Home Rentals- the New American Dream?

USA TODAY is featuring a great article today entitled “Home Rentals — the New American Dream?

Here are some great snippets on the future of the rental market…

The foreclosure crisis will drive 3 million former homeowners to rent single-family homes between 2010 and 2015…

Single-family home rental was the fastest-growing part of the rental market, Fannie Mae says, citing U.S. Census data….

“In the next five to 10 years, you’ll see tens of billions, if not hundreds of billions, of dollars of private equity” pouring into the single-family rental business…

In the past six months, Colony Capital has bought more than 1,000 homes to turn into rentals. Most are in Arizona, California and Nevada, though Colony expects to expand into Texas, Georgia and Florida. In the next year, it will invest at least $1.5 billion in single-family rentals….

He says the growth of big-time investors in the single-family rental market is a “transitory thing” because it’s more expensive to manage them than multi-family housing. “The end game for investors is to sell these homes profitably in three to five years to owners….”

70 percent of those who lose homes to mortgage distress will own again. A recent Harris Interactive survey, commissioned by Coldwell Banker, found that 83 percent of renters want to own a home….

For Rent

What do YOU think about the upcoming rental boom?  Are you ready to capitalize on this trend?

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Sand Castles vs T-Bills

Right now?

I’d rather own a sand castle than Treasuries.

Last week the 52 week T-Bill yield was .18%.  In other words…. lend the government $99,820 and they pay you back $100,000 in a year.

You lock in $180 profit on your investment.  For almost no risk.

Or… with that same $100k, you could buy a perfectly rehabbed rental house in a nice neighborhood.  At the end of the year, after taxes, insurance, maintenance and professional property management, you would passively pocket at least $6,000.

$6k in annual rental income… even if the house never went up in value.  With minimal risk.

$6,000 vs $180.

Oh… by the way… did we forget to account for inflation?

Even the most optimistic projections are betting inflation will exceed 2% for the next year.

So your T-bill is really going to lock in a loss of about -$1,820.

That’s right… it’s no risk… but you automatically lose money….

By contrast, your rental house will make you $4,000 AFTER inflation….and you will probably raise rents next year.

I guess it all depends how you define risk, right?

How do YOU define risk?  What returns are YOU looking for?  Please leave a Comment or share this post.


7 Survival Tips for the Accidental Landlord

Nothing says “future distressed seller” like an Accidental Landlord.

Becoming a landlord by choice can be an excellent, intelligent financial decision.

But turning into a landlord because the property you thought would flip quickly just couldn’t sell…. Well that usually just sucks.

Too many investors screw up the calculation on their acquisition price or rehab costs, and then find themselves with no choice but to rent out the property and mitigate the damage.  Or they found a title problem.  Or a foundation issue that doesn’t impact safety, but prevents a sale.  In these cases, the flip usually needs to become a rental.

A cash investor usually has no problem doing this. Even accounting for professional property management, property taxes, insurance and maintenance bills, most cash investors are going to have positive cash flow at the end of the month with a rental property.

The problem is when you used leverage to buy that flip.

Most people don’t believe this, but even with a hard money loan, you can make a nice profit off of a rental property.  IF you were conservative with the loan amount, IF you had enough skin in the game, and IF you don’t have a short-term balloon.

So what’s an Accidental Landlord to do?  Here are some Emergency Tips:

Rent Quickly– the longer the house sits empty …  or the longer you wait to list it or market it as a rental … the less likely you are to make a profit.  So market as a rental as soon as you realize that’s the only viable option. 

Price it Right.  Then price it right.  This goes hand-in-hand with Rent Quickly.  Do some quick market research, see what the rental comps are… then price 10% below the market to get someone in right away.  Waiting a few months to rent the house out will hurt a lot more than dropping the rent right away.

Rent to the Right Tenant.  Losing a tenant (or cleaning up after one who trashed the place) is a sure way to kill profits.  Screening takes time and money… and requires experience.  But it is a smart investment to do a background check and credit check.  You may not care if they were 30 days late on a Visa bill…. but you want to make sure your prospective tenant hasn’t left a trail of jilted landlords.

Consider Professional Management.  We are a DIY nation.  But are you cut out to be a landlord?  Do you like early calls on a Saturday?  How will you handle the inevitable emergencies?  Do you feel comfortable with the screening, billing and collecting process?  Managing tenants is a BUSINESS.  Are you set up for that?  If not, find a good property manager.  Delegate.

Talk to an Accountant.  You need to know what you can and can’t expense on a rental property.  If you are used to flipping, you may not have a clue how depreciation works.  But it’s an important part of the profit equation for all buy-and-hold strategies.  And you have to recapture depreciation when you sell, so you might as well learn how to benefit from it.  You also need different record keeping for your rentals than for your flips.  So don’t forget to call the CPA.

Talk to a Lawyer.  Sure, you can use an off-the-shelf lease agreement.  Just fill in the blanks and hope for the best.  But do you understand your state’s landlord-tenant law?  Do you know the rules for escrowing a security deposit?  Or what notice you must send for non-payment?  Or what the Fair Housing Act requires? Again, most flippers try to get by without a lawyer on the team (except for at closing).  Landlords always need competent legal counsel.

Call your Insurance Agent.  Make sure the policy you bought to cover your rehab and flip will work.  It usually won’t.  You need to insure the property against damage and yourself against liability.  If a guest of your tenant gets hurt… you will get sued.  And you want to make sure your tenant understands they have to insure their stuff—that’s not usually covered under your policy.

What other tips do YOU have for an Accidental Landlord?  What does a flipper need to know if they suddenly find themselves with a rental property?

Please leave a Comment below!