“Oh, you know, COVID…”: Spotlighting Tenant Retention Amid Rising Costs

 

“I noticed you didn’t post a blog last month?  I really missed it!!”

(Actually, no one said this…😊)

 

I think one of the frustrations that I’ve had in the last year is how seemingly how every business underperforming service-wise or raising prices can be explained away easily by COVID or her offspring (shortages, inflation, sharp price increases, not enough employees, etc.).  Examples:

 

My coffee cost $4.00 last week and now it is $5.50.  Why?

“Oh you know, COVID…  Prices of coffee in South America have spiked due to complications in the harvesting process and container price shipping increases.”

 

Why wasn’t the gym open this Monday when I showed up there?

(A sign with a partial explanation was posted to the locked front door on Monday and then Tuesday the front desk person offered more details)

“Oh, you know, COVID…  Staffing is still really tough as no one wants to work anymore.  Once people left the workforce, they just didn’t want to come back.  You know, I think it’s mostly due to video games- guys just prefer to play them all day instead of going to work.” (Oh, really???)

 

Voicemails I run into frequently: “Due to recent events, call volume has increased creating longer than normal hold times."

(I’d like to get an explanation on why this voice mail message is still there and has not changed in almost three years).  But I can speculate…  COVID?

 

I can be frustrated as a consumer, but understand it.  I’m used to getting what I want at a reasonable price and in a reasonable time period and feel slighted when I don’t.  Pretty much every business has raised prices and many have had hiring issues.  It’s a fact that costs and wait times have skyrocketed whether I agree with the causation rationale or not.

 

Many landlords have experienced “Oh, you know, COVID…” conversations for the costs now associated with fixing up rental homes between tenants.  All of the issues above coupled with a hot real estate market has led to sticker shock when these repair quotes come out.  The cost of painting an entire house and replacing the flooring (as well as the myriad of handyman issues) has risen, especially when landlords compare prices 5-10 years ago (think double).

 

Rising rents after fix-up will eventually offset these increased costs, but it is still painful to look a $10K+ repair bill and know that the person writing that check is going to be you.  So, how can this be avoided?

 

It can’t be avoided forever.  However, there is the strategy of kicking the can down the road as long as possible.  This can be accomplished through an intentional effort in tenant retention.  The basic rationale is that if tenants don’t move out, most repair costs (cosmetic, that is) can be avoided until after their tenancy is eventually over.

 

So how do landlords accomplish tenant retention?  There are books written about this, so I’m not going to go into all the creative ways people have thought up of: giving free flat screen TVs to the tenants when they sign a multi-year lease, delivering chocolate chip cookies on their birthdays, having a monthly rent credit incentive where some of the money is forfeited if tenants move-out prior to a set number of years, etc.  The advice below is for a landlord who is more a “nuts and bolts” person and doesn’t bake very well.

 

The great news is that the cards are stacked in the landlord’s favor right now so most of what I propose is being done by others already.  The landlord’s job is just to keep the rental rate reasonable on lease extension offers.  That’s it.  I’m not even saying to not raise the rent at all; just don’t be greedy.  That’s the only thing the landlord has to do right now as a decent tenant retention strategy. 

 

Very few people like to move.  Landlords should continue to perform normal landlord activities in a timely manner so tenants do not have some explicit reason why it is imperative for them to leave the house.  And be pleasant.  Then wait.  The heavy lifting is already being done by the big institutional landlords who own houses nearby and are raising the rents up 25%-50%.  When tenants see the advertised rental rates of homes on the market and then see their reasonable lease extension rate, most will stay put. 

 

If the tenant still leaves, then biting the bullet on fixing up the property may be an unfortunate reality.  But the silver lining is that the house can now be advertised at the higher market rate (thank you again, big institutional landlords!) which will reduce the time on the ROI.

 

Best of luck keeping your good tenants around and avoiding the “Oh, you know, COVID…” expenses on your rental home for as long as possible.

 

Happy Landlording!

Real Estate Investing: Preparing for Recession

 

“Where there is no vision, the people perish…”

Proverbs 29:18

 

Well, we started with a Bible verse, so it’s a good time to go into the story of Joseph in the Bible (located in Genesis 41). 

