Based on current census bureau statistics, there is a large immigration going on. People are moving to Texas! Dallas, Houston, San Antonio and Austin are continuing to add population at high levels. How does this impact changes in rents and real estate pricing in the current economic strife?
Everyone has been feeling the impact of the bubble which burst, a bubble created by cheap credit and real estate speculation. Everyone seems to have forgotten the traditional measures which control economic drivers, the actual supply and demand of real houses and people to live in them. The question I kept asking myself was why did the price of real estate go up 20% per year in Phoenix when there was no shortage in the supply of houses? These valuation increases, the types of which are normally created by scarcity, made no sense as they were filling homes as fast as they could build them.
The supply and demand issue which created the housing bubble was the supply of easy credit and the demand to leverage this credit into accumulation of the physical asset of real estate. This equation ignored the actual use of the improved land to support the needs of the population for housing and the additional supporting commercial uses of office space for jobs and the retail space to support shopping.
Remember, this forum is a "blog", a place where someone writes their thoughts and opinions. Read the legal disclaimer at the bottom before taking any actions based on my opinions which I am about to express.
To look beyond the current crisis and see the other side; let’s get back to basics. The basics include, where are people choosing to live and where will the jobs be which can support an expanding economy. The facts are that there are specific areas of the country which have a current oversupply of housing and other areas which have an adequate supply or may actually be looking at an impending shortage. The oversupply exists for one of two reasons; either the area was overbuilt in anticipation of greater population growth then actual, or the areas suffered from a loss of population and jobs.
The Sun Belt real estate crash resulted from overbuilding and today there is too much housing. These areas include Phoenix, Las Vegas, Southern Florida and the inland valleys of California. The crash would not be as severe if the population and job growth had developed at the hyper levels required to sustain the rate of new home construction which existed from 2002-2007. You cannot blame the whole crash on easy credit. Part of the reason for the crash is the people who were loaning money to builders failed to properly forecast consumption.
There are now houses in these overbuilt areas which can be purchased for less than the cost to build a new home. These can be a bargain and should be purchased if you can find a use for the house. This means you have to live in the house to make it productive or you must be able to place a paying tenant in the home to offset the acquisition costs. People still move into these areas, so if and when jobs are created, this is where you might want to own real estate.
There are areas of the country where the oversupply has been created by emigration as people move out of the area. Small towns throughout the country have long experienced a stagnant real estate market as the young people grow up and move away to the bigger cities. The situation in many cities in Rust Belt states is uniquely severe, not only do the people leave, but the jobs leave as well. Detroit is the textbook example. This area, once the fourth largest in the country, is now only number eleven in large part because of emigration. The diminishing status is not just because Dallas area has grown to be the new number four, but Detroit has shrunk to half its largest population. There are houses in Detroit which burned during the riots of 1967 and were never torn down because the land was never needed for anything else. The price of houses in Detroit are far below what it would cost to rebuild, but there is no light at the end of the tunnel because there is no projected need for significant additional housing. Phoenix is expected to recover, adding jobs and people in the future, and at some point the housing market should reach a situation where all existing stock is absorbed and a demand is created for new construction.
Texas is the current shining light in this economic downturn. I would call it a dim light, but it beats the black gloom hanging over Las Vegas and Southern Florida. The immigration into Texas cities continues to be strong and the need for additional housing stock still exists. The housing need is being met, so far, by a greater number of apartment complexes being built. There has been minimal job loss in the major metro areas, and Austin has experienced a net job gain over each of the past two months. There have been layoffs in Dallas, but there continue to be new job opportunities to replace the lost jobs. These new Dallas area jobs are usually at the expense of other parts of the country as employers continue to move jobs to Texas.
The inventory of resale homes in DFW is currently at 5.5 months, well within the normal range of 3-6 months. The issue people are failing to consider is that Dallas usually has a 3-6 month inventory and at the same time there are a large number of new homes under construction. The second piece of this equation, new homes, is largely missing. When this recession ends the need for housing will expand and it will take quite a while for builders to re-engage their construction teams and get new homes rolling out to the public. The cost of new construction is anticipated to be higher, since much of the economy of scale will be lost as new projects are started on a smaller scale than in the past.
