1 in 5 Tenets Struggle to Pay Rent

16 Replies

A very interesting article on rising rents

Bloomberg Article   https://www.bloomberg.com/news/articles/2017-10-26...

Actual Survey   https://www.apartmentlist.com/rentonomics/rental-i...

Some of the points I thought were interesting

-  Among households earning up to $30,000 a year, 27.5 percent failed to pay the rent in full in at least one of the past three months. Among those earning $30,000 to $60,000, it was 14.8 percent. Even of those making more than $60,000 a year, it was 8.8 percent.

-  Eviction rate is 5-6% in the "hottest" markets.   Memphis, Phoenix, Atlanta, and Indianapolis are sited over and over as great buy and hold places with strong job growth and reasonable prices.  

-  Households with children twice as likely to face an eviction threat, regardless of marital status

- the Map of the eviction rates across the country

- Their conclusion is 20% of renters struggle to pay rent.  

I am not qualified to understand the broader implications, but I would say it is evidence that rents have an upper limit and assuming you can buy and increase rents at a 5-7% rate every year is not a valid strategy.   I see that assumption in almost every multifamily syndication deal I have reviewed.

@John Nachtigall great post and concerns. 

According to Realpage: The people who live at professionally-managed, class-B properties earn more than $50,000 a year on average and spend less than 24 percent of that on rent, reports RealPage. These residents can generally afford rent increases without breaking the bank. In the Midwest we're definitely seeing evidence of this.

Economics is a huge driver in why we invest in B class assets located in B/A areas with diverse employment and good schools.

Further, any syndicator that's claiming 5 to 7% rent growth per year over multiple years is likely smoking something.  We look for projects that average 2.5 to 3.5% rent growth through improvements.

Happy Hunting!

Where are the other 4 hiding? I'll take them.

Thanks for sharing this.  I know a lot of families and individuals are struggling out there for a multitude of reasons.  It is sad.  I think as landlords/property managers we must do our best to screen tenants for their best interest as well as our own.  We should encourage tenants not to overextend themselves, and seek tenants that can prove they have a sufficient income to cover their rent and expenses...I know, easier said than done!

Interesting survey, but, as noted in the survey these broader trends could vary widely by neighborhood even within a specific city. I don't doubt that Memphis has a high eviction rate, because we do have more than our fair share of poverty-stricken C class neighborhoods. There are other areas where eviction risk is likely much less than the national average. Overall trends are nice to be aware of, but it's the details that make or break a deal.

Originally posted by @Daniel Weaver :

Interesting survey, but, as noted in the survey these broader trends could vary widely by neighborhood even within a specific city. I don't doubt that Memphis has a high eviction rate, because we do have more than our fair share of poverty-stricken C class neighborhoods. There are other areas where eviction risk is likely much less than the national average. Overall trends are nice to be aware of, but it's the details that make or break a deal.

 All real estate is local, I get that.   But I was surprised by the breadth of the distress.   9% of people making more than 60,000 a year missed at least 1 of 3 rent payments in the last 3 months.  To me that is a shocking statistic.   The median average household income in the US is 59,039 a year.   So that means that for the population of people who ALL make above the average, almost 10% missed a rent payment in the last 3 months.   

I think we are really reaching a point where rents have caught up with income.   As a result buying instead of renting will once again become the cheaper alternative.   And and also think that there are a lot of current real estate strategies that rely on the assumption that rents will not go down.   Is that a valid assumption at this point?

Originally posted by @John Nachtigall :
Originally posted by @Daniel Weaver:

Interesting survey, but, as noted in the survey these broader trends could vary widely by neighborhood even within a specific city. I don't doubt that Memphis has a high eviction rate, because we do have more than our fair share of poverty-stricken C class neighborhoods. There are other areas where eviction risk is likely much less than the national average. Overall trends are nice to be aware of, but it's the details that make or break a deal.

 All real estate is local, I get that.   But I was surprised by the breadth of the distress.   9% of people making more than 60,000 a year missed at least 1 of 3 rent payments in the last 3 months.  To me that is a shocking statistic.   The median average household income in the US is 59,039 a year.   So that means that for the population of people who ALL make above the average, almost 10% missed a rent payment in the last 3 months.   

I think we are really reaching a point where rents have caught up with income.   As a result buying instead of renting will once again become the cheaper alternative.   And and also think that there are a lot of current real estate strategies that rely on the assumption that rents will not go down.   Is that a valid assumption at this point?

 A household who makes $60,000 a year may struggle to pay rent in San Francisco or NYC, but be fine and maybe even a homeowner in Kansas City or Indianapolis. That is why it is hard to make assumptions with an article like this one.

Last month I had all 4 renters in my Birmingham turnkeys pay late.

Originally posted by @Anthony Gayden :
Originally posted by @John Nachtigall:
Originally posted by @Daniel Weaver:

Interesting survey, but, as noted in the survey these broader trends could vary widely by neighborhood even within a specific city. I don't doubt that Memphis has a high eviction rate, because we do have more than our fair share of poverty-stricken C class neighborhoods. There are other areas where eviction risk is likely much less than the national average. Overall trends are nice to be aware of, but it's the details that make or break a deal.

