Think twice before becoming a landlord
It may seem like a good time to snag an investment property or two and rent them out, but becoming a landlord has its downside.
If you're thinking about snapping up properties at fire-sale prices and renting them out to all the people who can't get a mortgage, think twice before you leap.
The temptation for would-be investors is strong: Thanks to record numbers of foreclosures, short sales, bank-owned properties and homeowners in distress, prices on all shades of real estate are low and getting lower.
But despite the allure of covering costs with rent money and (hopefully) generating an increase in value in the coming years, there is a downside to the equation.
Vacancy rates are up
It seems logical that people who can't buy a house or have lost their home are going to rent. After all, they have to live somewhere. But nationwide, landlords are having trouble filling vacancies. That’s prompting them to offer tenants incentives to sign a lease. More often than not, it's a discount. It might be a free month of rent, a lower security deposit or a three-bedroom unit for the price of a two-bedroom unit.
"Between 2002 and 2006, our No. 1 source of losing tenants was to buying a home," says Jason Post, president of Los Angeles-based Post Investment Group, a boutique real-estate investment company that buys and operates apartment buildings. "Now, our No. 1 source of losing tenants is skips and evictions. We're seeing lower occupancy rates across the board and more concessions to lower effective rents."
Among the latest incentives landlords are offering is a deal borrowed from the auto industry: reduced rent for 90 days if a tenant gets laid off, says Dan Page of the Boulder, Colo.-based American Apartment Owners Association. If he doesn't find a new job by then, he can be released from the rest of his lease.
“It's a great offer," Page says. "If the tenant loses his job, the landlord is probably going to lose the tenant anyway, and they're using it as a way to fill vacancies."
Applicant histories are getting worse
A credit check is a central element of the tenant screening process, and most applications have a question about foreclosures, bankruptcies and previous evictions. In the past, answering "yes" to any of these questions would automatically disqualify a prospective tenant. Not anymore.
"In the old days, if you had a foreclosure, we wouldn't even talk to you. Today, it's a whole market segment we want to talk to," says Jeffrey I. Friedman, chairman and CEO of Associated Estates Realty Corp., a national rental-property company based in Richmond Heights, Ohio. If an applicant lost a home to foreclosure but had a job and good credit otherwise, that applicant probably would get approved. Associated Estate Realty also has started including unemployment benefits in an applicant's income, which it never used to do.
Drew Sygit, a partner at Royal Rose Properties in Birmingham, Mich., say his company has "gotten really good at looking past the credit report. Income is more important now than credit. We see tenants who have been displaced because their landlord got foreclosed on and tenants who lost their homes to foreclosure. That makes up 60% of our applicants."
Evictions are taking longer
With the rise in unemployment and the prevalence of foreclosures on rental properties, eviction filings are up. That means it's taking longer for courts to process the necessary legal paperwork, and local law enforcement is backed up on carrying out the evictions. "They're taking far longer than they used to," Page says. “Some sheriff's departments are refusing to serve eviction notices. People need to take that into account."
Some landlords are willing to work with tenants who can document their financial difficulties and provide evidence that it will be a short-term situation. Others "support the concept of paying them to move out," Page says. It all comes down to deciding which option will cost them the least amount of money, given the expense of an eviction and the increased risk of damage to the unit by a frustrated tenant.
Rental units are getting pet-friendlier
Because of the risk of flea infestations, damage from toileting accidents and noise, there's no question that pets are a hassle for landlords. It's no wonder that so many landlords used to adhere to a "no pets" policy. That's changed, in a big way. Few landlords are willing to turn away a pet lover with a good job, a good rental history and good credit. And most tenants are willing to pay extra for their four-legged family members.
Most landlords who accept pets charge a nonrefundable pet fee, and some also charge a small monthly "pet rent." "People are much more willing to pay that today," Friedman says.
Post says his property managers "do little things to make the property attractive to pet owners," such as setting aside areas for walking dogs and providing scoopers and bags for owners to clean up after their dogs. "We're pretty loose as it pertains to pets," he says. "We're pet lovers ourselves."
This article was written by Pat Curry for Bankrate.com.
Golf goof...where do you effing morrons come from. There's no deduction because the lack of revenue for that month is the deduction, unless of course you want to pay your share of income tax on the revenue you should have received.
People at your level of stupidity are exactly the reason we have so many problems in this country!
good article, love different opinions. Seems like property management companies need a brush up on how to market services and properties. Go to propertymanagementmarketing dot netand if you are interested I can put together a solid game plan for you!
I have had two rental properties for six years, and I am ready to get out of the business! There are plenty of people that want to rent them, but between chasing down the rent every single month, and cleaning up the filth they leave behind, I am done! Both of my house's are nice properties but finding a truthful renter that will actually take care of it and pay their rent in a timely manner is an entirely different story.
