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!

Rental Tenant Interviews: 3 Additional Questions To Ask

 

"Winning is not a sometime thing; it's an all the time thing. You don't win once in a while; you don't do things right once in a while; you do them right all of the time. Winning is a habit. Unfortunately, so is losing.”

Vince Lombardi (former Green Bay Packers Head Coach)

 

With low unemployment numbers, job applicants seem to really have the upper hand in the hiring process now.  The stories are interesting, if not shocking, to someone who remembers pleading for employment back in the day.  I remember it being nerve-wracking going into interviews and then wondering how things went afterwards:

 

Did they like me? 

I might have blown question #3; I hope that doesn’t sink me

How long should I wait to get a call back before following up?

Where’s a stamp to send a “thank you” letter for the interviewer?

My greatest weakness?  Oh, sometimes I just work too long and hard and forget to eat…

 

But now, the onus seems to be on the companies.  They need workers!  They ask:

 

What kind of coffee would you like?  We have lots of different kinds and sweeteners!  Oh, you want Gatorade instead?  No problem!  I like your style already!

When did you say you could start?

Do you prefer a car service to work or did you just want to work from home?

Is this person going to show up or did we get “ghosted” again?

 

Fortunately, for property managers in Charlotte, the advantage is with the landlords (for the time being…).  There are a smaller number of Charlotte-area rental homes available for prospective renters, especially those priced on the lower side.  It is not uncommon to get many rental applications on the first day a rental home comes on the market.  Tenants compete to secure these homes. 

 

But with so many applications, how does one choose a winner?

 

Sticking with the basics is paramount- credit and criminal background checks, landlord history, employment/income verification.  These are the backbone of finding the best candidate.  However, there is often a lot of grey area left after finding out this basic information, especially when several potential renters have very similar background results.  It can be tough to figure out who to approve.

 

So what to do?

 

There’s a common saying in human resources that the job interview begins at first contact; so what has the prospective tenant shown us so far in our dealings?  Here are three questions that may be helpful in further assessing closely qualified candidates:

 

1. Were they on-time (or early!) if we met them at the property?
2. How long did it take for them to provide any documentation we needed to run their application?  Did we need to ask several times?
3. (And what I think is the most telling) Have they been pleasant to interact with?

 

As Coach Lombardi said, “you don’t do things right once in a while; you do them right all the time.”  It’s a habit.  Regular background checks will reveal much of the habits of applicants.  We want tenants with good ones!  And courtesy, responsiveness, and (especially) pleasantness are other habits that are invaluable to landlords. 

 

Happy Landlording!

Still Gotta Buy Cereal… Lease Renewal Discounting Opportunities

 

 Grocery store prices have really gone up!  Whether it’s due to inflation, the war in Ukraine,  gas prices, Will Smith punching Chris Rock at the Oscars, or whatever explanation mega-corporations think the public will best swallow, it’s been sort of shocking how much more things cost percentage-wise. 

 

This leads to an issue in my house.  My son is a picky eater (following the youthful pattern of his old man, unfortunately…); finding things he is willing to eat is difficult.  Fortunately, Honey Nut Cheerios have been on his acceptable list for a while now and are a go-to for at least 1 meal a day.  But prices have gone up and substitute store brands don’t pass muster, so we are in a conundrum.

 

General Mills’ stockholders are pleased as we are forking over a dollar more per box.  I’m somewhat positive their actual increased costs are a fraction of that, but “never let a crisis go to waste” has long been part of good business acumen.  So we grit our teeth and pay it so the young tyke can survive.

 

Tenants are in a similar situation now.  As their existing leases are coming up for renewal, they are finding that the rental prices offered to extend them are much higher than their current rate.  This leads many to quickly try to locate the greener pasture of a cheaper rental home.  But these homes are largely non-existent as most landlords have followed suit and raised their rental home prices as well.  They find the rent they are currently paying is a huge bargain to what their new rate would be, but, unfortunately, also to what other homes are renting for.  What to do?

 

The old answer would be to take this rental market and shove it!  Become a home buyer!  Build wealth!  Get a fixed rate mortgage so that the monthly costs of the home would never go up!  But the only thing harder than the rental market currently is the “for sale” market.  Talk to anyone who has tried to buy a house in the past few years.  Mission (almost) Impossible- and, if successful, you’re not buying a bargain!