I predict Dallas is sitting on a potential shortage of housing once the economy (and job growth) recovers. We see some of this shortage in the rising rents and lower vacancy in the DFW area. Phoenix, on the other hand, will be able to handle expanding immigration and a recovering economy for a couple of years without asking its new home builders to get ramped up. The same house (similar age, configuration, neighborhood demographics) which receives $800/month in Phoenix is receiving $1,200/month in Dallas and $1,300/month in Austin. The price difference in rents is created by the traditional forces of supply and demand for housing.In order to see price appreciation in residential real estate we are waiting for two things to happen 1) the restarting of job growth and 2) the ability of banks to once again lend money for real estate. When these things happen there will eventually be a shortage on the supply side, which will first appear in Texas, then later in the other areas which add population and jobs. This shortage will drive up the value of real estate over today’s prices which will mimic the shortage there currently exists in our markets for single family rentals.
There is no telling what will be required to make the fuller economy recover, but until then the market forces of increasing population in some markets and tight credit are forcing more people to be renters and it continues to make this a good market to be a landlord in Texas. Texas is also where I first expect upward price pressure for real estate valuations. I never expected Texas real estate to increase in value at the 10/20/30% per year which other markets experienced in the bubble years, but that is not what I am look for. Because my real estate is leveraged, all I need for good return, with my rent/value ratios, is 3% increase in value per year and I get an excellent return with 4-5% per year.
Read more from other prognosticators at these links:
http://www.builderonline.com/local-markets/first-housing-markets-to-recover.aspx
http://www.builderonline.com/local-markets/the-healthiest-housing-markets-for-2009.aspx
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Thursday, April 23, 2009
Tuesday, March 31, 2009
When Do I Raise Rents? (The 2% Rule)
The quick answer to the question "When do I raise rents?" is that this should be done whenever the market allows. If you have a tenant in your house, it is now an investment and you should treat this like all investments, trying to achieve the best return at the lowest cost. There are two components to investment performance which must be managed, income and expense.
Right now about 20% of our clients are refusing our recommendations to raise rents. I don't understand how an owner will easily turn down $300.00/year in additional income, then anguish and get upset over a $100.00 repair. I have often said home ownership creates emotional decisions when the decisions should be financial, please try to avoid this trap.
So, how do you know if the market will allow? Ask us! We are experts in determining the correct amount of rent to ask when a tenant first moves in and also in determining the amount of rent you can increase at the time of the expiration of the initial lease period. We want your asset to have the best overall performance, it will cause you to continue to use us as your investment manager. We also want you to make enough money from rent so you agree when we recommend appropriate maintenance and upgrade expenses.
I will not reveal all of our secrets on how we make the determination of how much to increase the rent, but part of the equation is the "cost of the pain to move". If you have a tenant already living in a home, and the tenant can get the exact same home for the same price right down the street then you can increase the rent. A tenant will almost never move over a $25.00/month increase.You can then use this $300.00 extra per year to provide a higher level of maintenance, increasing your value in the home and providing a better product for the tenant. A variable measure/rule to use for rent increase at renewal is 2% of the rent. In my last post I talked about the 1% rule (annual maintenance costs compared to the value of the home), so let's call this the "2% rule" - always raise the rent 2% at renewal.
One of the things I often do after a rent increase is send the tenant a thank you note with a gift certificate, which the tenant can use in whatever manner they see fit. If you want this done, just ask your property manager, they will send a gift card to your tenant with a personal note. I usually send a $50.00 gift card when I do this.
I also use the additional rent funds to send an HVAC specialist to perform a system maintenance which will keep the system in better repair, and reduce energy consumption for the tenant. This is a win/win situation, the tenant benefits from lower energy costs and the HVAC unit's life is extended, lowering my overall costs. Your tenant will appreciate this care you provide for the home and remember this when it comes time to renew their lease.
