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Is there Such Thing as Buying Too Nice of a Rental Property? (Hint: The Answer is Yes.)

by Ali Boone on April 5, 2014 · 31 comments

  
house

I actually wish I wasn’t telling you there is such thing as too nice of a rental property because it might mean that I’m not experiencing this first-hand as we speak but, unfortunately, I know for certain that it is possible to have too nice of a rental property! I have one now and it’s not looking pretty. Not the house, it’s actually too pretty, but the situation.

I can’t find renters!

Would you believe it? At first I wanted to second-guess my property manager but I’ve been working with him forever and I know he’s not the problem. The problem is: the house is too nice. It’s newer (2007), big size as far as how rentals usually go (2100 ft2), 4 bedrooms/3 bathrooms, and it is in an amazing location south of Atlanta. The location is great because it’s only a mile off the main freeway and half a mile from a lot of major commercial shops and restaurants, but you’d never know any of that stuff was there if you were standing outside the front door. It’s a very quiet, wooded, cute little neighborhood, and I’d say it qualifies as primarily upper middle-class. It’s not quite to the full designation of upper middle-class in my opinion, but it’s not far from it. All of this about the location was a lot of what had me filled with excitement when I was looking at it. Atlanta was starting to appreciate at the time, I knew there was a lot of appreciation to be had in the market itself, and if any property in particular had a lot of room to build equity, it was this one. On top of that, the monthly cash flow was scheduled to be amazing. I bought the house for $94,500 and it was rented out at $1300/month with low taxes and insurance, plus it was fully rehabbed and in amazing condition so it was doubtful there’d be any major repair expenses anytime soon. So the cash flow was great, the property had so much appreciation potential, and it was just a stinkin’ cute house.

Related: RED FLAGS! Risk Factors of Rental Properties

Yeah, well…

At first when the tenants who were living there when I bought the house stopped paying and were eventually evicted, I thought it was a fluke. Then the property manager (who was a different manager than who has the house now) put in a second set of tenants (like 4-5 months later, which was already causing me stress in itself), I was super excited because they even paid an extra month’s rent upfront and everything seemed to be great. Sure enough though, they stopped paying too. It was a repeat all over again of the first set of tenants. Because this was a property manager I hadn’t used before, I had every bit of faith in the fact that obviously this manager was horrible. He clearly couldn’t screen tenants and I know for sure he was giving them too much leeway to be able to pay late and try to make up missed payments. That part I should have nipped in the bud immediately, but in general I just knew it had to be this guy. So, before the second set of tenants were even out of the house, I fired that property manager and reassigned the property to my usual PM. I knew he could fix the situation as he had always been amazing in the past and was doing a great job with my other properties. I was so excited to have him take over the property so now it could reach its full investment potential.

That was last September. It is now April (and this is no April fool’s joke) and there are still no tenants in the house.

At first I understood there is always a little lag time, it seems like, once a property is marketed to really get traction of people looking at it and from those people, sorting out the good ones. So there was some lag time. Well that lag time put us into the beginning of the holiday season, and if you have ever owned a rental property, you know holiday season is a horrible time to find tenants. I mean, who looks for new places to live at Christmas? Not many people. So there was the holiday time. As we started coming out of the holidays, I got excited thinking it was time for a tenant. I wasn’t hearing anything, so I asked.  There had been a few calls, but that was it. I was confused as to why this would be the case. Other than the house I used to live in that I now rent out, this house is the nicest rental property I own! What in the world? I gave it another week or two and asked again. They had gotten two applications. One woman seemed good but when the PM started requesting documents to move forward, she wouldn’t answer the phone. I’m always of the mindset that how things end are the same way they begin, so I was totally against this woman moving in even if she did suddenly pick up the phone a week later. No idea what ever happened to her. The other application was for a section 8 tenant, which normally I’d be fine with, but apparently this one had six children under the age of, something young, and didn’t have a fantastic background. Nix. That was the end of the application traffic. Now it was March. I had talked to my PM on and off during all this, but at this point we finally had to really sit down at length and figure this one out. Just to be clear, the PM is great. I’ve never thought twice that he wasn’t looking for tenants in the right places, advertising, or anything like that. He’s done amazing with my other properties so I had no doubt something different was going on with this one.

