Do Rentals Hurt Neighborhood Property Values?

Question

I'm just getting started in investing. I have a rental already, but I'm shopping for my first property that I'm buying expressly as an investment. My current rental is my last residence.

My realtor showed me 5 houses today. One was right down the street from a friend of mine in a very nice neighborhood. I texted my friend to ask about HOA and/or covenants (there are none, thankfully) and he said, "don't be [buying rentals] in my neighborhood if that's gonna drive down my property value please."

We discussed it a bit and he's under the impression that renters don't care about the property, trash the place, and hurt property values. He said that he and his wife chose the neighborhood partly because there were not many rentals. I have no idea how he knew that, but he said so. Apparently, a few other properties on the block got rented out and lots of owners weren't happy about it.

Much of what he said sounds like hearsay, not based in evidence, but is there any truth to it? I don't expect it will factor in to my decision to buy or not buy that property, but I am curious.

Tim Guy · Answer

Unfortunately, a local physician bought up some houses in my neighborhood!  Every single person who has moved into one of those homes has trashed it.   The homes are in horrible condition.  The renters do not care.   They dump trash all over the street.   Don't tell me that none of these things are true! THEY ARE.  In my neighborhood.  They have driven down our property values and none of us appreciate it!   We ARE going to do something about this SLUMLORD.  He doesn't care!   He doesn't care about our property values. He lives elsewhere!   We will get something about this and hopefully THIS WILL BE THE END OF RENTAL HOMES IN OUR NEIGHBORHOOD!!!

Lynn McGeein · Answer

Colin, we buy detached single family in neighborhoods that are heavily owner occupied, and, No, the owners don't like it --  I've even had a nasty call from an HOA president a week after closing on one telling me, basically, to sell and get out of the neighborhood.  I didn't.  Our solution is that even though we have property management and live out of state, we spend 3-5 days every year or so (last time was 18 months in between), inspecting them and make them beautiful again.  We pressure wash, paint any outside trim (porch railings, etc., as mostly all vinyl or brick), mulch, etc., whatever brings it back to looking like one of the cutest on the street.  Tenants definitely let things go, and I'm usually surprised at how run down it looks when we first see it, but it always looks like one of the best in the neighborhood when we leave again.   We've also gotten to know a few of the longer-term neighbors during our work sessions, and once I know they aren't nuts, I leave them my number.  None of them have ever called, but I think they feel better knowing they can reach me if they have a complaint.

Mirinda Lowe · Answer

Renters certainly can pull down the property values - either through not maintaining the property (but that's ultimately the owner's fault for allowing it, so let's not blame the renters), but also like others mention, most homeowners prefer to live next to other owners.  Stability, maintenance, etc.

But you are ultimately interested in your property.  So, if you are happy with the neighborhood and think it's a good investment, then make sure you put the proper requirements in your lease, your systems, and your inspections to make sure your property doesn't fall into disrepair.

I make sure my lease specifies that the tenants are responsible to sufficiently water all landscaping.  I pay for the gardener, and he reports to me.  So if he sees an issue, he calls me or resolves it for me.  Then I do a walk through inspection (which is also in the lease) about 3x a year.  That way I stay on top of any issues.  Find what works for you in this regard, but have good screening up front and good systems to maintain.

Good luck!

Lisa Wright · Answer

I think it could possibly drive the homes value down if there are too many rentals near it. This is also very dependent on whether the tenants of that rental are respectable and keep it clean, as well as, the landlord making sure he is staying up on this property and keeping it clean. There are a lot of factors that could go into this, so saying for sure that it will or won't hurt the value is difficult but those are some things that might effect it.

Bill Gulley · Answer

Too many rentals in a concentrated area of single family homes becomes an issue of "external obsolescence" it is less desirable for owners. The fact that property values are effected may well be from perception, but many people don't want to approach a pit bull due to perception. If there is a negative perception that reduces the pool of buyers, reducing the number of potential buyers reduces value. It can get to a point that financing becomes more difficult as well. Lenders may not see that property as staying as an owner occupied, they may be more critical, making a 95% loan or even 90% becomes more critical from a default-collateral standpoint. Much the same issue in a condo development that is 50% leased.

Having less than a third as rentals is usually fine, going past that you'll be getting into issues. It boils down too as to what is common for the area. :)

David Krulac · Answer

@Colin Reid

Sometimes tenants do not care for the property the same as owners.  Or if every year there is a new move in the neighbors can tell that the property is a rental.

One of the things we look for when looking to purchase is a neighborhood with mostly owner occupants.  Combine that with some long term tenants, and things like planting flowers and dressing up the property, many neighbors don't know if they are rentals.  If you can drive down a street and identify the rentals, that may not be a good thing.

On one cul-de-sac street where we bought there were a total of 22 SFH, 20 of which were owner occupied, guess who owned the other two.

On another street of 20 houses, only 4 were rentals, guess who owned them.

We like to buy rentals where there are few rentals and mostly owner occupants.  We are often buying properties that were or are owner occupancy and we convert to rentals.  There would typically not be any apts in the neighborhood, and it would be on a quiet residential side street, in and area with low crime and good schools.  For one reason or another we have later sold SFH that had been rentals.  Sometimes we sell to the existing tenant, working on two such deals right now.  But of all the SFHs that we rented out and later sold all but one were sold to owner occupants.  These owner occupants bought the properties based on sales comps not income generated.  See @Mark F. recent blog post on SFH rentals.

Kerry Baird · Answer

If the numbers work, make an offer.  Worry about the property values after you have the house under contract.  Take some action if the house works for your parameters...and forget the rest.  Obviously, if property values go down in the neighborhood (due to your tenant alone?) then you lose money.  That is contradictory.  The rest is just "noise."  And if it concerns you once you own it, problem-solve it then.

Andrew Fingado · Answer

@Colin Reid Call a few property management companies and ask them what they use in the screening process.  Get some other people's opinions on what they think of the management company also.  Shop around and have questions ready for them.

Colin Reid · Answer

DIY is not an option, beyond hiring a lawn service, perhaps. This will be the first investment in my local area, but I'm military, so that can change at a moment's notice. For the next few years, at least, all my investments will be handled by a property manager. I simply don't have the time or the flexibility in my schedule.

Is there a way I can make sure my manager screens tenants up to a certain standard?

Travis Weston · Answer

As with everything else in this business, it really comes down to tenant screening. If you get the right tenant into a place, they're going to take care of it. Location plays a large role there, if the rest of the area is top class, and you screen out all but the best tenants, you're not going to see a drop.

Another way to fight this is to take on the maintenance of the outside of the rental yourself, but this means more expenses in time and money for you. But if it's a major concern, I would build it into the lease, and do regular, weekly, yard work.