So when we suggest you raise the rent, follow our expert advice. Then you have a choice, you can spend the extra money on yourself, enjoying the fruits of your investment, or you can reinvest, either into this home or any other investments you may have. But, never turn us down when we recommend a rent increase, this is money you can never get back.
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Right now about 20% of our clients are refusing our recommendations to raise rents. I don't understand how an owner will easily turn down $300.00/year in additional income, then anguish and get upset over a $100.00 repair. I have often said home ownership creates emotional decisions when the decisions should be financial, please try to avoid this trap.
So, how do you know if the market will allow? Ask us! We are experts in determining the correct amount of rent to ask when a tenant first moves in and also in determining the amount of rent you can increase at the time of the expiration of the initial lease period. We want your asset to have the best overall performance, it will cause you to continue to use us as your investment manager. We also want you to make enough money from rent so you agree when we recommend appropriate maintenance and upgrade expenses.
I will not reveal all of our secrets on how we make the determination of how much to increase the rent, but part of the equation is the "cost of the pain to move". If you have a tenant already living in a home, and the tenant can get the exact same home for the same price right down the street then you can increase the rent. A tenant will almost never move over a $25.00/month increase.You can then use this $300.00 extra per year to provide a higher level of maintenance, increasing your value in the home and providing a better product for the tenant. A variable measure/rule to use for rent increase at renewal is 2% of the rent. In my last post I talked about the 1% rule (annual maintenance costs compared to the value of the home), so let's call this the "2% rule" - always raise the rent 2% at renewal.
One of the things I often do after a rent increase is send the tenant a thank you note with a gift certificate, which the tenant can use in whatever manner they see fit. If you want this done, just ask your property manager, they will send a gift card to your tenant with a personal note. I usually send a $50.00 gift card when I do this.
I also use the additional rent funds to send an HVAC specialist to perform a system maintenance which will keep the system in better repair, and reduce energy consumption for the tenant. This is a win/win situation, the tenant benefits from lower energy costs and the HVAC unit's life is extended, lowering my overall costs. Your tenant will appreciate this care you provide for the home and remember this when it comes time to renew their lease.
So when we suggest you raise the rent, follow our expert advice. Then you have a choice, you can spend the extra money on yourself, enjoying the fruits of your investment, or you can reinvest, either into this home or any other investments you may have. But, never turn us down when we recommend a rent increase, this is money you can never get back.
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Tuesday, March 10, 2009
The 1% Solution - Maintenance Costs on Single Family Rental Properties
If you have a single family investment property you need to consider the "1% rule". If a property is less then ten years old you should set aside about 1% of the value of the home each year for ongoing maintenance and repair expenses. You may go 1, 2, or 3 years with no more than $200-$300 in minor repairs, but you will eventually get hit with some larger repair costs. Go to this link How Long Does a Dishwasher Last? If you read the document at this link you will know what to expect going forward.
If your property is more than twenty years old you may have additional costs since you may need to update the property in order to keep the home up to date from a marketing standpoint.
What can you do to reduce your maintenance expenses? The number one thing which impacts maintenance costs is tenant turnover. The current change in the economy is a favorable trend for our clients. Tenants are staying longer and taking better care of the homes they rent. Higher tenant turnover = higher maintenance costs. This is primarily because more minor maintenance expense is uncovered/created when a new tenant moves in. If you have had a few tenant turns in your rental property you have found that the new tenant tends to uncover a group of small maintenance items which the old tenant lived with.
Frequent tenant turnover can have the most significant impact, but it is not the only factor to be considered. A poor tenant must be replaced as the costs of maintaining a poor tenant will be higher (over time) than costs associated with replacing them. The replacement costs of a poor tenant can only be deferred and the sooner you get the new tenant in the better off you will be. Remember, there are exceptions to every rule and in this business there are more than the usual number of exceptions. If your property manager is recommending you leave a poor tenant in the house, there is probably a good reason, so feel free to ask.
