to after my cuz moves out to fix up the place.
I/we emotionally cant get myself to sell at the price my nieghborhood is going for. This is my first house i bought and put a butt load of my own hard work into it and bettering the blocks around us. i know in 5 years that things still wont be great but i am hoping/betting that i wont be competing with so many foreclosures by that time. seriously there are boarded up houses for sale and selling for 80k-100k around me in a neighborhood where most are DYI or somebody in there family is DYI types. even if i list my place for a low low price i dont see it selling for long time (also the realtor i spoke with said the same but she doesnt specialize in our hood though)
becoming a landlord may suck and for most people it may be a nightmare. after read the article and what MG wrote i am having some second thoughts (well third thoughts already was scared of doing it)
wow wloop those places at 15 USW are fabulous… too bad i’d never be able to afford a place like that even in Chicago 🙂
I was an unintentional landlord in Washington DC several years ago when I moved to New York and it went badly. My first mistake was trying to manage it myself as an absentee landlord. A local managing agent would have been worth his weight in gold. My second was not to check credit. I was young and ignorant and credit checks weren’t as readily available back then before the internet is what it is today. I ultimately sold the property at a loss because the stress was ruining my life.
I checked my current tenant’s credit and references and had him fill out a comprehensive rental application. My real estate agent is managing the property. But I still have a question about one thing. Everyone stresses the importance of checking former rental references. I never took these seriously though because if you are a landlord with a problem tenant, your objective is to get him out, right? So even if you had a horrible tenant, you would probably lie and say he’s great, right? So can someone please tell me how to get an accurate read of a prospective tenant’s rental history?
Thanks!
“Everyone stresses the importance of checking former rental references. I never took these seriously though because if you are a landlord with a problem tenant, your objective is to get him out, right? So even if you had a horrible tenant, you would probably lie and say he’s great, right? So can someone please tell me how to get an accurate read of a prospective tenant’s rental history?”
If you talk to an actual human and ask the right questions, you can tell if someone is giving a good rec. or trying to obfuscate. I have found that speaking to former landlords and to current employers has been critical to making a good decision.
Basically , you want everything about the prospective tenant to add up and make sense. The person with the best credit is not always the best person.