Charlotte Property Management Weekly: Importance of Getting Paid from Rentals in the Next 5 Years

“Go to where the money is.” (Business Axiom)




According to an article in Barron’s this month, the future of the real estate market is in rentals for the next five years. Most real estate agents are hoping this news is akin to the Bush White House claiming the existence of Iraqi weapons of mass destruction (WMD); hopefully, it is just another example of faulty American intelligence.



However, the supporting information for a rental uptrend (as well as brokerage to be on a continued, extended downtrend) is pretty compelling; if this is what is going to happen, then anyone in the field of residential real estate needs to start thinking about how they are going to operate in this type of future. And then think about how they are going to operate in a rental-dominated market.



And let me clarify. When I say “how to operate”, I mean “how to make money” and “how to stay employed in the real estate industry.”



With rentals, this means creating:

1. Quantifiable value

2. Your fee structure

3. A narrative to explain why you should earn your fee



So what does this look like? What is the quantifiable value of a rental tenant? What is my fee? What story (narrative) am I telling to back up my fee? An example:



If I bring a tenant paying $2K/month and they sign a 2-year lease, I just created $48K (24 months X $2K/month in rent) in future cash flows for you, Mr. Owner (this is the quantifying the value). What is this worth? 10%. Why? How about because that is what the commercial agents charge for leasing fees (the narrative)? If so, that’s a $4,800 commission to you.



A tried and true business model in any industry is to take a percentage of the money you bring in. It works for hedge funds (they take 20% of the money they earn for their client off the top), real estate firms, and any other commissioned salespeople.



So, to recap:



1. How much money are you bringing in to your client? (total quantified value)

2. What percentage of it is your fee? (your value)

3. Why? (the narrative)



Those that adapt will survive!



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: When Will Rental Rates Rise?

Every property owner I’ve ever met (including yours truly) wants to charge the highest rent possible. Every tenant wants to pay as little rent as possible.




Sorry, there is no huge revelation here. This is pretty much the way any market works. The girl who sells cans of peas wants you to buy them for $100/can, and you want to buy 3 cans for a dollar.



This is what a free market is all about. What are buyers and sellers willing to accept price-wise?



Then supply and demand are thrown into the mix. If the girl is selling the peas for $100, and five other people are selling them for a dollar, the $100 price is not going to fly. But let’s say the pea market heats up (it becomes the rage in Europe) and the $100 girl is the only one who has peas to sell now. You come home and your wife tells you she is dead set on serving her famous pea soup with a side of pea pilaf for your anniversary dinner. Now, $100 may seem like a great deal!



The same is true of the rental market. When the economy is great (and especially when properties are in a hot geographic area), rental prices are able to rise because homes are snapped up as soon as they go on the market. The supply of homes is low and demand is strong.



Conversely, when the economy and real estate market are slow, the rental market suffers. The people who can’t sell their homes put them on the rental market, which join the many homes that are already on the rental market. This creates a glut of homes (increased supply).



With many rental houses to choose from (low demand), much like the many sellers of peas example, the prices must be lower. This has happened for the past few years. To be competitive and fill their properties, sellers have had to drop their rental prices.



Which leads to the question we really care about: When can we raise the rents to my properties? In short, soon. Why is that?



Many investors and home owners are sick of losing money every month on their rental properties. Some can no longer afford to be in the real estate investment game. As national sales numbers have shown, short sales and foreclosures continue to dominate the market. Many home owners are letting their houses go and this activity is a growing national trend.



As banks continue to take growing losses on bad loans, they will loan out even less. A recovery is not imminent; defaults will continue to abound.



However, in terms of the rental market, short sales and foreclosures will accomplish 2 things:

1. Removing rental homes from the market as owners let their investments go back to the bank (lower supply)

2. Adding foreclosed homeowners to the tenant-pool who now need to rent (increased demand)



The rental market will recover much sooner than the housing market (which is years away). I believe early 2011 will bring rental price increases, after years of holding the line or being reduced. The market is shaping up to reward the investors who hang on during this difficult period with higher rents and lower vacancies.



So, hang in there! Rentals will be back in 2011 and, in the meantime, “pea mania” has not hit the States and are still available on the cheap.



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.