8/5/2009 11:14:00 AM
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."
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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.
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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. <