 

To paraphrase, Pharoah, the leader of Egypt, had two dreams that no one could interpret.  His chief cupbearer (and a former jailbird) remembered that he knew a guy in the joint who had (successfully) interpreted dreams for him and his buddy a few years back.  He told Pharoah about this Joseph guy and Pharoah had him sent for. 

 

Joseph said God had revealed both of Pharoah’s dreams to him and they had the same message; Egypt and the surrounding lands would have seven years of incredible plenty followed by seven years of devastating famine.  He advised, “Let the Pharoah look for a discerning and wise man and put him in charge of the land of Egypt.  Let Pharoah appoint commissioners over the land to take a fifth (20%) of the harvest of Egypt during the seven years of abundance… This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt…”

 

He concurs and appoints Joseph to head this newly created post and things go as predicted.  Egypt is the only place that has food when the years of famine come, and Joseph is administering it on Pharoah’s behalf.  The Egyptians and the people of surrounding lands are forced to sell Pharoah all their possessions and land just to get food. 

 

To bring this back into the realm of real estate investing, landlords are clearly in the time of plenty as property values and rental prices have been on a growth curve for the last ten years.  To boot, interest rates have been historically low (and really still are) which allow for low borrowing costs and has made for a robust sales market.  Many landlords have used this as a time to sell some of their “dog” properties, make improvements and raise the rents on their existing properties, buy some new ones, and refinance/eliminate debt.

 

Recently, interest rates have more than doubled and many economists (none with divine inspiration like Joseph to my knowledge…) claim a recession is around the corner.  If that’s true, the housing market could take a sharp correction which could be a great opportunity for prepared investors.

 

I have vague recollections from the last housing correction from 2008-2012.  I did not buy any investment properties then; I was too concentrated on keeping my existing rental homes afloat as rents were low during that time period.  I remember that selling homes was really hard; buyers were scarce!  Many sellers were just giving their houses back to the bank or using “short sales” as the banks would take a loss on part of the loan during the sale.  I remember thinking, “What’s wrong with me?  As a wanna-be real estate investor, how am I not buying homes now?  These houses are going for a steal and they seem to be all over the place!”

 

The thing that was wrong was that I could not get a decent loan and did not have much cash on hand.  So, I needed to sit on the sidelines like most other people until the economic waves grew more favorable.  But the buyers who were prepared got some great deals!

 

The investment challenge now is to be more like Joseph and be prepared for any possible famine while things are favorable.  If the right investment comes along during any upcoming recessionary period, I’d like to be able to snap it up (while simultaneously staying solvent during any prolonged economic slump).  Preparation now can pay huge dividends later.

 

Happy Investing & Landlording!

Extend the Lease AND Sell? That’s Not “The Way”

 

 

 “You can have it all.”

(1980’s Michelob Light Advertising Slogan)

 

I was (attentively) listening to a teacher’s presentation at my children’s school and she referenced the movie, Twister.  I nudged my wife and whispered, “That movie is probably 20 years old now.”  “Yeah, at least…”, she quietly agreed while discreetly double-pointing to the stage to redirect my attention back to (arguably) more important points of the on-going monologue.

 

But it got me thinking about older movies and Road Trip came to mind.  In short, it is about a group of Ithaca College (NY) students racing against time trying to get across the country to the main character’s girlfriend’s dorm in Texas before her mail arrived.  It was going to be close so they needed the quickest route to get there. 

 

There was the route that took all interstates and would definitely be the safest way.  But would it be fast enough?  Preliminary math on the mileage didn’t look promising.  However, there was another path that was more closely aligned with “how the crow flies” that would cut considerable time off of the trip.  It would take them on unproven, side roads.  It was the classic “risk versus reward”. 

 

One of the quotes from the movie that I still remember is from the character, Rubin, when he was defending taking the unproven route:

 

“It’s supposed to be a challenge, it’s a shortcut!  If it were easy, it would just be the way.”

 

The point that I take from this is that if something is straight-forward with the least amount of risk, it is “the way”.  It’s a “best practice”; there is no short-cut needed.  If they could have made it to Texas in plenty of time on the interstates, they would have been cruising in the fast lane there (though it would have made the movie less interesting…).