My PM told me specifically, “one problem is everyone who lives in this area and the closest neighborhoods nearby are home owners, not renters.” As much as I always encourage people to buy rentals in neighborhoods that do have owner occupants (helps with tenant quality, appreciation potential, and general enjoyment), I had picked a property that went too far to that end of the spectrum. Fantastic. But seriously, no interest? So we talked about getting more diligent about advertising it on rent-to-own websites and putting tenants under a lease option to buy if that would help drift more towards the owner occupant-desiring crowd. At this point I even had my PM run some comps and decide what he thought the property could go for, considering the 20%+ appreciation in Atlanta over the last few years, I figured it would have to sell for something decent. The comps didn’t seem to support it (have I ever mentioned shooting for appreciation is like looking in a crystal ball?). Great! I was at a loss.

Ironically enough, a couple weeks after my PM listed the property for sale just to see what happened, he received a cash offer to buy the property for $130,000. This amount was what I had initially set as my minimum price I’d be willing to sell it for, since I had bought it for $94,500 and needed to profit after all financing costs, interest, and hello mega vacancies. I agreed to the offer, signed it, and the property is in escrow now as we speak. I have my hesitations as to whether the property will make it to close or not because of the unsupportive comps, but who am I to criticize a cash offer. The property is still listed on rental sites as well to see what happens on that front, if anything. So far, still nothing.

Related: Patience and Real Estate Investing: My Story of Getting Started with Rental Properties

Takeaways

I am the biggest supporter of buying higher-quality properties and while I’ve always known it didn’t make sense to buy the really fancy stuff, because the cost of them surpasses the income you can collect, I didn’t realize where the line really was as far as a property being ‘too nice’ to be a good rental.

Some parting thoughts I’ll leave you with based on this experience:

  • I talk to a lot of people who can’t understand why they wouldn’t want to buy a property in the A-grade neighborhoods of any particular market. There are some A-grade neighborhoods that could work, but more often those areas are the significantly more expensive areas, best school districts, and upper middle class if not higher… meaning, most everyone is more likely to be a homeowner. At least in the markets with investor-friendly price-to-rent ratios they are likely to be homeowners. If there are more renters in the nice areas, it’s a likely indication that the price-to-rent ratios are not advantageous to investors for rental properties there anyway. This is exactly why B-grade neighborhoods and areas can be much more profitable than the really good stuff in terms of cash flow. If you just want an A-property due to looks, bragging rights, and appreciation potential, fine, but at least admit that’s what you’re out for rather than a cash-flowing investment.
  • As part of your due diligence in selecting a rental property to buy, call at least a couple local PMs and ask their opinions on that neighborhood specifically for rentals. Ask them about the ease of renting there and the typical quality of the tenants. For example, if someone was looking to buy a rental property in the same neighborhood as mine and they called my PM, my PM would easily tell them he’s had a horrible time renting it out and that should be discouraging to a potential investor. Turns out, had I talked to him before I bought this property he says he would have cautioned me about that area because of how hard it is to find renters.
  • Never buy just for appreciation potential. I didn’t buy this one under that thought as the cash flow was scheduled to be amazing, but I had high hopes for appreciation because of how fast Atlanta housing prices were climbing and predictions for the market. Atlanta’s prices did in fact rise, but for whatever reason the comps around this house only tacked on about $6,000 to what I originally paid for it.
  • Just because numbers are written out and look fancy on paper doesn’t mean they will pan out. The 10% cap rate and 20% cash-on-cash return that was supposed to happen certainly didn’t. I have lost money on this house, no question.
  • Even when you do extreme amounts of due diligence, you can never account for every potential issue you might hit with an investment property. Because of this, I encourage you to always keep good margins when estimating returns on a property. Be conservative with your numbers, leave some room for error, and don’t buy a property that can’t provide those margins. On the other end of the stick, because you can’t account for every issue no matter how diligent you are, don’t try to be a perfectionist. No matter how thorough you are and no matter how much research you do, you can never predict 100% what will happen. Heavy duty stress will just wear you out and not make your buying decisions any better. So find that fine line between doing thorough, accurate due diligence and becoming a perfectionist. Somewhere in the middle of those two is the best place to be.