Meth is so easy to make now that it can be done in a 2 liter soda bottle. Ingredients to make meth are easy to get and information about how to cook meth is all over the Internet, although most cooks learn how to do it from other meth cooks.
If someone rents your property and makes meth in it, you've got a major problem on your hands. Decontaminating property that's been used to manufacture meth can cost as much as $150,000. In some cases, you may be told that it's cheaper just to demolish the house. Is it a bad time to be a landlord? I think so.
Worrying about whether a renter is going to pay their rent is nothing compared to the loss you'll have if they decide to use your property to make methamphetamine. The cost of clean up is staggering. In addition, meth labs explode and can incinerate a building in a matter of minutes. Our current rate of unemployment and the rise in meth addiction has created the perfect storm for landlords as well as private home owners.
Landlords, beware! If your tenant gets busted for manufacturing meth, you're going to get stuck with the bill!
Besides those who have gone through it and have allowed me to post their personal stories on Meth Lab Homes, you might also want to check out an article on eTruth called "Grappling With Meth: Local landlords, property owners foot the bill for cleanup Part 2 of 5". Do a Google search for meth labs and it won't take you long to find out how many landlords are now dealing with the problem. Renting is not what it used to be.
I have been a landlord since 1973. I can name my three worst tenants. One bad tenant will change any one's ideas about becoming a landlord.
In real estate it is location, price, and condition. If you decide to become a landlord then you must be a people person, tolerant, be patient, be a business man, and be very handy. If you don't have sufficient cash to cover expenses, repairs, mortgages, and emergencies don't become a landlord. If you are greedy, violent, quick tempered, have no tolerance for liars and thieves, don't become a landlord. If you like fixing damage from pets and enjoy cleaning up urine, crap, fleas, ruined carpets, rent with a liberal pet policy.
All real estate turns into a matter of the local market. Over the last 37 years the quality of the tenant has gone down. The truly good tenant has bought their own home. The average tenant is renting from a good landlord that keeps the rents on a livable basis. The rest of the tenants cannot afford their own home, cannot afford the new apartments, cannot afford the apartments they were living in and now is trying to move into your place. Even though I have been a good landlord for a long time I would not recommend anyone becoming a landlord in the present economy and with the attitudes people have nowadays.
My last bad tenant had good credit, paid the rent on time, and had a lease with NO PETS! She moved in nine dogs, put up a cheap fence, ran the pets in and out through the bedroom window. After lost rent, eviction, thousands of dollars in damages she did get out and moved to parts unknown. Even good tenants may turn bad. If you are thinking about renting out your well kept beloved home think long and hard.
Well it depends on your outlook,demographics, number of vacancies around your investment. No tenant is better then a bad tenant. My property is near metro DC, and the University of Maryland. I improve the structure every year there is a profit. Last year I added 17 energy savers, saving tenants 50% on water, 33% on heat.
Currently their are 12,000 foreclosures in the county and 14,000 vacant rentals. We have $700 cheap apartments to compete with. I have interviewed 80 applicants in the last year. And corresponded with 300 people. My rental is empty because I run identity checks,
and require W-2's and an id card or drivers license. I don't have the tax money yet, but I will donate it to charity, before letting someone pay 50k for July 2009 assessment was 428k for the house 75k for the lot. The assessor came in person.
I agree with most of the article, and additionally agree that location and what market you are in makes a difference. To qualify this, I manage 700 plus homes in Southern California and see many of these items being demonstrated. 1. Vacancy rates are up...yep, and it is taking longer to locate quality residents. Where are these foreclosed people going? well, shacking up together, multiple families living together or going home to live with mom and dad, grandma, aunt, etc...2. Applicants histories are getting worse...... yep, but not across the board, some just got caught up in the frenzy. Not bad people, just uninformed or not real sharp. But that doesn't change the requirements, you just have to treat them as new to the market... extra deposit, co-signors, etc..... 3. Eviction are taking longer....yep, if you haven't heard they cut back the number of sheriff's processing evictions and the courts are obviously impacted, so its going to take longer...... 4. Pet friendlier..... its about the same, your policy to take animals is the same, allow them or they don't, however, some pressed property owners are loosening up their criteria or modifying their criteria to allow pets.
Thanks Pat for the interesting information that gets people thinking.
Once Bitten Landlord,
My partners Smith and Wesson would have solved your problem within about 10 minutes
This article is so biased I can't believe the author did any research to make such a huge generalization of the real estate market! As a Real Estate Broker I see many areas that landlords are getting their rent and more! As the previous person said its all about the LOCATION! Most open rental property vacancies are due to people who just left a house and refuse to move down to a dump and/or poorly managed properties. Those landlords will now face a high vacancy rates if they do not offer nice looking properties with good property management.