 

The way may be boring, but it is effective.  And it requires good planning in advance.

 

As a property manager in Charlotte, we ask our owners approximately 75 days prior to lease expiration whether they want us to extend a tenant’s lease and for ideally how long of a time period (one year or multi-year).  If the rental home is being kept as a long term investment, then “the way” is to offer to sign a lease extension for a long period of time.  If the owner wants to sell it in the near future, “the way” would be to sign a shorter-term lease and/or let the current lease expire and go month-to-month until a notice to vacate is needed.

 

In a perfect landlord world, tenants would be in leases all the time (no vacancies!), but landlords could still sell the home and have the tenants vacate when the buyer wanted.  But, alas, the world doesn’t work like that.  We live in a world of tradeoffs.

A lease is legally binding regardless of who owns it.  The main trade-off made with long term leases is that both the tenants and owner are sacrificing flexibility for security.  The tenants now cannot move out (without incurring financial penalty) if Uncle Joe calls in a few months and offers a free house to stay in.  They are stuck in a lease.  And, on the same token, if the owner loses his job and wants to move back into the house, he cannot kick the tenants out and take the house back.  On the plus side, the tenants can feel confident that their kids will be able to go to the same school for the life of the lease.  And the owner can count on monthly rental payments. 

 

There is security for both parties, but not flexibility.

 

You usually can’t have it all, no matter what Michelob Light says.

 

But what if the owner did extend the lease and then decided he wanted to sell the home right away?  We still live in the United States of America and no one can tell someone they can’t sell an asset that they own.  However, when selling, the prospective buyer would be purchasing the home SUBJECT TO the existing lease.  In short, the buyer would be stuck with the tenants at the terms of the lease for its duration.  For investors, that may be acceptable (or preferable!).  For someone who intends to live there, not so much.

 

That’s when Rubin’s “shortcut” would be needed.  And that is when it can be a challenge.  Solutions include trying to find investors to buy the home subject to the lease, letting the tenants out of their lease and encouraging them to find a new house, and/or negotiating a financial settlement to entice the tenants to move.  It can be tricky (and not always successful).

 

However, shortcuts sometime work out.  The Ithaca students were able to get to the incriminating piece of mail before the girlfriend could get to her mailbox.  But it was a stressful “road trip” and success didn’t seem likely during most of it.

 

I don’t know about you, but I generally prefer the calmness of the way; “boring” property management works well for me!  It’s good to make lease extension decisions thoughtfully now to avoid having to take uncertain shortcuts later.

 

Happy Landlording!

Rental Roomies & Higher-End Homes a Win-Win?

 

 

 “Many hands make light work.”

(Old English Proverb)

 

I remember back to my college days in sunny Arizona when I had to figure out where I was going to live my sophomore year.  Most of my friends were thinking of staying in the student housing in the dormitories for Year 2.  I had virtually no experience with rental properties and wasn’t sure what to do.

 

I talked to my Dad about it (I learned early it was always smart to run my plans by my financial backer first).  He didn’t really have any input on where I lived; I was the third child and he was much more pragmatic.  “I’m paying XX dollars for your housing- just let me know in what bank account it should go.  So, in that brief exchange, I had my financial backing and freedom to choose where to live.

 

Some of my friends got similar commitments from their parents and we were house hunting!  Of course we were all-in on finding a house with a pool (common in hot Phoenix) and hot tub (more rare, but not insurmountable).  We found a 4 bedroom house with both, plus lemon and lime trees in the backyard to boot.  It came to $1,200.00/month (which was high back then for Phoenix and definitely over market rate).

 

But… split between 4 guys it was $300.00/month which was a third of my Dad-provided housing budget.  I now had extra funds to play with.  We, as a group, were overpaying, but I was psyched!  I was paying much less than if I was living on my own or with one other roommate.

 

I’m seeing a similar play in the rental market as prices continue to rise.  Some of our higher-end rentals are (smartly) getting taken by groups of young professionals. 

 

First, as a point of reference (according to Rent.com), the average one-bedroom apartment in Charlotte in April 2022 costs $1,513.00/month and the average two-bedroom is $1,730.00/month. 