Any experienced investors out there that have had any freak accidents with properties that they never expected to happen?

Photo Credit: Steven Martin

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{ 31 comments… read them below or add one }

Dennis April 5, 2014 at 6:45 am

You are renting to the wrong market with this house, however location is everything sometimes.

I have a hvac customer who only rents high end houses $1-2million dollar properties.
His niche is executive corporate housing, his 4 homes are located just outside of a large corporate office district in the suburbs of Philadelphia.

Pretty sure a nice under $100k house in the woods would not work for corporate housing.

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Ali Boone April 6, 2014 at 8:49 pm

You’re right, it wouldn’t Dennis. This house is too far out of Atlanta to be corporate housing as most of those guys would likely be closer to downtown (although being far out of Atlanta is normal for families and such). More of the corporate action goes on in the city or just north of it and this one is south.

You’re right though, it’s for the wrong market than where it’s located unfortunately. It’s definitely in this weird in between niche. Great house, wrong location.

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Jake Kucheck April 5, 2014 at 9:11 am

Just my two cents, but it sounds like you may have had a skewed concept of market rent. Landlords are more prone to not being able to collect rent than houses are, and typically the is because the rent is too (damn) high. Yes, you had a tenant there and bought the place with the tenant paying that much, but do we really know that was market rent? If you didn’t place that tenant, can you be sure they weren’t offered incentives to sign at that amount which skews both your perception of market rent and a cap rate based purchase price? I’m certainly not questioning your skills as an investor, but you do state that this property is outside the norm of what you usually buy, and thus, you may not be as familiar with market rents, and therefore susceptible to these types of shenanigans.

Also, isn’t $1300/mo a little light for $94,500 in purchase price? Napkin math puts you at a little over an 8 cap… we both know that isn’t hitting the numbers you usually hit.

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Ali Boone April 6, 2014 at 8:54 pm

Jake, good thoughts. And actually I just realized I left out a huge point in this article. It’s actually marketed right now for $1100/month which is exactly equal to current market rents in that area. The $1300/month was from the old manager and the extra per month was apparently…not sure the word…incentive? No, wrong word. Basically if the tenants had a blemish on their backgrounds (an eviction or something), he would tell them they can still have the house but they’d have to pay more. He never let someone in with an absurdly back background, just usually like one blemish. So he really kind of played with fire there (and it burned me, big time).

But current market rents are in fact right at $110/month for it, and he’s even trying to lower it to $1000-1050 to see what happens. The cap with the $1300/month was about 10% so it will be much lower with the lowered rent but still not as bad as no rent.

The house wasn’t outside of the norm that I buy by any means, it is just nicer than the others (just a nicer area and bigger house, really).

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Sharon Tzib April 5, 2014 at 9:24 am

Hey Ali! Kudos to you for sharing both your successes and your failures – it really helps others learn. I’m sure you’re gonna get a bunch of responses from those of us who think we could have done it better, lol! But I did have a question – did you ever try to lower the rent? Normally there is always a price at which any home is rentable, even a too nice of one. It may not be the number you want, and may even make you cash flow negative, but getting some money to come in is better than none when you’re in a situation like this.

I also wonder if your PM suggested offering move-in incentives. That’s probably what I would have done-a combo of rent reduction & incentives. Hopefully the cash deal will close, since the comps shouldn’t matter w/ no lender involved. Take care,

Sharon

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Ali Boone April 6, 2014 at 8:57 pm

Hey Sharon! Great put. And yes, he is lowering it now actually. I think it’s one of those things that in hindsight we should have lowered it sooner, but with the holidays and all those other perfectly logical reasons for not being able to rent something, we didn’t think of it faster and assumed that wasn’t the problem. The listed rent is in fact market right now, but with so few renters in the area (like none…okay one since assuming none would be stupid (ha)), market rent almost doesn’t even matter. But yeah, trying that now. I’m hoping the sale grows through instead ;)

Move-in incentives can be a double-edged sword. They get tenants in, but they can also get tenants in who can’t actually afford the house. If it’s done right, then it might be able to work, but it will just cost me even more in the long-run to have yet more tenants walk out with the appliances and/or get evicted. They just tend to advertise to the wrong crowd, but it might also be worth trying just to see if it gets more traffic at least and we are really careful on qualifying the tenant.

