TOP 10 THINGS TO DO When #Renting Your Home…
Across the country, a divide is emerging between cities that are growing outward and remaining affordable and ones that are hemmed in by geography and onerous zoning codes and are becoming more and more expensive.
As a whole, U.S. cities are expanding as rapidly, as they have throughout the last half-century. From the 1950s until the 2000s they have added about 10,000 square miles per decade, or an area roughly the size of Massachusetts, according to research byIssi Romem, chief economist at real-estate site BuildZoom, to be released Monday. But beneath the surface a divide is deepening.
On the one side are cities such as San Francisco, Boston, New York and Miami that have slowed their pace of expansion dramatically since the 1970s, in part as they have added layer upon layer of building regulations. On the other side are cities concentrated in the southeast and Texas, which have grown outward and seen much slower price growth.
The developed residential area in Atlanta, for example, grew by 208% from 1980 to 2010 and real home values grew by 14%. In contrast, in the San Francisco-San Jose area, developed residential land grew by just 30%, while homes values grew by 188%.
The developed residential area in Raleigh, N.C., grew by 219% in the same period, while home values grew by 27%. In Seattle, the developed area grew by 69%, while home values grew by 119%.
Mr. Romem draws the distinction succinctly: expansive cities versus expensive cities.
“If you don’t let the city grow, you’re going to get prices going upward…and see the middle class being pushed out,” Mr. Romem said.
Mr. Romem’s research reads on its face like an argument for suburban sprawl, which has come under fire both for its environmental consequences and tendency to lead to oversupply that can lead home prices to crash.
Mr. Romem said ideally cities would relax regulations and build upward rather than outward. But, he said, promoting development on empty fields is more politically feasible than building apartment towers in single-family neighborhoods, and thus likely to ease affordability pressures more quickly.
Many of the more expensive cities are prevented from growing outward by natural barriers, such as oceans or mountains. Those cities are unlikely to grow significantly upward or outward in the next couple of decades, he said, and thus the price divide is likely to continue to widen.
That could be good news for cities such as Atlanta and Raleigh, N.C., that have long been overshadowed by more economically powerful legacy cities.
“These cities are growing more important because of having more population. They have become more viable places for certain types of firms to locate,” he said.
Investing in rental property has long been a popular option for people who want to diversify their investments beyond stocks and mutual funds. But, unlike those more mainstream investments, rental properties can require significant hands-on work, including dealing with tenants and keeping up with maintenance. You have to be smart to make rental investment pay.
“The idea of investing in real estate being easy money is nonsense,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area who owns rental properties.
While investing in real estate is often referred to as “passive income,” there is nothing passive about it. You should expect to put in plenty of effort if you hope to bring in a return.
“I think the key question is do you want to be a landlord,” says Tiffany Alexy, a broker with Lucky Penny Realty Team inRaleigh, North Carolina, and the owner of several rental properties. “Yes, it’s passive income, but if you’re managing the property yourself, you’re potentially giving yourself a second job.”
Mutual funds don’t call when the toilet is stopped up, they don’t write on the walls and they don’t refuse to pay rent, all issues you’re likely to face with tenants.
“People need to do some deep soul searching before they walk into this,” says Ray Rodriguez, regional mortgage sales manager for TD Bank. “Being a landlord is hard work”
The other myth you need to dispel before starting out is that you can invest in real estate with no money. “That’s not going to happen,” Rodriguez says. “If you’re struggling just to get by … it’s probably not a good idea right now.”
In most cases, not only will you seed a sizeable down payment, you’ll need to show additional savings and enough income to make payments.
If you invest in a duplex, triplex or quadraplex – and you’re going to live in one of the units – you can get a conventional mortgage with a down payment as low as 5 percent if you show enough income to make the payments.
You can get a conventional loan on properties of four or fewer units with 20 percent down with solid credit. But, says Fleming, lenders will want to see at least three months of reserves, plus proof that you can afford all your current expenses as well as the mortgage on the new property. Investing in properties with more than four units requires commercial financing, which is usually more expensive.
If you don’t have experience as a landlord, demonstrated by a Schedule E filed with your recent tax returns, the lender usually will not let you count income from the rentals toward your mortgage qualification. If you do have experience, the lender will use the appraiser’s estimate of the rent (taking 75 percent of that) and subtract mortgage costs, property tax and insurance to get the net income that will be counted.
Even after you surmount all those financial hurdles, you still need to make sure the specific rental property will provide a positive cash flow once all the expenses are paid. Sellers and real estate agents will often provide figures that show the property is profitable, but it’s up to you to make sure those figures truly reflect all the expenses and take into account maintenance costs, home repairs and vacancies.