 

If we chop that into per person, we can calculate roughly $850 - $1,500 per person.  When that is multiplied into a 4 or 5 bedroom home or townhome, you can equate that to a $3,400.00 (low end) to a $7,500.00 (upper end) rent spend- and that’s going off of averages.  Obviously, some people spend more than that on their housing.

 

As good of a strategy it is for tenants to decrease their rental costs, it is also a good one for landlords.  Purchasing lower-priced housing in Charlotte has been very competitive for years, but most investors typically avoid higher-end housing.  However, by buying higher-end housing and marketing to roommate situations, it could allow for good cash flow.  Relatively-speaking, there is just not that much higher-end housing available for rent in the Charlotte market.  Really nice, feature-rich houses could go fast and for top dollar.

 

For now, it’s a good deal for all, much like my college housing.  Tenants get better housing at a lower price and investors get less buying competition and the ability to charge higher rents.  It could be a rare win-win in the current investment housing market.

 

Happy Landlording!

Don’t Ask Me When You Should Buy Real Estate…

 

 

 “Don’t ask the barber whether you need a haircut.”

(Warren Buffett)

 

“Hindsight is 20/20”

(Popular Idiom)

 

When you work in real estate for a living (especially on what could be considered the investment side in property management), you tend to get a lot of “party questions” about buying rental homes.  You hear different versions of this:

 

Oh, you’re in property management?  My cousin owns about 50 rentals in Lincroft, NJ and is making a killing.  He fills them all with Section 8 tenants and just collects the guaranteed money on the first of each month.  Lucky dog!  Is it a good time to start buying properties and get into something like that here in Charlotte?

 

There are different schools of thought on how to answer that question.

 

The first school of thought: YES, YES, & YES!!  You sell and manage rental properties for a living- duh!! 

 

Back in the day, I worked with a woman who would look at me cross-eyed when she saw me show any hesitation when the question of when someone should be buying real estate came up.  To her, the answer was always unequivocally “now!”, followed up with “I’ll pull up some listings that we can go look at!”.  In her book, it was a complete rookie move to even contemplate any different type of answer.  If her kids were going to eat tomorrow, she needed to sell real estate today.  So it was always a good time for anyone to buy real estate (and the more the better!).

 

I laughed at her response and actually thought it was a bit dishonest.  But, if you followed her advice at the time, you would have made an absolute killing.  And her advice is still the same, in case you were wondering.

 

The second school of thought:  I’m not sure… (The “Honest “Approach)

 

A friend of mine recently forwarded me an e-mail from 2018 that we had shared discussing an investment property he was contemplating buying.  I wasn’t sure (at $120K it seemed a bit high for what it was…) so I encouraged him to lowball the offer and ask for some concessions.  Of course, when an offer is bogged down like that, it is typically rejected unless the seller is on the desperate side and low on options.  So my friend did what I suggested and the sale never went through.

 

On top of his recent e-mail was a link showing that the property sold this year for $210K.   So in less than four years, he would have pocketed $90K; that’s not a bad day in the office for the eventual buyer!  But I felt sort of badly that I helped talk my friend out of what turned out to be a great deal.  Fortunately, he is a gracious guy, and hasn’t come over to break my legs (yet…).

 

So, don’t ask me when you should buy real estate!  I want to give you the right answer, I really do.  But timing the market is tough.  I’m not sure if we are on the top of the market (and about to fall of a cliff) or if we are only getting started.

 

However, if you can make the numbers work for immediate cash flow and have plans to hold the real estate long term, it is a good time to buy now (especially in Charlotte!).  I can say that with all honesty while not drawing the ire of my old co-worker.

 

Happy Landlording!

 

Good Landlords & the Golden State Warriors: A Deep (Vendor) Bench Matters

 

 

The Warriors won the NBA title this month in an exciting series versus the Boston Celtics.  Steph Curry, the star of the team (and local Charlotte product!), won NBA Finals MVP and fellow starters Andrew Wiggins and Klay Thompson played well.  But one of the major reasons they were able to pull off a series victory was the play of their bench.  Less heralded Warrior’s players- namely Jordan Poole, Kevin Looney, and Gary Payton, Jr.- gave the team great minutes while the starring players weren’t on the court.  “Strength in Numbers” was the team’s slogan during the regular season and it continued in the playoffs leading to an NBA Championship.

