Advice on renting (long) - Posted by Kelly

Real Estate Investing Section 8
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Posted by Maxx(TX) on July 14, 2003 at 07:57:11:

L/O is a good suggestion and so is seller-financing. You can offer a 2nd position or even a 1st. If you feel that you want to get out bad, then you could even sell the note.

If you intend to keep the house, offer a “low-down”, $990/mth rent and $50 rent credit, see if you can pull this off. Option period of 3-5 years. Apply the rent credit towards the down-payment at the end of option period. (No down?? How about offering to financing the down in 12-24 months for $50-$100 plus interest)? I’m not sure if you could do that, but you could try.

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Advice on renting (long) - Posted by Kelly

Posted by Kelly on July 12, 2003 at 19:12:42:

My husband and I are trying to rent our first investment home, and it is very frustrating. Aside from the fact that it seems near to impossible that we will ever re-coup all of the money invested so far (didn’t realize until after deal completed…I think we jumped in too fast)but we’re realizing that there’s nothing we can do at this point other than get the thing rented. It is in a lower income part of Phoenix and the applicants we’ve had make barely more monthly income per month than we’re asking for in rent. They have child support coming in, but still it seems like they will never be able to make these payments. We’ve heard a ratio of 3:1 for monthly income vs. rent is pretty standard in what we should look for. Even including child support, these people haven’t been coming close. Their credit is awful. We’re accepting Section 8 (government assistance), but haven’t gotten much from that. We need to get the house rented. We are now regretting our decision because we would have to hold on to the house for a long time to ever make any money, let alone break even…not to mention all the headaches it’s been. We’ve had ad’s in the papers, signs, it’s on the MLS, on the Section 8 lists and I’ve only showed it to 3 families. Any advice?

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Time may be the answer - Posted by randyOH

Posted by randyOH on July 13, 2003 at 10:34:03:

Kelly,
Could you give us a little more info? How much did you pay for the house? How much debt? What are your expenses? What is the outlook for the area?

I have to think the outlook is pretty good if big builders are building there. They tend to do their homework.

If you can stand some negative cash flow, you may do just fine eventually. I wonder if you are analyzing the investment properly. If this is a good area, you will probably get at least 5% appreciation per year. And the rent should go up by a similar rate.

So in five years you may be looking at positive cash flow and some nice equity. If the appreciation rate is 7%, in ten years the property will be worth double what you paid for it.

And don’t overlook the tax benefits. This will offset at least some of your negative cash flow (maybe all of it) in the early years of the investment.

Just something to think about.

Good luck,
Randy

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Re: Advice on renting (long) - Posted by Frank Chin

Posted by Frank Chin on July 13, 2003 at 07:13:39:

Hi Kelly:

I’ve been landlording for over some 20 years.

You mention that:

1- The property is newly built property in a new rural development.

2- Most of the potential renters can barely make the rent.

3- Its 15 minutes from Phoenix.

Based on this, I have several observations:

A- With 5% rates, and almost zero percent down in many cases, most working folks who qualify would be buying a home.

B- Folks who usually rent are:

i) Have bad credit, and do not make enough to pay the mortgage. These are the ones you met so far.

ii) They’re in a situation where they cannot or do not want to own a home for the moment. These are usually recent grads, recently divorced, relocated folks not wanting to buy immediately. Then there are snowbirds from the colder climates.

C- The challenge for “low paid” rural folks in addition to housing is the lack of transportation. If they flip burgers at McDonalds, after paying $1000.00 rent, how can they make car payments and insurance.

D- Section 8 only helps with the rent. Low paid workers normally live where they can commute by public transit.

My suggestion is:

I) Find out what your competition is. How many rentals are out there, how much are they charging. I do that by researching the local papers, and calling up local realtors pretending to be a renter.

II) Try renting to Snowbirds trying out the Phoenix area. I have a friend , a former co-worker from NYC who bought a house in Florida, renting it out for a few years before moving down there from NYC. The Realtor found a retired couple from the Long Island NY area who spends a few months a year in Florida. My freind explained that with the low wages in the area, few working people can afford to live in the newer developments.

