The U.S. rental vacancy rate is now the highest it has ever been, at 11.1%.  This is not at all what we expected when the housing market crashed and mortgage companies started going out of business in record numbers.

At that time, the prediction was that landlords would actually benefit, because people who weren’t able to buy homes (because of the mortgage mess) would instead rent.  After all, everybody has to live somewhere right?

We were not counting on the housing collapse causing an overall economic crash, but that’s what happened.  Many of the people who would ordinarily be our tenants are either unemployed or underemployed.  While they can’t afford an apartment, they have many other options.  They might rent a room in a friend’s house, share an apartment or even move back in with mom and dad.

All of these terrible trends are putting a huge amount of pressure on landlords.  To a much greater degree than before, we are in direct competition with each other to find tenants.  So what are our options?

Two dangerous paths

The most obvious paths are both dangerous and destructive in the long run.  One is to simply hope for the best – using the “rent I need” mindset I mentioned in a recent post.  Let’s say you really want $1000 for the rental unit.  You could post your “For Rent” signs at that amount, have faith that the economy will eventually turn around, and deal with short-term financial losses.  Of course, the problem here is that you will have those losses.  Bear in mind that nobody really knows when employment will turn around.

Another option is to discount the rent.  You could offer the place at $900 instead of $1000 per month.  Chances are you will see an uptick in prospective tenants who want to see the place.  When you do this, you enter a price war with the competing landlords in the area.  Price wars devalue your properties in the long run, along with those of all your neighbors.  You may also end up stuck with below-market rents a few years from now when the economy improves.

I don’t really like either of these ideas and would much prefer an approach that let me keep rents at the current level, while finding many more prospective tenants.  (I would rather discount than sit on my hands and hope for the best.)

The key is flexibility in dealing with potential tenants

To expand my pool of tenants, I’ll have to be more flexible in what I allow tenants. Here are some examples:

1. I will certainly allow shorter lease terms, and I might suggest a step-up lease for a tenant who balks at the rent. What’s a step-up lease? It’s one that starts at a lower rent, which increases after a certain period of time. The step-up might even include a provision that the tenant can opt out of the lease (and leave the unit without penalty) at the end of the six-month period if he doesn’t want to pay the rent increase.
2. I will be more flexible about allowing tenants to have small pets. Of course, they will have to pay a larger damage deposit.
3. I might allow the tenants to pay the damage deposit over a period of several months.
4. I will be loose on credit standards.

That last point deserves some extra comment. I expect that before this recession is over, many more people will have poor credit scores than just a few years ago. These people need homes and many of them will have money. It makes sense to try and find a way to work with them.

However, I won’t let a tenant with a poor credit score spread out his damage deposit over several months.  I will also perform all other background checks (employment, criminal, and tenant history).

That brings up a larger point about flexibility.  If I’m going to deal with people who have a record of not paying their bills, I will have to make darn sure they pay mine, or at the very least don’t stay in the unit as a non-paying tenant.

So when I sit down with one of these prospects, we’ll have a very serious conversation about money, to wit:

• Every penny of the rent is due at the first of the month.
• The late fee goes into effect on the 4^th.
• The eviction notice goes out on the 8^th.
• If they then pack up and go by the 15^th, leaving the place broom-clean, I will return their entire security deposit. If not, we go to court.

I think there will be quite a few evictions, because we are in tough times and I’m targeting some more fringe-y people.  I will also continue to enforce my very long, detailed list of tenant rules.

Photo Credit: aforero

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Getting Tenants in Tough Times

It cost billionaire Donald T. Sterling millions.

On November 3rd of this year the Justice department received the biggest settlement on a housing discrimination lawsuit.

Donald T. Sterling has agreed to pay $2.725 million to settle allegations that he discriminated against African-Americans, Hispanics and families with children at apartment buildings he controls in Los Angeles.

The Justice Department had proof of their discrimination and proof of internal reports that the company was keeping the racial makeup of particular apartment buildings.

The thing that strikes me as ironic is that Donald T Sterling is very admired in the African American community here in Southern California. In fact Donald T. Sterling was honored by the NAACP – National Association for the Advancement of Colored People - back in May of this year.

Did the NAACP know that allegations were brought by the Justice Department in 2006? I’m sure they would have reconsidered their honoring of him.

