Understanding market conditions and having that “6th sense” of what is going on, allows the successful investor to stay out in front and operate where there is no competition. Just like the book “Who Moved The Cheese?”, screening tenants for your rentals is critical now more than ever. We have seen many small market indicators creep up on us over the last few years. Although each condition by itself is not too bad, when combined all at the same time, results in a major impact on our rental market including single family homes.
These factors include the nightly news regular update of our bad economy, high unemployment, more jobs leaving the USA, and homeownership at all time highs. The nonstop new home construction. The new home construction rate far exceeds the growth of our local household census over the past few years. New apartment construction, availability of FREE money to first time homebuyers (including our own long term tenants), continued all time low interest rates, access to easy money from lenders, stock market jumpers who “see the light” realizing real estate is the place to be and jump into the real estate investing arena, have all contributed to putting us in a simple but very challenging market of SUPPLY AND DEMAND. Too many houses and not enough quality Tenants!
While surfing the net last month, I found a website devoted exclusively to educating tenants on how to negotiate better terms with landlords and the inside scoop on how to beat up and cause grief to your landlord. They even sell T-Shirts “Kill the Landlord” promoting the same. This website harps on market conditions of an abundance of available rental properties and encourages tenants to go after 2-3 months FREE Rent. Locally, we have apartment communities whose profitability is projected at a maximum 5% vacancy rate and are now experiencing an average of 25% vacancy rate. We have an apartment community locally with a 40% vacancy. These apartment communities are offering blow out specials and low and FREE rent prices to fill vacancies.
Last month my brother purchased a home I would rent to a tenant for $800.00. His total piti (principal, interest, taxes, and insurance) payment is $543.00. Be aware of how this can affect YOU! Mortgage brokers and lenders are targeting our sometimes overlooked, but valued long time tenant and they are pitching this exact same situation. They pound our tenant with “Why are you paying $800 month rent making your landlord rich when you can buy a home just like yours or bigger and better for $250.00 month less?” The sad reality is we learn about this too late. We receive our tenant's notice of their intent to move because they are becoming a homeowner. (Perhaps you would have sold your tenant the home they are renting from you)
Congratulations to tenants who become homeowners. Almost anyone who can breathe can buy a home.. (think about who is left an ugly, ugly thought) Although they are excited about homeownership, we have seen many get zapped with outrageous fees resulting in the tenant paying well over 100% for their home. In addition to this mess, the tenant does not receive any financial education on how to “run their household financially.” When the roof, furnace, water heater, etc. breaks or needs replacing, the tenant, now homeowner, will have to dig into their empty pocket to make repairs – previously, a phone call to the Landlord resolved their problem. Now we are in the beginning and perhaps the middle of a cycle eventually giving us great rewards. Unfortunately, many will eventually go belly up and lose their home and return to being a tenant. In the meantime, we are short a boatload of quality tenants right now.
Some new investors have added to the current problems for investors. Poor financial decisions from the recent bygone days of EZ Cash Out Re-Finances have allowed some new investors to have the “good life” on borrowed money. These types have now run out of cash and their rent income barely pays mortgages, let alone repairs or lost rent from vacancies. These people are going belly up by the dozens locally and lenders have shut all doors on loans involving non-owner occupied property, including the seasoned veteran cash heavy investor. The pendulum has swung the other way.
The investor with CASH is KING! If you do not have cash, you must have resources to cash in order to stay active. The gravy train days of pay cash, make it right, refinance and cash out, getting your money back on 30 year fixed, to go do it again are almost gone. Focus and polish your education on seller financing, negotiations, and develop your own network of private lenders. Cash in on private lenders whose certificates of deposit are paying two percent. Make it attractive to the private lender and you will always have cash resources at your fingertips. Private lenders with cash network with people with cash.