 

This is also applicable for landlords utilizing the vendors they have to do maintenance and repairs on their rental homes.  I got a call last week from someone interested in our property management services.  When asked what prompted the call, she said that her handyman had gone back to the workforce; this left her without anyone she trusted to do the work on her rental home in a timely, well done, and reasonably-priced manner.   I could empathize.

 

When COVID hit, many people who had little time to make home improvements suddenly became very interested in their homes.  Part of it was being home and seeing many of the issues their homes had that they had ignored.   Some of it was just making improvements so they could enjoy their home as they were around much more.  Either way, it led to vendor demand to increase which led to scarcity of vendor availability and price increases.  This hit property managers as well.  The advantage swung to vendors as they had more work than they could handle, putting them in a position to refuse jobs and not call prospective customers back.  This trend continues now.

 

The good news for experienced property managers is that most have a deep bench of vendors.  While we use many of our “stars” regularly to service our homes (and have for years), it is helpful to have a list of secondary vendors who are proven to do good work.  Going to Google as sudden needs arise and hoping that a vendor is going to provide tenants a good experience is not ideal.  It is far better to incorporate new vendors on a regular basis on smaller jobs to ascertain if they meet expectations.  Cultivating a good vendor list is an asset that makes a property manager’s job much easier and keeps owner clients and tenants happy.

 

Though property managers have a built-in advantage of managing large number of homes which can make working with them attractive (repeat business), smaller landlords can also build good vendor lists by:

 

1. Being courteous with vendors and trying to make things easy for them
2. Paying quickly and in full
3. Providing pictures and details upfront of what needs to be done so they can minimize trips and maximize their revenue
4. Working with their schedules and only accelerating issues that are truly time-sensitive
5. Providing referrals to them from friends and family that need similar services
6. Writing 5-Star Google reviews (when warranted)

 

The Warriors would arguably not have gone far in the playoffs and won a championship if they did not allow their bench players to play meaningful minutes and make them feel like a valued part of the team.  Smart landlords should do likewise and use secondary vendors on occasion so they are in the fold and can be utilized when the need arises.

 

Happy Landlording!

As Landlords (Temporarily) Rejoice, Renting Still Has Its Merits

 

“Every cloud has a silver lining” & “The grass is always greener on the other side”

(Popular Axioms)

 

I’m not sure I’ve ever read an article that talked about the “joys of renting.”  I’m sure it exists somewhere.  Maybe it’s because I’m saturated with a bunch of real estate industry communications that always tout “the dream of homeownership” and how everyone should strive for it. I’m bombarded by banter like, “There’s no feeling like stepping over the front door threshold for the first time and knowing that you own the home”*.

 

* As my uncle likes to point out, it must be the warm feeling that comes from knowing that your bank actually owns most of it.

 

The way home prices and rents have shot up, the pro-homeownership articles seem to have a lot of merit!  After sorting through all the mail and texts from investment groups hungry to buy homes, it is sometimes shocking to see what prices they are offering.  It makes me think, “I don’t think I have much money, but these people are telling me I’m sort of rich…”

 

But as a veteran of leaner landlord times when rent barely covered the mortgage (and often went negative when repairs and vacancy happened) and it was hard to sell a house, life wasn’t always so rosy.  I often thought of how renters had it pretty good in many respects:

 

1. No fear of a $10K repair call at any moment
2. If something major breaks, call the landlord and let him deal with it
3. If you want to live somewhere else at any time, just move.  No fuss, no muss.

 

That all holds true today.

 

So, though it seems landlords have a better situation now, things change.  Renting will always have merit and hot markets always turn sour at some point.

 

Homeowners and landlords are able to enjoy current market conditions (and they should!), but renters shouldn’t feel totally left out.  Things always swing back and forth and renters always have some built-in advantages in any market that owners never get to enjoy. 

 

But, for now, landlords should rejoice!

 

(Very) Happy Landlording!