In today’s day and age the last thing you want to do is discriminate in the selection of your new tenants. It’s very simple. Just don’t discriminate, period. In case you have forgotten here is the list of  ways you cannot discriminate against prospective tenants or clients, according to Fair Housing Laws:

1. race
2. color
3. national origin
4. religion
5. sex
6. family status
7. disability

At my company here in Victorville, CA we go a step further and do not discriminate based on sexual orientation. Discrimination is not right and it’s not a sound business practice. The only thing you should discriminate in is their credit report and their financial ability to repay the mortgage or rent along with their debt. That’s it.

You will find that by adhering to these sound business practices your business will flourish and you will help build a better America.

Be good in all you do America!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Landlords Beware: Discrimination can cost you Millions!

I was astonished to hear these words coming from a seasoned investor – somebody I respect a lot.  “I need to rent the place for at least $1,200,” he said.  “I won’t rent it until I can get at least that.”

The rental unit in question had been sitting vacant for about six months.  It wasn’t that the rental market was completely dead, although it was… sick.  (We’re talking South Florida within the last year.)

My friend’s fundamental error…

No matter what you’re marketing, “I need this price” is not an effective selling argument.  The prospective customer does not care, nor should he care, about what you “need.”  He only cares that the product is a good value for him.

That does not mean that somebody won’t eventually rent the place for the rent you need.  Just recognize that you may be waiting for a while.  And while you’re waiting, do some calculations to figure out the net effect of your waiting.  Every month your unit is vacant, you get $0.  Let’s compare two identical units, one offered at $1,200, one at $1,050.  Unit One sits for six months before being rented; Unit Two sits for three months.

Unit One does eventually catch up to and start delivering better returns than Unit Two if, and this is a big if, each of the original tenants stays for at least two years.  Unfortunately, in this rental environment, that’s pretty unlikely.  When the tenants move out, the units are back on the market, and the pattern will repeat.

…and why he made it.

Like a lot of people, my friend has been hit hard by the economy, and doesn’t really want to keep losing money.  He could even be described as a bit desperate, although he is far from broke.  He feels like he’s broke, however, because he’s lost a significant percentage of his wealth over the last 18 months. 

This mindset is actually very fairly common right now.  There are also a lot of people who are desperate because they really are going broke.  They are looking for ways to stop losing money, and to start exerting some control over their situations.

Getting $1,200 per month for his rental unit wouldn’t completely stop my friend’s financial bleeding, but it would help.  His expenses for the unit run more than $1100 per month.

The answer is…

There are almost certainly ways for my friend to make more money from his rental, though they may not involve getting the higher rent he “needs.”  Maybe he can reduce expenses.  If he gets his monthly expenses, including the loan payment, down to $1,000 per month, he can make money by charging just $1,050 per month.

For many landlords, of course, the loan payment is the big expense, especially if they bought during the boom.  (Never mind that the loan payment, except for an interest-only loan, is not a pure expense.  Part of the money goes to equity – reducing the balance of the loan.  My friend’s problem is cash flow, pure and simple.)

He can still reduce expenses with a loan modification program or refinance.

Alternatively, he can look for ways to increase the value of his rental.  Can he make the rental unit more attractive to prospective tenants?  In other words, he’s got to change his mindset and forget about getting what he “needs.”  What he really needs is to make the rental unit worth the money he would like to get.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Getting “The Rent I Need”

Owners of income property understandably cringe when they hear the words “vacancy and credit losses.” After all, anything that negatively affects net income is cause for distaste. Yet, vacancy and credit losses remain a necessary and unavoidable cost of doing business. Being able to understand and differentiate between vacancy and credit losses is vital to the success of real estate investors. I’ll explain how later in this article.

First, let’s talk about vacancies!

A vacancy occurs when a unit in an income property goes unleased (brings in zero income). A vacancy can be unwanted (“why can’t I get this unit leased!?”) or necessary (“After I finally renovate this dated apartment, I’ll get to increase rents by at least $200 a month!”). Regardless of the reason for it, vacancy is a curable problem. It is probably in your best interest to cure that vacancy sooner rather than later because un-rented units greatly reduce net operating income and have an exponential negative effect on the overall value of the property.

What are credit losses?

Credit losses are quite different from vacancy in that they result when the tenant in the property is not paying the full rental amount, or not paying rent at all. That’s not all; credit losses can be encompassing of a variety of losses. For example, an on-site manager, maintenance employee, or owner may be residing in a unit. For accounting purposes, the property can charge rent for that unit and then credit the charge, resulting in an increase in credit loss. Another example is when a rent credit is issued to a resident that has been excessively inconvenienced due to a lengthy maintenance or renovation. In the attempt to monetarily compensate a displeased tenant, the landlord incurs a credit loss.