Thanks for the input!

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Sharon Tzib April 7, 2014 at 7:57 am

Yes, Ali, you definitely don’t want to offer move in incentives at the expense of proper tenant screening – you still have to always do that, no matter what. There are other non-rent deduction incentives some landlords/PM’s employ too, like two month’s free cable or free security system install – stuff like that. I am almost NEVER a fan of offering incentives, but desperate times calls for going outside the box sometimes.

Again, good luck girl!

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jeffrey gordon April 5, 2014 at 9:24 am

Ali, not sure I understand what you are saying here. Are you saying that renters cant pay $1300+ to rent in Atlanta for a big 4/3 home in a nice neighborhood with schools?

It sounds to me like the rent is too high for a $130k house? In DC we get $3500 for a $600k house in a great neighborhood and $3100 for a $500k duplex (in an urban renewal neighborhood where at least 50% of the potential tenants drive by and dont stop) you are getting the equivalent of $5,200+. and we are happy with the 7-8 Caps we are getting and have had great tenant experience the last 6 years.

Can you explain why you only get bad tenants in a too nice house in a nice neighborhood?

I suspect you have a too high rent in a market where there is now more supply of rentals–as there is in many markets–and you are drawing folks who have it in their mind to institute their own rent reduction program by not paying rent.

j

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Darrin April 5, 2014 at 10:39 am

In our Dayton, Ohio market, an A rental like that is easy to rent. However, we have a large rotations of military personnel and medical residents looking for rentals, as they know they’re only here for a short time (9 months to 3 years.) However, A neighborhood rentals are hard to cash flow as the property taxes in those neighborhoods are high.

We have a LOT of accidental landlords that couldn’t sell their properties when they moved. I ended up renting my personal residence in Beavercreek, Ohio, when I couldn’t sell it in 2007/2008. It was a $175,000 house that rented fairly easily at $1900 per month. However the property taxes made it a break-even property.

By comparison, our typical rental neighborhoods offer great cash flow with returns well into double digit cap rates.

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Ali Boone April 6, 2014 at 9:04 pm

Jeffrey, no I’m not saying that at all. I’m saying this particular subset area has few renters, and that’s why I can’t get the house rented (or haven’t yet rather). The bad tenants got in the house because the property manager (who has since been fired) ‘worked with’ the blemishes on their record and both sets were freelancers with unstable businesses. He should have not qualified them on the income side, but justified it by raising the rent on them. That tactic didn’t work, as it turns out.

No, $1300/month is not uncommon on a $100k-130k house in Atlanta. Well, actually let me take that back some. That kind of rent is totally normal for a house in that range that was bought two years ago. Now a $100k-130k house there would not see that high of rent because of the dramatic rise in housing prices there over the last few years because of the super high amounts of investor-buying going on there. But that difference aside, you have to understand that every market has different price-to-rent ratios. You can’t compare Atlanta to DC because the ratios in each are completely different. In defense of your argument though, people outside of a city like Atlanta are usually completely floored when they see price-to-rent ratios like $1300/month on a $100k house because it’s so unheard of in most places. But that is the reason Atlanta has been bombarded with investors over the last few years- for exactly the fact of how crazy (good) the price-to-rent ratios are there. More so were there, as they’ve chilled out a lot now, but that’s why Atlanta had such a draw and places like DC have not.

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jeffrey gordon April 6, 2014 at 9:21 pm

okay, well I know he DC market pretty well and it has been on fire the last 4 years for both sales and rentals and the numbers have worked well for landlords. Just the last 6 months a wave of new apartments have shown some softening in rental demand, but there is still strong demand for folks not wanting to live in an apt. building.

Perhaps Atlanta had a lot of homes in REO status or foreclosure and the rental market was jacked out of shape by the lack of rental inventory and now with the investors putting the units on the market the rents are returning to a normal relationship for rent/building price–because $1,300/$130,000 is way out of the range and tells me the market had something very weird going on and likely to not last–how does it relate to the long term ratios in Atlanta and more importantly to the Wages/Rents ratio for Atlanta.