So find some realtors specializing in relocations.

III) I have rentals in Springfield MA, where there’s an abundance of Section 8 tenants. I’m told that rentals along the bus lines command a premium as the tenant can do with only one car, or no car at all, to go to work and shopping.

In other words, section 8 housing is OK if you can get to work and shopping. Is there a bus within walking distance that can get the tenant to downtown Pheonix to work??

In fact, a condo that I own has a bus stop right in front. While its a luxury condo, and I don’t offer it to Section 8, I have section 8 people looking to rent, in addition to folks who cannot or will not drive a car. One prospect says she enjoys fine dining, and rather spend the money on food rather on a car.

I have to say I never thought much about the realationship between transit and housing when I started landlording.

Frank Chin

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Re: Advice on renting (long) - Posted by Ed V (baddog)

Posted by Ed V (baddog) on July 13, 2003 at 24:01:53:

It’s all the little things that can make a difference in this business. Aside from waiting a little longer, try a few different things first. By waiting I mean that sometimes when it rains it pours. Just like anything else, renters are scarce or they flood you. If you can wait, do that and I’m sure you will get better qualified renters soon if your rent is within reason. Dolf’s book suggests that you only have to do one thing in order to rent a property, LOWER THE RENT! Renters are like buyers in that they are controlled by market conditions for the most part. They seem to be attracted to certain areas at certain prices at certain times ETC. One lesson I learned and applied is the old retail method. If you are really asking $1000 for your property, lower the price to $990. It’s only $10 less but in many peoples minds, especially the ones your trying to attract, it is a world of difference. Also if you want to get out of this property and still get your money back, think of things such as offering the property to someone as NO DOWN PAYMENT! Ask for enough rent to cover your expenses plus a little more if you can. They pay you and you pay the bank in a wrap-around mortgage. If they leave or move you still own the property to try and rent or sell at a later date when things may be better. Anyway if you are going to survive in this business open your mind. Even the littlest things sometimes make a world of difference.

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Re: Advice on renting (long) - Posted by Arthur

Posted by Arthur on July 12, 2003 at 21:39:51:

Sorry to hear about your problem, and i hope this doesn’t deter you from future deals.

Sometimes, its best to accept defeat, cut your losses, and move on to the next deal. Thid would be a lesson learn’t.

I’ve read “Real Estate Riches” by Dolf De Roo’s, and he claims that any property is rentable. If you can’t rent it, then you must be doing something wrong.

Ask yourself this, would you live in that property as it is? If your answer is no, then theres your problem. Does the property have curb apeal? Does it have cut grass at the front, maybe some flowers? Does it have a garage or carport? If not, try adding a carport. It could cost you about $1k and would add to the value of your property, while increasing possible rental income (and rentablility).

Is the rent to high? Consider one of these options:

  1. Cutting the rent (its better to lower the rent $50 than to earn nothing for months - that lost rental income could fund the rental cut for years)
  2. Offer something like *FREE CABLE TV (that would cost you like $20 a month)
  3. Install something like a jacuzzi (this would depend on what find of income your looking for, don’t bother if your talking about a property thats going to get you $400 a month).

This of course is IMHO, i myself am learning about the US way of things (i’m moving to the US) as i have been an investor in the UK and things work differently there.

Good luck, i hope it works out well.

p.s. I’m thinking of starting a kind of “online community” for investors in Arizona. The sort of thing where we can share info, recommend contractors, perhaps help eachother out in situations like yours. If you, or anyone else is interested in being part of such a community, drop me an e-mail.

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Re: Advice on renting (long) - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 12, 2003 at 21:19:50:

Kelly–(AZ)--------------

Sorry to hear about your unhappiness.

When I first started renting a house in Sacramento, CA, after a few years of renting houses in Oakland, CA, I could not believe the low quality of the renters. I said to myself after looking at about a half dozen applications “Doesn’t anybody in Sacramento have a job?” Finally, after a long wait and many applications I did get a married couple with a working husband. They were good for about five years, until he lost his job. Then they disappeared in the middle of the night, owing me mucho rent and moved, according to a neighbor, to PHOENIX!