How does this apply to real estate investing?

Perhaps the most important aspect of real estate investing is the property analysis. During one’s due diligence, he will examine a property’s vacancy and credit loss numbers. As a result, it is imperative that he understands exactly what is captured in the vacancy and credit loss account—is it vacancies, poor tenants, on-site management, combination of all of the above? An oversight in this department may result in missing real revenue or double counting a negative. If one doesn’t truly understand a property’s vacancy and credit loss account, it makes it difficult to get line of sight as to how and if the amount can be reduced. There are already so many uncontrollable variables in real estate investing—you owe it to yourself to understand and take charge of the ones you can control.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Vacancy and Credit Losses: Unlocking a Property’s Potential

Many people ask me what it’s like to own a mobile home park. They expect stories of exciting shoot-outs, drugged-out topless dancers bashing in windows with baseball bats and Jeff Foxworthy humor. Unfortunately, that’s not the case.

I, myself, thought that would be the normal agenda when I bought my first park. The first thing I did during due diligence was to get a concealed handgun license. I was certain that my role would be that of Wyatt Earp in cleaning up trailer town. But again, a day in the gun class and the shooting test were all wasted. It’s just not like that.

“Well, then how is it?” you’re asking. The answer: boring. Really boring. Here’s why.

NOTHING EVER HAPPENS

In a typical mobile home park, the phone might ring once per month for a lot for rent (normally an RV) – that’s the whole sales side of the thing. The yellow page ad comes up once a year, so that kind of handles marketing. I show up in court to evict someone every once in a while. But that’s about as much action as I get.

What about crime? I tell the tenant to call 911. What about rowdy neighbors? I tell the tenant to call 911. Loose dog? Call 911. There really isn’t much that ever goes on that the answer is not “call 911″.

What about property repairs? Glad you asked that. I can’t emphasize enough that I could care less what happens in people’s mobile homes BECAUSE I DON’T OWN THEM. I only own and rent the land. They can smoke, get drunk, play air guitar — I don’t care. As long as it doesn’t bother their neighbor. And if it does? Call 911.

Sure, the police may be busy sometimes, but I never am.

The sheer amount of crime in parks is grossly blown out of proportion. I have parks that the median age is probably 50, and there has not been a police call to the park in years.

On a day to day basis, here’s the whole month’s schedule. On the first, the rent is due. Everyone mails it in to a P.O. Box. On the seventh, I send out demand letters on those who have not paid. On the tenth, I’m filing an eviction, if any. On the fifteenth I’m sending next month’s invoices. On the thirtieth, I’m sending out the bills (of which there is less than ten: water/sewer, trash, insurance, electricity, gas, payroll, yellow pages, other.

Not too bad, huh? Compare that to your typical apartment or single-family investment, where you have to spend a huge portion of every day responding to tenant issues and repairs, like stopped up toilets.

I prefer being bored.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

A Day in the Life of a Mobile Home Park Owner

Many landlords are scared to push their rents right now. In the self-storage industry, for example, landlords are considering rent reductions more than increases, and many real estate owners feel lucky if they can leave their rents unchanged this year. Articles are abundant, talking about the inability of office and commercial landlords to maintain current rent levels if they want to attract or retain tenants.

Rents Falling Everywhere – Are Mobile Home Parks Immune?

Well, it’s a different story in mobile home park land. And it highlights some of the key reasons that mobile home parks are the best niche in real estate investing.

So how can you raise mobile home park rents when every other landlord is stopped dead in their tracks? Several reasons:

1. It costs a tenant $3,000 to move their mobile home out of your park and into another. So, basically, you can continue to raise rents because the cost for the tenant to move is far higher than the resulting rent increase.
2. The rents are low to begin with, so when you raise a $200 per month rent by 10%, it’s still just a $20 per month increase. The normal lot rent in the U.S. is about that much.
3. Mobile home park rents are still far, far below apartment rents. Thanks to the rampant rent increases by apartment owners over the last decade, a two bedroom apartment in the worst part of town in most cities is still $600+ per month. Mobile home park lot rents have a long, long way to go before they bump up against their apartment competition.
4. The laws of supply and demand. There is still a lot of demand out there for mobile homes. Why? I hate to pin it to anybody, but the feedback we get is that people crave owning their own yard and getting away from having neighbors beating on their floors, ceilings and walls in apartments, as well as escaping the over-zealous management style of most apartment complex managers.

So how much farther can mobile home lot rents go?