“You have to do some very good due diligence,” Rodriguez says. Fleming suggests you ask to see the current owner’s Schedule E from the last few years or make an offer on the property that is subject to review of those documents. “A negative cash flow is not an asset,” he says. “It’s a liability.”
Finding rental property that yields a positive cash flow may take some searching. Fleming recommends looking for a building that’s a little rundown but in a good neighborhood, provided you have the money to improve the property. “If you get a great deal, you could probably find something for 25 percent down that cash flows,” he says.
Here are six things to do before you buy rental property:
Gather as much information as you can. Talk to other investors, mortgage brokers and real estate agents who have worked with income property about what owning a rental property is really like, in addition to reading books and articles on the topic. “It’s all about obtaining knowledge,” Rodriguez says.
Decide if you’re ready to be a landlord. Buying and managing property yourself provides the greatest return but also the greatest headaches. “Do you have the stomach for being a landlord?” Fleming says. “Stuff’s going to happen that just really ticks you off.” Other, less active options include becoming a partner in a limited liability company that owns properties or buying into a real estate investment trust.
Crunch the numbers carefully. A rental property is only a worthwhile investment if it makes money. Yes, the property may rise in value and yield a profit when you sell, but it also may lose value depending on which way the market goes. “If you’re banking on just appreciation, it’s really hit or miss,” Alexy says.
Make sure you have enough cash. Getting rich on real estate with no money down is a great dream, but it’s almost impossible to accomplish. Expect to need a sizeable down payment, reserves to pay for repairs and maintenance and a good income before you start investing.
Consider a live-in property. If you’re buying a home for yourself, buying one with up to three additional units can be a good way to get started with investing. “We see a lot of younger people going this route,” Rodriguez says. “I think it’s a good way for a first-time homeowner to begin homeownership.”
Plan for hands-on management. In the long run, you may decide to pay someone to do the day-to-day management of your property, including dealing with tenants and arranging for repairs. Costs vary, but you should estimate paying about 10 percent of the rents collected for this sort of service. But you will still need to be there at the beginning to make sure the building is in tiptop shape and the tenants are dependable.
Food for thought… A SKILLED Property Manager isn’t cheap, and a CHEAP Property Manager isn’t skilled.
Prior to hiring any 3rd party property management company, you should take time to do your research. The mission will be to find a property management service that is experienced, trustworthy and organized. Tips to help you find the very best fit for your rental properties are highlighted here.
Take time to talk with other property owners and real estate agents that are in your area. Ask about the companies or managers that they currently use or that they have used in the past. Also ask them what they like about these services, and what they dislike. This can provide you with some invaluable asset when you are trying to find a property management company.
Complete a Search Online
It is also a good idea to search for a property management service online. There are a number of services available and you can look on their website in order to see the services they offer and learn more about what they can do for your properties. Prior to wasting our time interviewing a certain company, you should also look at the reviews about the company on sites such as Facebook or Yelp.
Ask about Current Clients
You should look at a number of the property managers existing ads. Do they appear compelling and professional? Are they advertising the properties in a number of different places, or are they simply limited to some free sources, such as community bulletin boards and Craigslist?
Also, take time to look at the properties that are currently being managed. Do the properties appear clean and look maintained? When you speak to the current tenants in these properties you can also gain some helpful insight regarding the way that the property management service operates. Since the role of this service is to ensure happy tenants, you need to be sure that you find out if they are capable of this.
Talk with Several Different Services
Chances are you will screen a number of tenants prior to choosing one, you should also interview a number of property management services prior to finding the right one for your needs. When you interview a number of different services then you can find the one that is best suited for your particular needs and the needs of the various rental properties that you are looking to have managed.
With all of the different companies out there that can help with this type of work, finding the right one will take some time. Making a list of needs beforehand is a great way to narrow the selection down.
Q: Dear Mr. Reno:
In a lot of your responses you mention taking the individuals to small claims court. In my case the leased individual is certain to die in the next couple of days. How do I take the current occupiers to court if I don’t have names, socials, or other identification. I only have license plate numbers of all the cars associated with the people currently residing there.
A: These are John Doe’s. You can evict John Doe’s for nonpayment or a holdover. Sometimes the John Doe’s come into court and give their names, so there’s a chance you’ll get a money judgement. But even then, the Judge may rule that you have no rental agreement with them. The problem is, your legal theory that these particular people owe you money is a little shaky.