The other issue associated with more frequent tenant turns is that "normal" wear and tear is usually higher for carpet and paint. Different tenants use a house differently, so if you have four sets of tenants over a ten year period you will have higher "normal" wear. A judge explained to me that his definition of normal wear (and what we use as a measure) is based on the question of "what is the intended use" of the item. Although it may be normal for a dog to chew on a door (puppies tend to do this), the intended use of a door is to provide access from one space to a next, so damage caused by the dog is not normal wear and tear. It may be normal for children to run their dirty hands along the wall, but the intended use of a wall is to provide separation between spaces, protection from the elements and a place to hang photo's, so the grease on the paint from the children is not normal wear and tear.
One thing you can do as a landlord is to not accept marginal tenants. Unfortunately you cannot tell who will be a good tenant and who will bad until after they move in. In spite of our best attempts to provide a complete background check you can't tell how they will really behave until after they move in. If you have a tenant who is continually late paying their rent they are also, as a general rule, not taking care of the house
I define a good tenant in very simple terms, 1) they pay their rent, in full and on time 2) they keep the house and yard clean and in accordance with their lease and 3) they report any problems. When we had higher vacancies rates in 2004-2006 I was happy if I got two out of the three things. I now expect better compliance. If there is a tenant who is not conforming we will replace them. Over 90% of the tenants are good tenants, with the remaining 10% failing on one of the three basic criteria. The most important measure is item #1, if they are failing on rent payment it is a good indicator there will be other issues. If a tenant fails on timely payment of their rent and other financial obligations we are moving quickly and aggressively to replace them with new tenants.
Returning to my original thought, maintenance. The proper tenant can have a significant impact on your ability to keep your maintenance costs within the 1% range and the most important indicator of a tenant being responsible is if they get rent in on time and in full. The next thing we do is to educate the tenant on how to maintain the property in a manner which keeps your costs low. We explain to tenants they do have an obligation to report all problems, but if they participate in helping keep costs low it encourages their landlords to keep their rent reasonable. Tenants participate by unclogging drains, resetting disposals and replacing/repairing minor items under our guidance. Most people can replace a toilet seat with nothing more than a screwdriver.
One of the other methods to reduce repair costs is to combine repair items. If a home has a minor, non-urgent, repair, we encourage the tenant to save this item on list for later. If we have a more urgent repair in the future we may be able to add the minor repairs onto the punch list and provide a very cost effective solution for tenant and landlord. The largest cost of many repair is the cost to put a repair person on site. It may be $75.00 for the first repair item, but we may be able to get another three items completed at a small additional cost.
In the end, with all of this effort the goal is still to keep maintenance/repair/replacement costs at or below 1% of the value of the home/year over time. This includes annual service to HVAC and yard, new carpet every 7 years (on average), a new AC unit every 10 years, fresh paint every 7-10 years, a disposer here and there and a new roof every 20.
There are other options to a strategy of proper maintenance of a home, including doing absolutely nothing unless required by law and letting a property deteriorate. A financial case can be made for this alternate method, but if you plan on selling the property in the future for anything other than a tear down the financial rewards do not appear to work any better. Even if you plan on selling the property as a tear down you can be well served by providing proper maintenance as you will tend to attract more responsible, better paying tenants to your home, which reduces tenant turnover and leading to a lower overall cost of ownership.
I hope this provides a better understanding of what to expect as a landlord and how we focus our efforts to minimize this specific expense area of being a landlord. Before you finish this thought, I want you to take this idea and think about how it impacts our recommendation that investors try to keep their invetments focused on the $100,000 to $250,000 price point for the homes they purchase. More expensive homes have more expensive repairs, two and three HVAC units and water heaters, upgraded materials, etc. Think about it and you will begin to see the advantages of the sweet middle range!
----------------------------------------------------------------------
If your property is more than twenty years old you may have additional costs since you may need to update the property in order to keep the home up to date from a marketing standpoint.