Sounds like you better get that baby listed and sold before the rest of the investor, especially the big ones pull up stakes and put their units on the market and blow up the values further. I would assume that is one of the reasons J. Scott has relocated out of the Atlanta region?

good luck!

j

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Eric April 5, 2014 at 11:16 am

The only reason you cannot find a renter is that you are either overpriced, or under marketing. The only reason (90% anyway) why tenants get evicted is due to the property manager taking in a tenant that cannot afford to pay (income), or is a high risk (credit).

Most property managers do not have the slightest clue how to screen tenants, let alone what to look for in a screening report.

Income will tell you the tenants ability to pay rent. Credit score will tell you the tenants desire to pay rent. Both are needed.

I would LOVE to have that property, in a neighborhood with mostly owners. Get a future homeowner, and rent it to them. They will have solid credit, and solid income, but just not yet in the position to buy. Rent to them for a couple of years, and sell them a house in the future, likely somewhere else. Use the property as your farm team for buyers.

It’s easy to be a PM, it’s hard to be a great PM.

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Ali Boone April 6, 2014 at 9:07 pm

I agree Eric and the initial problem with this property, no doubt, was it had a bad PM who did just what you mentioned- let in people who couldn’t afford the house. They were aspiring home owners but couldn’t do it yet, which was great, but he let too much slide and wasn’t strict enough on the qualifying. The new PM, one I have worked with for years and love and he is all over the marketing and other factors, knows what he is doing. The marketing is there for sure, and we are lowering the price. It has been listed at market, but with so few renters in the area, market doesn’t work. As we found out.

You are WELCOME to buy this house and have at it. $130k and it’s all yours. :)

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Eric April 6, 2014 at 9:27 pm

At 130K, it would not be a deal… But at the 94K, it might have been.

Whenever you price too high, you get low quality tenants, and higher risk. I have 24 rentals, plus another one I manage, and all 25 rents are always in by the 5th of the month. With a full time job, I do not have time for low quality tenants.

Most PMs do not have a clue how to screen tenants, or what the statistical averages are. Most do not even know that the average renter credit score is slightly higher than ~650. That is what you should be shooting for.

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Luis Toledo April 5, 2014 at 11:57 am

I have a hard time believing 1300 is too high a rent. It sounds like you’re marketing to the wrong people. Have you tried listing it on Craigslist with a headline emphasizing proximity to hospitals, corporate campuses, universities and possibly the airport? Large teaching hospitals and universities have fellows that come and work for a couple of years and move on. They’re usually older than residents and students and are more likely to have young families. They rent nice houses and aren’t too concerned with schools because they’ll move before their kids start school. Newly relo’d corporate types also rent for a while before buying… Also, remember that price is rarely the most important factor In why someone chooses a place to live. The price is a qualifier, not a winning criteria. They’ll tend to look at a few places they can afford and choose between them based on other criteria.

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Ali Boone April 6, 2014 at 9:10 pm

Luis, good thoughts. The problem is, and this is more hindsight about what I should have been looking at as far as location when I was looking to buy it, is the house is just barely too far for people who would be working or going to the types of places you mention. It’s not too far for families who work in those industries, but for renters it’s a little different. They can just rent closer. The families are the ones wanting a little further out, and more so families who just buy houses instead of rent. So if it was a tiiiiiny bit closer to all of those things, I think you’d be spot-on for sure.

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Luis Toledo April 6, 2014 at 9:27 pm

So if the people who are buying in your area are families with children, then highlight your home’s convenience to places like daycares and community centers and playgrounds. I live in a similar part of the research triangle in NC and there are several families renting in our area that are would buy here except that they’re only here for a few years. You might find that the same families that would buy in your area will also rent in your area given the right circumstances. Hospitals and universities provide those circumstances quite frequently.

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Ali Boone April 6, 2014 at 9:49 pm

Great put Luis. I’ll talk to my PM and see what he is writing in his marketing. I’ll see if we can’t tailor a little.