The Landlord Protection Agency’s “Ask the Attorney” column is for informational purposes only. The questions answered by Mr. Reno on this site do not constitute an attorney – client relationship and are not to be considered legal advice. Not all questions will be answered and some may appear in the LPA Q&A Forum.
The Landlord Protection Agency recommends that you seek legal advice before using any of the material offered on this web site, and makes no guarantee on the effectiveness, compliance with local laws or success of any of the material offered on this web site. The Landlord Protection Agency is not engaged in rendering legal advice.
So, you want to be a real estate investor? You are probably thinking the way I did when I started as a real estate investor. I thought the most important objective was to buy as many properties as possible. Well, I still had a lot to learn.
As an investor in residential real estate, being able to purchase properties that will allow you to make money is paramount. While there are various methods you can use to make your real estate fortune, the two most common plans are quite simple.
Buy and flip. This is when you purchase a property and sell it for a higher price. Many investors will find “Handyman Specials” or “Fixer Uppers” at a low price to improve and sell at a higher price. Sometimes you are fortunate enough to find an excellent opportunity requiring little or no work, only to resell for a quick and easy profit. Although this is a common way to make money in real estate, many investors choose not to sell their investment property.
Buy and hold. This is when the real estate investor becomes a landlord in order to enable the investment property to generate income. Holding onto the property is also a way to allow the investment to appreciate in value over time. Why? The demand for residential real estate continues to grow and people are willing to pay top dollar for a place to live. What can be better than that? You have an asset appreciating in value plus you also have a tenant to pay your expenses on the property. You may even have a positive cash flow.
So what is “The Secret Career Killer Facing Real Estate Investors”?
Before I answer that question, let me ask you,
Tenant problems are the one of the biggest reasons, if not, the biggest reason most landlords quit investing in real estate and sell their rental properties way before benefiting from one of the best features of owning real estate: appreciation.
It is just as important to learn the secrets of landlord protection and property management as it is to know how to accumulate rental property. Let me say it another way: Without knowledge of landlord protection, you as a landlord, are in big trouble!
Think about how much money people spend on books, seminars and trial and error learning about buying real estate. It’s incredible! I invested so much money learning creative ways to buy property. How about you? How much have you invested learning to be an efficient landlord? Most landlords learn their lessons the hard way like I did. Fortunately, now there are some books and websites on landlord topics that can shed some light on the subject and allow average landlords and “Newbies” to become educated and aware of their legal rights concerning landlord – tenant relationships.
What good is struggling and sacrificing to own a lot of properties only to bail out because of overwhelming tenant problems?
Get educated in the art of “landlord protection”. Learn how to avoid tenant problems so you can keep buying more investment property.
The three most important landlord issues to learn about for your own protection are:
If you have experienced the unpleasant part of being a landlord which includes loss of rent, possible foreclosure, loss of sleep, confrontations with unreasonable tenants, expensive repairs and restoration, vandalism, theft, squatters, evictions, legal fees, you may have had to consider if it’s all worth it or not. Many new new investor / landlords decide quit the landlording business soon after a bad tenant experience.
As a real estate investor who intends to be a landlord and enjoy that excellent long term appreciation, it is absolutely imperative to have some landlording knowledge. I strongly recommend having more landlord tenant knowledge than your tenants do!
Happy investing and landlording!
About the author:
As a Real Estate broker / investor in New York, John Nuzzolese has been involved with rentals and investment property since 1979. Besides owning and operating two real estate businesses, he is president and founder of The Landlord Protection Agency, Inc. , an organization specializing in helping landlords and property managers avoid the hurdles and pitfalls and expensive blunders common when dealing with tenants.
More information on The Landlord Protection Agency is available at www.theLPA.com
As housing is inches closer to fair value due to rising home prices and distressed properties for sale continue to decline, private investors are finding it harder to find bargains in the market.
A U.S. housing market update from Capital Economics by Property Economist, Matthew Pointon, showed that although there are a few roadblocks on their path, private investor demand is not likely to dry up anytime soon.
“With returns on other types of assets looking low and/or risky, expectations for further gains in house prices suggest Americans will continue to see housing as a good place to store wealth,” Pointon wrote.
In the midst of tight supply, heightened competition for buyers, and unpredictable financial markets, U.S. home prices continued to rise in the fourth quarter.
The Federal Housing Finance Agency’s (FHFA) House Price Index (HPI) shows that home prices rose 5.8 percent year-over-year in the fourth quarter of 2015. Prices increased 1.4 percent from the third quarter of 2015, marking the 18 consecutive quarterly price increase in the purchase-only, seasonally adjusted index. Home prices were up 0.4 percent month-over-month for December.