Anyway. I think you have a couple of choices: tough it out or get out–as GL(ON) suggests.

It sounds to me as though you are doing a pretty good job advertising. Keep that up. Put “house for rent” signs on major thoroughfares near the property, with some other arrow signs to lead people to it.

Be sure that it is clean and decent. Sparkling windows, mowed lawn, nicely painted on the front and inside.

You may be asking too much rent. A lower rent might lure in more people.

Be selective. While you are feeling some pain with a vacancy, you will feel even more pain with a bad renter.

You might try to get a couple of other property owners in the area to look at the property, your advertising, and you price and see if they can give you better advice than those of us at a distance. Call some of the for rent ads in the newspaper. Many property owners are generous with help of beginners, even those who may be competing for the same renters.

Good Investing*************Ron Starr***********

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Re: Advice on renting (long) - Posted by GL - ON

Posted by GL - ON on July 12, 2003 at 20:48:29:

My heart goes out to you. You are suffering what a lot of beginners suffer, and it’s too bad because if you had found this site earlier you could have avoided a lot of grief.

Is the neighborhood or the house really that bad? If it is impossible to get a decent tenant, then maybe the best thing is to sell it and get rid of a headache, even at a loss.

I know you don’t want to hear that. But in the long run it may be better to take a loss now rather than let it drag you down and cause even more losses over the long term.

There is also the possibility of trading to another investor. If it is in decent shape you may be able to trade it in as a down payment on a house in a better neighborhood.

I’m sorry I don’t have any magic secret to get you out of this.

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Re: Time may be the answer - Posted by Kelly

Posted by Kelly on July 13, 2003 at 12:27:16:

Hi Randy
We paid $126,000 and between 10%down and the closing costs, we paid almost $18,000 down. As far as expenses, we have paid about $1200 before landscaping the backyard which for the very minimum will be at least $1000. Our mortgage payment monthly is $870 and we are asking for $1000/mo. It is a really high growth area, like all of Phoenix. We were looking at this as a shorter term investment rather than longer.

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Re: Advice on renting (long) - Posted by Kelly

Posted by Kelly on July 12, 2003 at 22:17:08:

Thanks for all of the feedback so far. I hate to be so down on this, but we’re just frustrated. Let me tell you a little about the house and community. We took the advice of our realtor (who had invested in real estate in the past) to find a brand new community (like in the beginning phases with no models up yet)and to be one of the 1st buyers in to get the absolute lowest price, so we would have several price increases after we were in. If you don’t know AZ well, these communities are everywhere. Everyone builds here and stays in their homes for only about 5 years (on average). An “older” home is about 10 years old here. So, taking his advice, we built in a new, master planned community with about 10 different neighborhoods, ours being the least expensive. The community is going to be really nice, all new, with new shopping, schools, etc. close by and also easy access to freeways. The area around this community is pretty rural, with some cornfields, but is only about 15 minutes from downtown Phoenix. The area around this community has a reputation for crime and it’s mostly minorities living in the area. We knew we would be renting to lower-income families, but like I said, we are accepting Section 8. The house is really cute, great curb appeal. We have signs on the major streets leading to the house, and I think the rent is fair, considering what other houses in that area are going for. I just don’t know if we’re being to picky with their qualifications, but realistically, how can someone who brings home $1200/mo. and gets $800/mo. child support with 2 kids afford $1000/mo for rent? She’s only paying $350/mo to live at her daughters now. We had a woman the other day…brings home $1200/mo and gets a “pension” from her ex-husband of $1600/mo. The husband sounds like a deadbeat and has their house in forclosure. I just don’t feel comfortable renting to someone whose income depends on some deadbeat ex-husband. ARGGGGGG!!! I really appreciate all of the help on this.
P.S. It is a 3/2 with a 2 car garage, 1323 sq. feet. desert landscape (low, if any, maintenance, but really pretty)

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Re: Advice on renting (long) - Posted by Sara

Posted by Sara on July 21, 2003 at 17:27:25:

I wish I could find a great place to rent with an outstanding landlord. Me and my two best friends want to move to sacramento but we cannot find a place that will let us have a dog or at least space for a kennel. We want to put money down on a place mid august and move in the last week of August. Let us know if you can accomodate us or if you know anyone.