Luis Toledo April 6, 2014 at 9:20 pm

So in reading the rest of the comments it seems that the problem is in the location rather than the property being “too nice”. It makes far more sense that a house might be too far outside of the desirable areas to be rented easily, or at least to support the same rent to price ratios as better areas. After all, renters are far more mobile than home owners and while someone might be willing to live a little outside of town or in a more inconvenient part in order to save 10’s of thousands on a home purchase, they probably won’t be willing to do the same in order to save a couple of hundred bucks on their rent.

I’m thinking that the lesson here is that location is even more important than usual when analyzing up market rentals because affluent renters can be more choosy and are less price sensitive.

You might want to try doing some research on where your property IS convenient to and tightly focus your marketing to possible tenants with those affiliations.

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Ali Boone April 6, 2014 at 9:51 pm

Luis you are absolutely right. It really is the location, as I was mentioning in comparison with my other A property. I didn’t realize that as much as I wrote the article, but between the comments here and a recent discussion with my PM, as we talked about it he told me that had he known I was looking in that area when I was looking to buy he would have absolutely advised me not to buy there as that area is very similar to 2-3 others areas of Atlanta in that it falls into that quirky niche of who knows what that makes renting there very hard. I regret not having had him in the mix back in the day, but it’s all the more reason to really do location due diligence on your properties and a huge resource for that is the local PMs. They’ll be the best ones to tell you what areas are hard to rent.

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Rachel April 5, 2014 at 1:32 pm

What a roller coaster ride, Ali!

I’ve heard stories of this happening to others, even in my own niche!! Turns out if over rehabbed, it may scare folks away.

One investor tried to sell (in my own niche) one which was completely overdone. Problem was the place looked too modern (if you can imagine that in my niche!) scaring off potential homeowners. What I saw in the home was far from standard so I could understand why he had no offers.

After a few months, he ended up putting in a family member into it and taking it off the market. Funny how folks view these homes when they look too nice!

When things have been slow in the past, I’ve had to bring in specialists. I’ve learned both the military (i.e. officers, higher-up personnel, etc) and education (i.e. grad students, international students, professors, etc) fields have an influx of steady folks looking all the time. Another growth industry is the medical field which I’ve had success with.

Looks like you’re about done with this one. Hope your deal closes, crossing my fingers for you!! :)

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Ali Boone April 6, 2014 at 9:18 pm

Thanks Rachel! :)

That is some great input (and in a sad way, hilarious). Jumping off of this house for a minute, the same thing keeps happening with an apartment adjacent to mine here in Venice. This apartment is a block from the ocean which is great and where I am, but the problem is…it’s still Venice Beach. The sidewalks are full of hippies, homeless people schizophrenics, drunks when the bars let out at night, and tourists. It’s exactly why I live here, because I love the people, but it also takes a certain kind of person to enjoy that on top of all the noise that is right here. My apartment is great and priced for someone who might enjoy all of the nonsense (although still stupidly expensive), as are the other apartments around here, but then there is this one adjacent to me…. it’s literally in the same courtyard as mine (mine doesn’t even have a kitchen) and it’s top-level, 3 bed/ 2 baths (big deal in Venice), huge ceilings, rooftop deck, amazing views, all new furnishings, gigantic, etc. It’s $5,000/month. It’s seriously beautiful. What adventurous person do you know who wants to live right in the middle of the Venice crazy but wants that nice of a house? Or at least of that style? It’s very modern, which doesn’t even fit in around here. Then, it has tandem carport parking. Who is going to pay $5,000/month for any place without an actual garage? Not many people. So it’s things like that, and a stubborn landlord who won’t lower the price, that make it so hard to rent it out. The person who would want to live there, for that price and for those amenities, almost doesn’t exist. It tends to bounce between corporate rentals and trust fund babies who destroy it. (I’m friends with the PM which is why I know all the numbers and the drama with it).

So it is interesting what can cause a property to seem hard to rent… sometimes it just is being too nice!

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Alex Craig April 5, 2014 at 2:48 pm

I think it depends on the market and the specific neighborhood. I have 2 rentals in A neighborhoods, one that rents for $2,700 a month that is worth $300,000 and the other rents for $2,100 and is worth $250,000. When they go vacant, I have always filled them quickly; and while they are vacant, they are typically the only rental in the area. My thought is, less supply of tenants, but far less choices of houses to rent for. Even if there is another home available for rent in the area, it usually is somebodies parent who died and the family decided to rent it out without any updates having been done to the house is 30 years–so competition is usually weak. I have a combo of A+, A, B and C (those C’s are probably D’s, but I am going to continue to be in denial on that). The A+ and A by far are my best houses–not best cash flow, but each year I see values increases, I never hear from my tenants as they all pay online and each time they move out, they have done improvements to the home.

