The Case for a Down Real Estate Market

Many lucky sellers saw their fates rise with the brief uptick in the real estate market. The housing tax credit, optimistic economic data, low mortgage rates and reluctant bank foreclosures set the stage for a fleeting rally in housing process.

More importantly, the real estate market re-opened for business with buyers snapping up homes at a faster rate (albeit at a steep discount to the purchased price). Of the factors listed above, the only enduring attribute of that market rise is the low mortgage rate.

Short-Term Real Estate Market Expectations

The sellers that missed the market or simply priced themselves too high in hopes of eking out a slightly larger profit will soon find themselves without a chair in the fast past game of musical chairs that is the real estate market. Many people are surprised at quickly the market turned sideways.

Unfortunately for many sellers, the expiration of the homebuyer tax credit coincided with renewed economic challenges. The job market remains soft; however, many jobless people face the end of their unemployment benefits. Legislation remains stalled that would either extend those benefits or provide outside financial help for jobless homeowners.

To further add to the perfect negative storm, banks finally got the foreclosure message. Listing of bank owned properties continue to increase and the high foreclosure numbers of the past six months have turned into even higher real estate inventory numbers in the market.

In the short-term, the real estate market faces a major supply and demand problem. On the demand side, consumers lost an $8,000 incentive to purchase a new home and they remain weary of the job outlook. On the supply side, bank foreclosures are flooding the market at extremely competitive prices dragging down an already challenged real estate market.

Real Estate Investor Opportunities

Real estate investors that missed the sale window should de-list their property and hunker down. Now would be a great time to lock a tenant in for one or two years until the market regains traction and the broader economy commits to a real recovery.

On the buy side, it is once again the time to go for big price concessions and target foreclosure opportunities. Given the above, the best strategy today is buy and hold. Flip opportunities will be rare in the next six months to a year and now is a great time to lock in great 30-year fixed interest rates. Buying big at deep discounts should pay huge dividends in the coming years.

Buyers should also avoid the hassle of short sales. There are too many opportunities in the market (read high inventory levels) to waste time, energy and money pursuing a short sale that could take six months or more. Recent foreclosures offer better discounts and can be purchased quickly. Now is the time to buy low

Success as a Landlord- Leadership: Owners of Residential Rental Properties Must Be Assertive

Investors in apartment buildings, single-family homes, duplexes, and other residential properties are landlords. The aim of most landlords is simple: to have tenants who will treat their units like homes they cherish, pay their rent on time, and not be a nuisance to others. That simple goal eludes many novice landlords because they fail to establish their authority over their properties.

Selecting Tenants: Avoid Cash-Flow Erosion, Landlord Burnout

The proper selection of tenants is one of the most important responsibilities of a landlord. To carry out this duty, a landlord must have clear selection criteria and a legal and effective screening process. Shortcuts in this process can result in future problems and misunderstandings with the tenant. This may include expensive and time-consuming court proceedings, which in turn can erode cash flow and contribute to landlord burnout.

Informing Tenants: Strong Lease, Clear Rules

Landlords should use well-drafted leases and rules (the rules may separate or included in the lease) that put the tenants on notice of the course of conduct that is expected of them. For example, the lease should state when the rent is due and how it is to be paid. The rules may specify that the use of illegal narcotics on the premises by anyone or that loud music or noises after a specific hour can lead to eviction procedures.

Notifying Tenants: Following Landlord/Tenant Laws

Landlord/tenant statutes in the United States are written with the view that landlords enjoy a stronger bargaining position than their tenants and, therefore, that leases favor the landlord over the tenants. To level the playing field, the laws of each state specify, among other things, the types and timing of written notices that landlords must give their tenants about lease infractions and eviction proceedings. Landlords who fail to follow these specifications needlessly surrender their legal standing and risk seeing their cases thrown out of court.

In many states, after buying a rental property, a landlord is obliged to advise existing tenants in writing that the ownership has changed. This type of letter also should inform the tenants how to contact the landlord (or property manager), where to send or make the monthly rental payment, where the security deposits are being held, and how to request repairs.