As you can see from these examples, really far. There are not too many parks out there that are bumping up against the ceiling of rational rent levels. That is not to say that it’s impossible. In Denver, Colorado, for example, there are four-star parks that have lot rents approaching $700 per month. That’s probably too high. But for your average park owner out there, you’d have to increase your rent for 20 straight years at 10% per year to hit that level — and by then, inflation has taken the average rent rates higher still.

So, if you want to find a class of investments that allows you to increase the rents a significant amount each year, whether it’s feast or famine in the general economy, then mobile home parks are worthy of further examination.

Until then, the rents are going to just keep going up.

Image via Wikipedia

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Why Mobile Home Park Rents Can Be Pushed Higher Than Others

Last year I had a gas bill for $1400.  That was almost one-third of my entire rent for that property for the month.  This year, however, I could get bills that are even higher.  Meteorologists are predicting the coldest and snowiest winter for the Northeast in years.

In this property, I currently pay for heat (natural gas) and water/sewer.  The water/sewer bills aren’t actually that high around here, although they are the lion’s share of utility costs for many property owners in Western states.  Regardless of location, however, utility costs are killing landlords.  They are rising much faster than inflation.  Rents, on the other hand, are rising much more slowly than inflation, if at all.

We can reduce overall utility costs by performing energy audits and installing efficiency measures such as insulation and weather-stripping.

We also might be able to install temperature-limited thermostats.  Google “landlord thermostat” and you’ll see a number of companies that make these useful devices.  Please do check with your state and community government, however, as they typically set minimum temperatures for residential apartments.  The local housing authority is a good place to start.

However, neither of these methods addresses the main problem of paying for tenant utilities.  Since the tenants are not paying, they have no reason to conserve – and so they don’t.  We are used to conserving in our own homes because our actions directly affect our costs.  If we leave taps running or take long showers, we pay more for water.  If we leave windows open or set our thermostats high in the winter, we pay more for heat.

The solution is to transfer those utility costs to the tenants.  If we can arrange for them to pay heating, water and electric costs in a way that is transparent for them, and convenient for us, we’ll benefit by having more control and predictability of costs.  The tenants will benefit by paying less overall for their combined heat and utilities.  In a multifamily unit, the only practical solutions are sub-metering and RUBS.

Implementing RUBS

The RUBS (ratio utility billing system) method involves allocating costs according to square footage of the various units, to the number of occupants in each unit, or a combination.  You can do this by yourself using RUBS software or by hiring a vendor (Google “RUBS utility billing” to find a number of vendors). 

I believe hiring a vendor makes more sense as it takes some of the workload off.  The vendor will compute the bills and send them to your tenants.  The payments are due to the vendor, who then pays you directly, typically deducting a flat fee.

Before you can implement RUBS, you must check to confirm that it is legal in your state and community.  I know RUBS is not legal in Massachusetts or Mississippi – other states and cities place restrictions on how it can be used.  Next, begin calculating the square footage per unit.  Don’t forget to calculate the square footage of all indoor common areas.  You will not be able to bill for utilities used in those areas.

It is still your responsibility to pay the utility bills, even using the RUBS system.

Implementing Sub-metering

Sub-metering is most often used for water/sewer, although it can also be used for natural gas and electricity.  It is very rare for landlords to implement submetering without a vendor, because the system is much more complex than RUBS.  It requires the installation of sub-meters and a way to check them on an ongoing basis.

In fact, sub-metering wasn’t really practical for many years, since meters had to be checked in person and were typically located inside tenants’ units.   Tenants were reluctant to let meter readers into their units.  However, sub-meters can now be checked wirelessly from outside the unit.

Billing, payment and collection are very similar to RUBS systems in that the vendor pretty much handles everything and sends you payment.  The vendor will typically charge you a flat fee.  The original utility vendor’s contract continues to be with you – it is your responsibility to make full payment of each bill.

Introducing utility cost transfer to your tenants

You will most likely introduce the change to tenants when a new lease is signed.  It will be much harder to make the change in the middle of a lease, since the tenant will probably think “there’s nothing in this for me.” 

As noted several weeks ago, sub-metering is a fairer system than RUBS, in that each tenant pays only for the gas, water/sewer or electricity he actually uses. 

Regardless, you will want to make these points to the tenant:

1. You are not making any profit off their utilities (in most states, it would be illegal for you to do so)
2. The tenant’s rent is going to be reduced by the amount you had been paying for utilities
3. The tenant can reduce his overall expenses by taking conservation measures.

Image by roberthuffstutter via Flickr

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Landlords: More Details on Transferring Utility Costs