Just my 2 cents……………….

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Ali Boone April 6, 2014 at 9:22 pm

Lol, I like your two cents Alex. The denial part is hilarious.

It’s interesting because I also rent out the house I had originally bought for myself, which would be considered an A property in an A location and I have the same experience you do…good, responsible tenants, always has a tenant or at least minimal vacancy time, etc. It’s in a nicer area than the property in this article but that area also has a lot more younger people, younger families, tons of industry where new employees are always transferring in and need a place to rent before they buy, etc. It’s something about the location of this property in the article where a lot of that is missing. So yeah, I totally agree with you and have the same experience with my other property that is comparable. But this one just hit this weird middle-area…

I think I should have more accurately not referred to the property as being too nice as far as why it won’t rent, the more I think about it. It really is more about being too nice for that area, I think would hit it better.

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Sara Cunningham April 6, 2014 at 9:47 am

I have my own personal home rented in Oklahoma City. It’s in a Class A neighborhood and is valued at over $300,000. It’s the worst house in my portfolio in terms of cash flow as it just breaks even. I am on my 3rd tenant in 2 1/2 years although this last one has been there for 19 months now. The first two were a nightmare. The 2nd one didn’t report a leak under the master bedroom sink which flooded the whole downstairs area and cost thousands to fix. They also left the property with some paintings we had left on the walls.So much for getting better tenants, that’s not always true. OK I know the Property Management company didn’t screen the tenants properly? I don’t agree with that statement by the way before everyone tells me that is what caused the problem. Just because people earn more money it doesn’t necessarily mean they are going to take good care of your house. I also believe that there is a price point in every market where you just cannot recoup your investment or even create cash flow. Luckily the PM s got the house rented again each time within 30 days. Of course we didn’t buy this house with the idea of using it as an investment and I still don’t consider it to be that. I plan on holding it for appreciation until we decide where we are going to settle long term.

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Ali Boone April 6, 2014 at 9:25 pm

Great comment Sara, thanks for sharing. You’re right, the higher-paying tenants aren’t always better. Sometimes having more money can make you more flighty and not know that leaks do damage. Ha.

There is definitely a balance between higher and lower quality tenants and properties and how successful they all are. It does ultimately come down to the management and screening the tenants, but it isn’t always just the manager’s fault. There are some cases where there is literally no way someone could have predicted something. It’s all part of the REI game!

Good luck with that property! I’ll be doing a little ‘keep the tenants’ dance for :)

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James April 7, 2014 at 12:32 pm

In regard to PMs, in my opinion, they are in the business to keep themselves busy and having said that, frequent repairs (which they often take a kickback on) and evictions, if they are doing this for you, are to their advantage…it’s their job security.

I had a PM want to rent to a couple that didn’t meet my requirements, but they were “nice” according to him (I give the final say on renting to tenants, by the way, not him) and when I said no, he thought that I was a monster. His business was making my business earn him money, and not that my rentals would make me money. PMs rarely have the best interests of the property owners in mind. A well run property is not their motivation! I just know that he wanted this “nice” couple to move in, so that when they stopped paying the rent, they would get a free place to live for a few months and he could bill me for proceeding to evict them. Thank goodness, I did not trust him and later fired him altogether. There are no consequences for firing a bad PM, because they have so many other rental property owners who hire them. I have found that most of these characters couldn’t hold down an ordinary job anyway, which is why they became PMs in the first place.

Yes, I don’t have as much free time with family and friends, because I am my own property manager, but my properties are very well managed now and the peace-of-mind is priceless! My cash flow is at an all time high now too!

Based on what you said about this property Ali, although you are very experienced, I think that it is the PM’s fault and if you were in Atlanta and not CA managing this property yourself, you would have had a tenant at the rent that you originally set. My 2 cents.