Sometimes, a tenant may test a new owner by not paying rent, paying it late, or making unreasonable demands for upgrades. Perhaps the previous owner had been too timid to confront the tenant about such conduct. To avoid becoming the tenant’s “doormat,” the new landlord must swiftly and unequivocally show that he or she does not tolerate unreasonable demands and the lease being breached.

By applying the lease terms and rules to all of the tenants and by using a system of written notices, landlords demonstrate that they are in control and that no one receives special treatment. This is an effective business practice because it encourages good tenants to stay and bad ones to move.

Landlords Lead by Managing Tenants

Smart investors manage their investments; they do not allow investments to manage them. This is equally true for investors who are landlords: smart landlords do not allow their tenants to dictate how to run their properties.

Demonstrating control of a rental property does not mean being authoritarian, offensive, or uncompromising. It does mean acting like a leader, setting the tone of a tenancy, and enforcing lease terms and property rules in a consistent, even-handed manner.

Begin With Single-Family or Multi-Unit Rentals? Investors Must Weigh Pros, Cons of Various Residential Properties

Owning fully-rented, residential rental properties is a surefire way to receive income every month. Not only do these properties generate cash flow, they also offer a good return on equity, both as the mortgage debt used to finance the properties goes down with each monthly payment and the value of the properties rises over time.

Nonetheless, an inexperienced real estate investor must carefully consider what type of rental property to buy. There are many types from which to choose:

  • single-family homes
  • two-family homes (also known as duplexes)
  • three-family homes (triplexes)
  • four-family homes (fourplexes or quadplexes)
  • large buildings with five or more apartments
  • buildings with one or more apartments and a commercial unit

Single Family Homes as a Start

“It is a great time, right now, to invest in residential real estate,” Rhonda Duffy, broker of Duffy Realty of Atlanta, wrote recently in an e-mail response to questions. She added, “The easiest property to buy, prepare, and flip is by far the single family home, and it should be the choice of the novice investor.”

In fact, many investors start off with a single-family house as a way to get their feet wet as landlords. Not only do these investors learn what it takes to maintain and even improve the physical features of the property, they start to understand how to select tenants, what to cover in a lease, how to set the parameters of the landlord/tenant relationship (for example, how each of them will handle emergency repairs, how late to accept non-emergency calls), and how to keep good tenants and oust bad ones. A variation on buying a single-family home as an investment is buying a duplex to live in one unit while renting out the other unit.

From there, investors may go on to buy additional single family houses to gain experience as landlords of more than one rental unit. Alternatively, investors may buy multi-unit properties.

Rental Property Considerations

Here are a few things to consider when deciding how large a rental property to take on:

Per-unit cost. The more units a building has, the lower the price of its individual units. Some investors find it more profitable, manageable, and efficient to own one building of five or more apartments than to own and manage several smaller rental properties.

Building control. In some ways, a landlord loses more and more control the larger a rental property is. In many states, tenant protection laws apply to buildings with three or more apartments and dictate how and when tenants get notices of rent increases and evictions. Local rent-control or rent-stabilization ordinances may limit the amount of annual rental increases, even if the landlord has made extensive repairs or improvements at the property. Tenants in a multi-unit building also may organize a rent strike over perceived failings by the landlord.

Financing programs. Most lenders define their residential-loan category to include properties of one to four units. Even with today’s stricter eligibility requirements, this category presents good opportunities for buyers. For example, there are loan guarantee programs for first-time homebuyers through mortgage lenders and the Federal Housing Authority (FHA) that allow as little as a 3.5 percent down payment as long as the buyer lives in one of the units; most of the closing costs and fees can be included in the loan.

Bright Rental Market

According to a recent e-mail from Alan Brymer, a Utah-based real estate investor and blogger, “It is easy to rent houses now that few people can qualify for a loan.” Brymer noted that the demand for rental units allows investors the choice to sell their rental properties when the real estate market picks up or to hold the properties “for the long haul.”