“Instability in financial markets did not seem to put much of a drag on home prices in the fourth quarter,” said Andrew Leventis, FHFA Supervisory Economist. The 1.4 percent rise in home prices “was in line with the extremely steady—but historically elevated— appreciation rates we have been observing for several years now.”
Capital Economics posed the question if the continued rise in prices will cause investors to withdraw from the market, potentially leading to a drop in housing demand if others—like first-time buyers—do not take up the slack. However, Pointon stated, “Private investors have proved a stable source of housing demand over in recent years.”
“Private investors are typically on the look-out for bargains they can buy with cash. But with housing now at fair value, good deals are becoming harder to find. In particular, the rise in house prices, low mortgage rates and improving labor market have all helped to bring mortgage delinquencies down to pre-crisis levels,” Pointon said. “As such, the share of homes bought for investment and vacation purposes that were distressed dropped in 2015 compared to 2014.”
Capital Economics said that it not likely that the lack of distressed properties will fend off investors. “While bargains may be harder to find, the fact remains that house prices are expected to keep on rising. Even if the home is not rented out, buyers will be expecting a decent capital gain,” the report said.
“We don’t see a collapse in private investor demand as a significant risk for the housing market. Rather, a slow recovery in first-time buyer numbers will complement second home buyers, and ensure that housing demand weathers the coming gradual rise in mortgage rates,” Pointon concluded.
Home prices keep rising—but not nearly as quickly as they rose earlier in the recovery. And that’s changing the math for investing in single-family rental houses.
“It’s no longer a gold rush and it’s more of a business,” says Daren Blomquist, vice president for research firm RealtyTrac.
Investors can still find good opportunities to buy single-family rental houses—but they now have to look a little harder to find attractive houses with prices low enough to make for good investments based on the rental income the properties can earn rather than home price appreciation.
Once investors find those properties, the outlook for rental housing continues to be strong, with rents growing faster than inflation.
The yields that investors can get from investing in single-family homes have shrunk, both in terms of income and appreciation. Investors accepted annual gross rent yields averaging 9.4 percent for single-family homes in March, according to RealtyTrac. That’s down from 9.5 percent in 2015. But it’s also a very steep decline from the average yield of 10.9 percent in 2011. (These yields represent the income from a property as a percentage of the purchase price.)
“If you had your druthers as a single-family investor, the best time to have bought would have been in 2011,” says Blomquist.
Giant institutions including the private equity firm Blackstone and REITs such as American Homes for Rent continue to hold the many thousands of houses they bought earlier in the recovery, benefiting from the rising rental income. “They are not going to divest,” says Blomquist. “The big players are holding on and keeping the assets they acquired over the last two to three years.”
Rents have begun to rise sharply for single-family rentals as the economy improves, according to the latest Fair Market Rents set by the U.S. Department of Housing and Urban Development.
Rents for homes with three bedrooms, which largely represent rental houses, grew 3.4 percent in 2016. That’s up from 2.2 percent in 2015 and 1.0 percent in 2014.
For several years, developers have built fewer homes—especially single-family homes—than the economy is likely to need to support a growing U.S. population. The recentConsensus Survey of economists from the Urban Land Institute predicts that developers will increase construction of single-family houses each year through 2018, when they would finally start 900,000 new houses, though that will still be well below historical levels.
That means that existing houses will continue to be in demand. In addition, the homeownership rate continues to be low, which increases demand for rental housing.
Home prices rose more than 5.0 percent over the 12 months that ended in January, according to the latest Case-Shiller Home Price Index. That’s more than twice the rate of inflation, though it’s also much less than the nearly 10.0 percent per year increases that were common earlier in the recovery.
Investors in single-family rental houses are find opportunities in a different set of markets as the recovery enters a new phase.
“There are lots of places that are still good single-family house rental opportunities—though it is getting harder and harder to find the houses that have the good returns,” says Blomquist.
Buyers can no longer find the best deals in the markets most affected by the housing bust. Home prices in cities including Las Vegas and Phoenix have recovered. The markets with the highest annual gross rental yields include counties where low median home prices create opportunities for investors.
RealtyTrac’s list starts with Baltimore City, Md. (28.5 percent); Clayton County, Ga., in the Atlanta metro area (25.8 percent); Wayne County, Mich. in the Detroit metro area (24.2 percent); Bay County, Mich., in the Bay City metro area (21.2 percent); and Macon County, Ga. (20.6 percent).