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Ali Boone April 8, 2014 at 1:23 pm

Thanks for the input James. I do disagree though that I would have had a tenant in there had I been there to manage instead of a PM because I don’t know the first thing about how to list a rental property or where (other than some of the obvious places) and how to properly screen tenants. I know what screening needs to be done, but I don’t know how to do those things (background checks, etc.). So most definitely I would not have a tenant in there.

I agree there is room to believe this is my PM’s fault. I’m not to that place though because I have had nothing but success with him in the past and even more than that, he has pulled off some really cool things for my properties I never would have even thought of. I’ve also been in touch with him regularly about this one and everything that is going on makes sense to me.

Your explanation of PMs is dead-on, for bad PMs. Which actually do make up the majority of PMs unfortunately. The key is to get one who does not follow the mindset and thought process you outline. They are hard to find, but they do exist.

I think in general it is really based on the owner’s personal goals as to whether to use a PM or not. I think your setup is perfect for what your priority, which is having that peace of mind from your properties and knowing they are well-managed above having more time for your friends and family. Whereas my absolutely priority is time and freedom, way over peace of mind with properties. However, with a good PM in place I do have the peace of mind but I don’t have that feeling of control over the properties that a lot of people want. For me, I actually prefer it that way while I know a lot of people don’t. So it’s all based on priorities. There is definitely no wrong setup, unless whatever setup you have going on is making you miserable. But if you go the PM route, you do have to find a good one because your life will be nothing but expensive headaches otherwise.

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James April 8, 2014 at 1:51 pm

Ali, thanks for your response and clarification on your choices.

I appreciate your being open with your experience (or lack thereof in regard to property management, i.e. finding tenants, marketing etc.) and I respect your priorities when it comes to having complete freedom. I will admit too that I do envy you. Wish that I were your age again and had rental properties to support my travels. It must be nice to travel the world with all that freedom! I was in Costa Rica last year about this time on a property hunt (and Spanish lessons) and I came across someone who also bought in C.R. and rents out his place for a HUGE amount per week. He said his next stop was to go surfing off the coast of Peru. I asked him “Why Peru”. His response, “Why, not?” There are some great deals to be had in Costa Rica, although too many Americans and Canadians have bought down there and the prices have gone up over the last years…BUT if you look hard and make some connections, deals can still be found. Venice Beach sounds like fun….!

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Ali Boone April 8, 2014 at 2:09 pm

I love that! “Why not?” Totally a mantra I live by. And yes, Costa Rica has put a good bit of money in people’s pockets over the years. It’s a lot harder to buy there now and see the same returns though because prices have sky-rocketed there. It is definitely post-boom there now. I do a ton in Nicaragua and am a huge advocate of investing there. The boom hasn’t happened there but it’s definitely coming (as much as one can predict that kind of thing). I haven’t even been to Costa Rica yet but definitely want to check it out. Every time I land in Nicaragua I end up never leaving. I am looking into Spanish immersion classes in Guatemala for later this year though. I’m ready for my next Central America adventure.

Thanks for being in touch! Yes, Venice is quite fun. A little loud sometimes, but I love it. Keep me posted on your Spanish country ventures! Those are definitely my favorite.

Robbie Hewitt July 3, 2014 at 12:44 pm

Hi Ali,
Sorry to hear of your woo’s. It’s not the asking rent nor the home, it’s the location and the income of the potential tenant base on the south-side that you’re pulling from. Generally speaking, that tenant base is good for $900-$1000 on the top end. Put that home on the north-side and it could yield $1600/mo or more depending on school district/neighborhood. I’ve got a 4/3, 1860 sq in Smyrna drawing $1450, last tenant paid $1500 and some 3/2’s also in Smyrna of 1250 sq to 1450 sq all drawing $1250 to $1350/mo. You should always be mindful of the income base of the potential tenant pool in the area you’re considering. The hedge funds are spending twice that much and more on the north-side and have no problem filling them at much higher rents with a more affluent tenant base to draw from. Like Alex, I never have a problem filling them, I usually have multiple applications and I rarely have any damage to repair. Most tenants stay two – four years and I mostly get a two year lease to start. I always offer them the option of no penalties to break the lease if they decide to buy and use me as their agent, I’ve sold three homes this way.
Robbie

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