What can you do to reduce your maintenance expenses? The number one thing which impacts maintenance costs is tenant turnover. The current change in the economy is a favorable trend for our clients. Tenants are staying longer and taking better care of the homes they rent. Higher tenant turnover = higher maintenance costs. This is primarily because more minor maintenance expense is uncovered/created when a new tenant moves in. If you have had a few tenant turns in your rental property you have found that the new tenant tends to uncover a group of small maintenance items which the old tenant lived with.
Frequent tenant turnover can have the most significant impact, but it is not the only factor to be considered. A poor tenant must be replaced as the costs of maintaining a poor tenant will be higher (over time) than costs associated with replacing them. The replacement costs of a poor tenant can only be deferred and the sooner you get the new tenant in the better off you will be. Remember, there are exceptions to every rule and in this business there are more than the usual number of exceptions. If your property manager is recommending you leave a poor tenant in the house, there is probably a good reason, so feel free to ask.
The other issue associated with more frequent tenant turns is that "normal" wear and tear is usually higher for carpet and paint. Different tenants use a house differently, so if you have four sets of tenants over a ten year period you will have higher "normal" wear. A judge explained to me that his definition of normal wear (and what we use as a measure) is based on the question of "what is the intended use" of the item. Although it may be normal for a dog to chew on a door (puppies tend to do this), the intended use of a door is to provide access from one space to a next, so damage caused by the dog is not normal wear and tear. It may be normal for children to run their dirty hands along the wall, but the intended use of a wall is to provide separation between spaces, protection from the elements and a place to hang photo's, so the grease on the paint from the children is not normal wear and tear.
One thing you can do as a landlord is to not accept marginal tenants. Unfortunately you cannot tell who will be a good tenant and who will bad until after they move in. In spite of our best attempts to provide a complete background check you can't tell how they will really behave until after they move in. If you have a tenant who is continually late paying their rent they are also, as a general rule, not taking care of the house
I define a good tenant in very simple terms, 1) they pay their rent, in full and on time 2) they keep the house and yard clean and in accordance with their lease and 3) they report any problems. When we had higher vacancies rates in 2004-2006 I was happy if I got two out of the three things. I now expect better compliance. If there is a tenant who is not conforming we will replace them. Over 90% of the tenants are good tenants, with the remaining 10% failing on one of the three basic criteria. The most important measure is item #1, if they are failing on rent payment it is a good indicator there will be other issues. If a tenant fails on timely payment of their rent and other financial obligations we are moving quickly and aggressively to replace them with new tenants.
Returning to my original thought, maintenance. The proper tenant can have a significant impact on your ability to keep your maintenance costs within the 1% range and the most important indicator of a tenant being responsible is if they get rent in on time and in full. The next thing we do is to educate the tenant on how to maintain the property in a manner which keeps your costs low. We explain to tenants they do have an obligation to report all problems, but if they participate in helping keep costs low it encourages their landlords to keep their rent reasonable. Tenants participate by unclogging drains, resetting disposals and replacing/repairing minor items under our guidance. Most people can replace a toilet seat with nothing more than a screwdriver.
One of the other methods to reduce repair costs is to combine repair items. If a home has a minor, non-urgent, repair, we encourage the tenant to save this item on list for later. If we have a more urgent repair in the future we may be able to add the minor repairs onto the punch list and provide a very cost effective solution for tenant and landlord. The largest cost of many repair is the cost to put a repair person on site. It may be $75.00 for the first repair item, but we may be able to get another three items completed at a small additional cost.
In the end, with all of this effort the goal is still to keep maintenance/repair/replacement costs at or below 1% of the value of the home/year over time. This includes annual service to HVAC and yard, new carpet every 7 years (on average), a new AC unit every 10 years, fresh paint every 7-10 years, a disposer here and there and a new roof every 20.
There are other options to a strategy of proper maintenance of a home, including doing absolutely nothing unless required by law and letting a property deteriorate. A financial case can be made for this alternate method, but if you plan on selling the property in the future for anything other than a tear down the financial rewards do not appear to work any better. Even if you plan on selling the property as a tear down you can be well served by providing proper maintenance as you will tend to attract more responsible, better paying tenants to your home, which reduces tenant turnover and leading to a lower overall cost of ownership.