 

So, again, what to do?

 

For tenants, it’s a tough situation.  I’d recommend being qualified to purchase and then to scour deals for sale and rent; then look to see and apply/make offers on a lot of houses.  A less stressful strategy would be to just batten down the hatches and wait things out until there is an inevitable housing market downturn.  It’s the “stay put and stay solvent” strategy.

 

But, as a landlord, what is a good strategy on lease renewals?  Landlords are in a good spot in today’s housing environment.  I think there is a temptation to raise the rent to or above market rate to maximize cash flow.  And then hope the tenant stays (and can afford it).

 

However, I’d offer a contrarian strategy of not putting existing tenants over a barrel.  True, it might be difficult for them to find another place to live so there is an inherent advantage that wouldn’t be exercised.  But if they have been good tenants who take care of the house and pay on time, I’d recommend pricing the lease extension rate 5-10% below the prevailing market rate for a vacant rental.

 

But why? 

 

Several reasons:

 

1. Fix-up and vacancy costs will probably push the payback period to over a year.  If the new tenant leaves after their 1-year lease expires, it’s a lot of activity to produce a loss.

 

2. When tenants examine the rental market (and they will!), they will see that the renewal terms are a relatively a good deal and will be more inclined to stay.

 

3. Good tenants are worth their weight in gold!  Continual cash flow from good tenants pays down landlord mortgages and reduces wear on homes.  And call me soft, but good tenants do deserve some type of positive consideration for keeping their part of the lease.  It’s good business.

 

Higher prices are hitting different groups differently, but people still gotta have somewhere to live and afford cereal too.  Housing discounts aren’t as ubiquitous as Cheerios coupons, so use lease renewal discounting as an opportunity to keep good tenants.

 

Happy Landlording!

Rental Tenant Screening: If You Have to Ask… You Shouldn’t

 

 

 “If you have to ask, you can’t afford it.”

JP Morgan

 

I recently had hernia surgery which went fine (thanks for asking!).  It lasted about 45 minutes, was pain-free (while I slept), and the recovery seems to be complete.  The process was smooth.

 

The issues I had were pre-procedure while trying to figure out how much it was going to cost.  I had a choice- I didn’t have to get the surgery per se.  I had some discomfort from time-to-time, but I think I had had the issue for around 25 years and there was no rush.  So I was trying to time it right with my insurance so I could pay the least amount out-of-pocket as possible.  My question was, “If I schedule the surgery next month, what would the approximate cost be?”

 

This was apparently a difficult question.  “Sir, it depends if the anesthesiologist is in-network or out-of-network.”  “Mr. Furniss, it is not the simple.  If the surgeon finds further issues while he’s in your body, it could take longer and cost more.”  I get it.  It’s not an exact science.  But if I ask my plumber how much it costs to fix my garbage disposal, he can give me a ballpark figure on what it usually costs.  I just wanted to know what to expect if the doctor didn’t discover that several of my nearby organs were failing.  You know, garden variety surgery cost figure stuff.  It was a painful process and I never got the answer I was looking for.

 

“If you have to ask, you can’t afford it.”  When the $32K bill came (before insurance), I guess the saying had some merit.

 

I bring up this story because I was thinking of some of the worst tenants we’ve ever had in our 20 years of being in the property management business.  Most of them had some “red flags” on their applications.  When we discussed what we found during our application screening process with the prospective tenants, they explained it in such a way that it was easy to sympathize.  And, usually, the rental house had been on the market for a while and the owner was anxious to get it filled (we were too!).  This led to approving some tenants far in the gray area.

 

These tenant approvals made me nervous in my stomach.  When we met to sign the lease, I found myself asking some variation of the same question:

 

“You’re going to be great tenants, right?”

 

Inevitably, the answer was always the same.  “Oh yeah, we’re going to be the best tenants you ever had!  We’re going to pay on time every month, you’ll see.  When you do your inspections, you’re going to think cleaning and lawn care people live here!  All we were looking for was someone to give us another chance.”

 

And, predictably, they were not the best tenants we ever had.

 

And I started to realize that if I ever felt I had to ask that question, it was the clearest sign that we shouldn’t approve the application.

 

I learned the hard way that JP Morgan was on to something that was applicable in the property management field.  “If you have to ask, you shouldn’t.”

 

Happy Landlording!