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You might be overpriced - Posted by Frank Chin

Posted by Frank Chin on July 14, 2003 at 05:23:33:

Hi Kelly:

If you say that at 10% down, your monthly payment is $870.00, then you may be overpriced.

A real estate investor named Gorel spoke at our REI club who specializes in doing “out of state” investing for folks with money to invest like doctors and lawyers. Las Vega, Pheonix, and FL are the areas that he specializes in, as I recall.

His formula calls for the investor to make a 10% down payment, at then just charge enough rent to cover the mortgage payment plus his management fee intially. Even with the management fee, his rent would still be lower than your’s.

One mistake I see newbie investors make is to price the rent to cover expenses plus a profit, in your case $1000.00. That may not be the market rent.

Remember, someone buying a place like yours pay $870 mortgage, and takes a tax deduction for interest, and RE taxes. The guy paying the $1,000 rent gets no deduction.

If I were you, try 950.00 or below and see if you get any bites. IF not, you might get a better repsonse at $895.00. At least breaking even is better than paying out $870.00 each month.

Frank Chin

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You may want to try a lease/option - Posted by randyOH

Posted by randyOH on July 13, 2003 at 12:59:45:

Kelly,
It does not look like a bad long-term investment as I suggested in my previous post. If you can get $1,000 per month, you will not have much negative cash flow. And, as I said, it will just get better from here.

But to improve your profitability, you may want to try a lease/option. I would try for $5,000 down (option fee) and $1,200 a month with a $120 rent credit. I would offer the option for $135,000 for two years. That will get you a positive cash flow and a little profit if they exercise the option within the two years. If they don’t, then you keep the $5,000 and do it again with another tenant. As time goes by (and nobody actually exercises their option), you will be able to increase the option price and the monthly rent.

I would run an ad that says “rent to own, $1,200 per month, 3BR, etc.” You will get calls from people that cannot qualify for a regular mortgage. But these people are usually better quality than your average tenant.

Another advantage of L/Os is that you can have the tenant take care of all repairs and maintenance. So there is less management involved.

Try it, you might like it.

Randy

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Re: Advice on renting (long) - Posted by Anne(ND-formerly AZ)

Posted by Anne(ND-formerly AZ) on July 13, 2003 at 14:10:20:

Kelly,

You said the house is 15 mins from downtown Phoenix- is it anywhere close to ASU? If so, I suggest you lower your rent a little and put up an ad at the ASU housing board (in the student center-it’s free!). You may find grad students or postdocs or even new faculty who are looking for a nice place to live.

I don’t recommend renting to people who have little chance of being able to pay the rent- in the long run you’ll be better off with a few months of vacancy and better tenants. Especially since this is a new house- you want to be able to capitalize on that for the first few years, so don’t put someone in there who cannot afford it and may tear it up if you evict them.

On my first rental house I ended up being in the red about $40/month the first few years. However, I was building equity (short time line for the loans) and I had very reliable tenants who made all minor repairs themselves, so I had almost no maintenance. Now it’s throwing off about $30/month positive, and I’m now using a lease that has a built-in rental increase each year. The house has really increased in value, so I’m glad I stuck it out through those first years. In a few years the loans will be paid off and this will be making lots of money for me.

A final thought- let the developer know that you’re looking to rent, perhaps some people who come through their office will not (yet) be able to afford to buy a house in the area, but might make nice tenants or tenant/buyers. The developer must have felt that people would want to live in the area, otherwise they aren’t going to sell their homes. Also- get your realtor involved since they apparently felt this would be a good investment.

good luck,
Anne

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Re: Advice on renting (long) - Posted by Arthur

Posted by Arthur on July 12, 2003 at 22:59:36:

Out of curisousity, how long have you been trying to rent it for?

Another thing to think about, is as its a new community, theres also going to be alot of new houses for sale, which may explain why there is not much demand for your property.

Another insentive…offer 1 months free rent (advertise it like that, but offer them the 12th month free, not the first).