I hope this provides a better understanding of what to expect as a landlord and how we focus our efforts to minimize this specific expense area of being a landlord. Before you finish this thought, I want you to take this idea and think about how it impacts our recommendation that investors try to keep their invetments focused on the $100,000 to $250,000 price point for the homes they purchase. More expensive homes have more expensive repairs, two and three HVAC units and water heaters, upgraded materials, etc. Think about it and you will begin to see the advantages of the sweet middle range!
----------------------------------------------------------------------
Sunday, March 8, 2009
Multiple Offers in this Real Estate Market?
Yes, it is happening - multiple offers are here once again, but the offers are for the opportunity to rent a single family home, not to buy. Do not listen to the "experts" who appear on the Today show telling tenants now is the time for hardball negotiations with landlords. It may be true in some markets, but in other markets the exact opposite is true. Make sure you know your market before you start throwing your weight around.
At Prime Properties our role is to represent the Landlord in these transactions and our legal obligation is to assist in getting them the best possible result from the performance of a rental property. All tenants need to consider there are now many people looking to rent rather then to buy, so when they submit an application to a landlord they need to put their best foot forward at all times. Submit a complete application, and if there is any issue which is deficient you should also submit a letter of explanation. Consider if there could be other offers, so if you have found the home you want to rent, you may want to offer additional security, strong references, or higher rent then the asking price. Offering a price of $10-$20 more then the asking price indicates you are interested in the home and that it is important to you. A landlord would look favorably on a prospective tenant who cares enough for a home to offer a little extra money to be sure they get the home.
Do not offer to provide information which could be used in a legally discriminatory manner. This could place your Realtor in an awkward position and what you may feel is in your favor may actually work against you. The best plan is to stick to the facts as they are requested on your rental application. Please note, lying on your application may make your lease void and you may be evicted, so do not lie! Work with a Realtor and follow their guidance as they are trained in how to best position your application. Also, if you are looking at a rental home represented by a Realtor you have someone involved with an obligation to see all are treated fairly.
Here is the catch, until a lease is signed by all parties we present all applications and offers to the landlord. This is not a secret, it is a license requirement and an ethical obligation as a Realtor. So, 1) make your best offer, 2) be honest and complete all requested information and 3) work with a Realtor!
Kevin Martin
COO/REALTOR
Prime Properties - We do it better!
KMartin@PrimeProp.com
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At Prime Properties our role is to represent the Landlord in these transactions and our legal obligation is to assist in getting them the best possible result from the performance of a rental property. All tenants need to consider there are now many people looking to rent rather then to buy, so when they submit an application to a landlord they need to put their best foot forward at all times. Submit a complete application, and if there is any issue which is deficient you should also submit a letter of explanation. Consider if there could be other offers, so if you have found the home you want to rent, you may want to offer additional security, strong references, or higher rent then the asking price. Offering a price of $10-$20 more then the asking price indicates you are interested in the home and that it is important to you. A landlord would look favorably on a prospective tenant who cares enough for a home to offer a little extra money to be sure they get the home.
Do not offer to provide information which could be used in a legally discriminatory manner. This could place your Realtor in an awkward position and what you may feel is in your favor may actually work against you. The best plan is to stick to the facts as they are requested on your rental application. Please note, lying on your application may make your lease void and you may be evicted, so do not lie! Work with a Realtor and follow their guidance as they are trained in how to best position your application. Also, if you are looking at a rental home represented by a Realtor you have someone involved with an obligation to see all are treated fairly.
Here is the catch, until a lease is signed by all parties we present all applications and offers to the landlord. This is not a secret, it is a license requirement and an ethical obligation as a Realtor. So, 1) make your best offer, 2) be honest and complete all requested information and 3) work with a Realtor!
Kevin Martin
COO/REALTOR
Prime Properties - We do it better!
KMartin@PrimeProp.com
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