Counties with the lowest annual gross rental yields include Arlington County, Va. (3.3 percent); the California Bay area counties of San Francisco (3.4 percent), San Mateo (3.6 percent), Marin (3.9 percent), Santa Cruz (4.0 percent) and Santa Clara (4.0 percent); Williamson County in the Nashville metro area (4.0 percent); and Kings County (Brooklyn), New York (4.0 percent), according to RealtyTrac.
When your circumstances change, such as starting a new job, having a baby or providing caregiving for an older relative, your current home may no longer fit your needs. Some homeowners may choose to sell or renovate their homes to cater to those needs, but others may opt to move and keep the property as a rental, especially if the real estate market isn’t where they would like it to be when they’re looking to sell.
Before going this route, here’s a checklist of top questions to ask yourself.
Do I need the equity? For many Americans, their home equity is a huge part of their net worth. If you’re planning to buy another home or you have another need for that equity, then renting the house may not be an option, says Larry Rosenthal, a certified financial planner and president of Rosenthal Wealth Management Group in northern Virginia. “In order to use the equity, you’ve got to sell the property, rent it or mortgage it,” he says.
What’s my long-term plan? “Investing in real estate is a great option. Just understand what your goal is with it,” Rosenthal says. “What do you want the property to do for you?” he asks. Often, a property where the mortgage is already paid off can bring in the most free cash flow since rent only has to cover smaller expenses such as property taxes and maintenance, rather than a mortgage. This typically creates the most ideal circumstance for the landlord.
However, if you’re a retiree who wants to turn a paid-off property into a pension-type income, Rosenthal says many retirees tire of dealing with the complexities of rental properties as they age and want more simplicity. And if your goal is to generate cash flow beyond your carry costs, including the mortgage, property taxes and maintenance, don’t forget that vacancies or non-paying tenants can cut into that free cash flow.
Or, if you’re planning to rent out the property for a few years and build up more equity, remember those gains in equity could be wiped out by future fluctuations in the market. Planning to cash in on the popularity of short-term rental sites like Airbnb or VRBO? Frequent short-term rentals can be more lucrative than long-term leases, but be prepared for more work and check your local ordinances. “The city of Santa Monica is cracking down on Airbnb and the short-term rental industry,” says Jose Tijam, a realtor with Grand Avenue Realty & Lending Inc. in the Greater Los Angeles area. Even if your municipality currently allows short-term rentals, that may change in the future.
Can I afford the carry costs? As a homeowner, you already know that you’re on the hook for more than just the mortgage. But don’t base your calculations on current carry costs, because some of these costs may actually increase once you turn the property into a rental. Do you have the cash to cover the mortgage and other costs such as utility charges and property taxes during vacancies? Have you priced out a landlord’s insurance policy rather than a homeowner’s policy?
If you’re moving across town or across the country, you may need to hire someone to do the maintenance work you previously handled yourself, such as cleaning the gutters and mowing the lawn. “Those are just some hidden costs, and things like that that will creep up from time to time,” Rosenthal says. You’ll also owe income taxes on rental income, but you can use expenses such as local property taxes and mortgage interest to reduce your tax liability on rental income.
Do I want to be a landlord? If you’re managing the property yourself and find someone who’s self-sufficient, it might be smooth sailing. Or you might have to deal with late-night plumbing emergencies and tenants who bounce checks or damage your home. Since damages can sometimes exceed the size of the security deposit and it’s stressful to evict someone, “it’s better to have your property vacant than have a nightmare tenant,” Tijam says.
Josh Rosenthal has turned several Washington, District of Columbia-area residences into rentals and says screening tenants is tricky. “Good credit scores are often a good indicator but don’t tell the entire story,” he says. “Verifying income is good, but unexpected unemployment happens,” he adds. He takes cues from how prospective tenants interact with him and whether they’re on time, and assesses how tidy their car is at a glance.
Josh Rosenthal’s experiences as a landlord inspired him to create MoveIn.Space, an online tool expected to launch later this year that is designed to help landlords and tenants document each property’s condition. While renting units to young professionals, he’s found that “you definitely get people who are very delicate with the property, but sometimes they can be a little more boisterous,” he says. “‘It was like that when I moved in’ seems to be the biggest line,” he adds.
Being a landlord isn’t for everyone, so some residence owners choose to hire a property manager, especially if they’re moving far away. That means you won’t have to deal with day-to-day maintenance or other issues, “but in some cases, [the cost of hiring a] property manager throws off the math,” Larry Rosenthal says. “You may be getting rent that’s very close to what the liability payments are,” he adds.