As with so many other things, the world of real estate tends to move in cycles. For proof, just look at the markets for single-family homes and apartments.
It wasn’t that many years ago that every American was buying a home. If you didn’t own a home, people demanded to know why. What were you waiting for, anyway, an engraved invite? People who’d never owned a home before bought homes. Those just out of college bought homes. Folks in college bought homes. People with no money, and little hope of every having enough to own a home, bought homes.
We all recognize now the cataclysm that trend brought about.
Almost predictably, we’ve now done a full 180. The turn-around occurred after many modest income folks learned owning a mansion bought with no cash down was a quick route to a different kind of house, that being the poor house.
Many of those former homeowners have now returned to the ranks of renters, helping make the apartment sector one of the hottest industries anywhere.
But it’s not just apartments that are being rented these days, it is single family homes as well. Some reports indicate more than 3.5 million single-family homes are being rented in the U.S. That number is likely to grow as demand from renters increases and the stock of foreclosed homes continues to surge.
Mary Ellen Polmolik, writing in the Chicago Tribune, recently noted the trend in her column: “Local and out-of-town investors are bumping into each other at the doorstep as they snap up homes for rehab, resale, or increasingly to convert them into rental properties,” she wrote. “It’s a noteworthy development. Despite low mortgage rates and a variety of government-fueled incentives, the residential real estate market has been stalled for several years. A newfound interest by investors could signal that the market is at, or near, its bottom.”
The opportunity that exists for ordinary as well as institutional investors to seek income from distressed homes is seen as “a good thing,” by Zillow chief economist Stan Humphries, whom Podmolik quotes as noting: “We have a need for less owner-occupied homes, and a need for more rental homes.”
You, a landlord?
If you’re among those seeking to cash in by buying and renting a single-family home or condo, experts advise caution before getting in too deeply.
“There’s no denying rental properties are one of the smartest additions to an investment portfolio right now,” says James McClelland, CEO and president of MACK Companies, one of the nation’s leading providers of single-family, turnkey investment properties. “But how you choose to manage those assets can make the difference between enjoying a positive monthly cash flow, and not covering your mortgage.”
Lots of people see themselves as great candidates to become landlords, based on their conviction that they are handy with a hammer and rule, and can tune in their powers of ESP and determine if an applicant they don’t know will turn out to be a good tenant.
Far from taking their first step on the way to real estate magnate status, they may be taking the initial step toward losing their shirts.
According to McClelland, the number one reason people fail when renting out a home is poor property management. “There’s a misconception that people fail in their investments because they didn’t buy the right property, or it wasn’t in the right location,” he says. “Of course, these factors come into play. However, when it comes right down to it, the inability to analyze one’s property and manage it correctly is what precipitates failure … Brick and mortar never make mistakes. What did that home sitting on its lot ever do wrong? Nothing. The property failed because of the person who was managing it, or better yet, mismanaging it.”
To be successful, property management has to be your priority, McClelland advises. “Without great property management, you won’t have great tenants. And great tenants are the key to successful real estate investment.”
Finding great tenants
McClelland reports one of the most common errors made by novice landlords is failing to properly screen their tenants. He and MACK Companies recommend a detailed screening that includes all the following steps.
First, run credit checks on all applicants, then interview their current landlords. Also, visit the existing homes of all applicants, keeping in mind that the way they maintain their current home is likely an indicator of how they will treat your property. Talk to their employers about their prospects for long term employment. Finally, perform a skip trace and a criminal background check on each applicant.
Once you’ve found what you believe to be an acceptable tenant, make a point of providing the new resident with a complete indoctrination on move-in day. McClelland suggests starting by introducing tenants to the home, the immediate neighborhood, and the amenities of the community. Give the tenant a housewarming gift. Provide tips on basic care and upkeep of appliances and equipment, such as HVAC. “We want our tenants to feel comfortable, because we want them to stay a long time. Long-term renters are typically the best tenants,” he says.
While landlords use a number of ways of collecting rent, McClelland says there are compelling reasons to do it the way MACK Companies does.
That way is to have property managers visit each tenant and personally collect rent payments, while also conducting visual assessments of the home’s upkeep.
Personally collecting rent takes time, McClelland says. But not as much time “as making costly repairs to the property because you haven’t checked on the tenant in weeks, and then find the property’s been poorly maintained.”
The old saying goes, “Home is where the heart is.” Take the right initial steps in your emerging role as a landlord, and it could also be where the income is.