If you're thinking about snapping up properties at fire-sale prices and renting them out to all the people who can't get a mortgage, think twice before you leap.
The temptation for would-be investors is strong. Thanks to record numbers of foreclosures, short sales, bank-owned properties and homeowners in distress, prices on all shades of real estate are low and getting lower.
But despite the allure of covering costs with rent money and (hopefully) generating an increase in value in the coming years, there is a downside to the equation.
Here are some of the most common problems landlords face in today's realty reality:
Vacancy rates are up. It seems logical that people who can't buy a house or lost their home are going to rent. After all, they have to live somewhere. But nationwide, landlords are having trouble filling vacancies. That's prompting landlords to offer tenants incentives to sign a lease. More often than not, it's a discount. It might be a free month of rent, a lower security deposit or a three-bedroom unit for the price of a two-bedroom unit.
- Vacancy rates are up.
- Applicant histories are getting worse.
- Evictions are taking longer.
- Rental units are getting pet-friendlier.
"Between 2002 and 2006, our No. 1 source of losing tenants was to buying a home," says Jason Post, president of Los Angeles-based Post Investment Group, a boutique real estate investment company that buys and operates apartment buildings. "Now, our No. 1 source of losing tenants is skips and evictions. We're seeing lower occupancy rates across the board and more concessions to lower effective rents."
Among the latest incentives property owners are offering to prospective tenants is a deal borrowed from the auto industry: reduced rent for 90 days if a tenant gets laid off, says Dan Page of the Boulder, Colo.-based American Apartment Owners Association. If they don't find a new job by then, they can be released from the rest of their lease.
"It's a great offer," Page says. "If the tenant loses his job, the landlord is probably going to lose the tenant anyway, and they're using it as a way to fill vacancies."
Applicant histories are getting worse. A credit check is a central element of the tenant screening process, and most applications have questions about foreclosures, bankruptcies and previous evictions. In the past, answering "yes" to any of these questions would automatically disqualify a prospective tenant. Not anymore.