 All real estate is local, I get that.   But I was surprised by the breadth of the distress.   9% of people making more than 60,000 a year missed at least 1 of 3 rent payments in the last 3 months.  To me that is a shocking statistic.   The median average household income in the US is 59,039 a year.   So that means that for the population of people who ALL make above the average, almost 10% missed a rent payment in the last 3 months.   

I think we are really reaching a point where rents have caught up with income.   As a result buying instead of renting will once again become the cheaper alternative.   And and also think that there are a lot of current real estate strategies that rely on the assumption that rents will not go down.   Is that a valid assumption at this point?

 A household who makes $60,000 a year may struggle to pay rent in San Francisco or NYC, but be fine and maybe even a homeowner in Kansas City or Indianapolis. That is why it is hard to make assumptions with an article like this one.

I don't think the data bears that out.   Looking at the eviction map, it is the south and the midwest that have the biggest issue.  San Francisco was actually one of the lowest eviction rate which is not surprising considering it is probably the most tenet friendly city in the nation.  

Regardless, they took geography into account

Originally posted by @John Nachtigall :
Originally posted by @Anthony Gayden:
Originally posted by @John Nachtigall:
Originally posted by @Daniel Weaver:

Interesting survey, but, as noted in the survey these broader trends could vary widely by neighborhood even within a specific city. I don't doubt that Memphis has a high eviction rate, because we do have more than our fair share of poverty-stricken C class neighborhoods. There are other areas where eviction risk is likely much less than the national average. Overall trends are nice to be aware of, but it's the details that make or break a deal.

 All real estate is local, I get that.   But I was surprised by the breadth of the distress.   9% of people making more than 60,000 a year missed at least 1 of 3 rent payments in the last 3 months.  To me that is a shocking statistic.   The median average household income in the US is 59,039 a year.   So that means that for the population of people who ALL make above the average, almost 10% missed a rent payment in the last 3 months.   

I think we are really reaching a point where rents have caught up with income.   As a result buying instead of renting will once again become the cheaper alternative.   And and also think that there are a lot of current real estate strategies that rely on the assumption that rents will not go down.   Is that a valid assumption at this point?

 A household who makes $60,000 a year may struggle to pay rent in San Francisco or NYC, but be fine and maybe even a homeowner in Kansas City or Indianapolis. That is why it is hard to make assumptions with an article like this one.

I don't think the data bears that out.   Looking at the eviction map, it is the south and the midwest that have the biggest issue.  San Francisco was actually one of the lowest eviction rate which is not surprising considering it is probably the most tenet friendly city in the nation.  

Regardless, they took geography into account

 Do you think that affordability just might not be the factor here? The south and the Midwest have landlord friendly laws that make eviction easier. It is darn near impossible for someone to be evicted in San Francisco. In many cases people get five figure payouts to leave.

Of course evictions are higher!!!

SF and other Bay Area cities have crazy rent control and some old time tenants....that's those big cash for keys payments. But let's also look at the price of that property even more so when it's at market rate vs 10,20,30 yr old rates...

$30k per year puts a 3x rent income at $833 per month. That’s a c class tenant in most areas.
That comes out to about $14 per hour.
You’re not going to make it on a 1 salary income at that level. I’d hope that someone with a $30k income is single and only needs a 1 bedroom place and rent would be lower than the $830 per month.

@Lane Kawaoka - Thanks for sharing the brutal fact. Talking to fellow investors 20% seems to be a number. Even a local agent with 42 properties has the exact same number, he is employing two full time to look after collection and eviction.

What is surprising to me is tenant paying $1400 rent pays $140 late penalty, reasons are too hard to believe.

@John Nachtigall - Thanks for sharing the link. Unfortunately 90% of the investors in these markets are not on BP and 90% of the ones on BP still believe their proforma numbers.

Thanks

Vivek

Our company sees about 10% late pays monthly, actually just a little less than that. We probably have the lowest eviction rate in the city. We recently filed our 10th eviction of the year and have almost 400 properties under management. Here's a link to the court database and search query to validate this statement.

Indiana Courts database search - 10 evictions

Two of these evictions were acquiring problematic tenants from another property manager.

Here are some links to queries regarding some of our biggest competitors

351 evictions this year - Yes, I know that they are 4-5 times our size

About 92 evictions this year - The query pulls about 10 mortgage foreclosures too and I don't know of a way to filter them out. They are about 3 times our size.

Tenant screening is vital. Most of our evictions are divorce, death in family, lay-offs, etc. Here are a few tips:

  • Provide desirable properties. Even in "C-D Class" areas, there are still decent tenants. The best prospective tenants have options. You have to give them a reason to choose your homes.
  • Good marketing habits and leasing team. Good pictures and marketing description is vital to being able to generate interest in your property. This gives you a large pool of prospective tenants to choose from.
  • Thorough tenant screening. Identify risk factors. Late payments on credit history, eviction history, rental history, employment history, criminal history, income and income history, debt-to-income ratio, etc.
  • Communication. We have great relationships with our tenants. Even if they are struggling, they communicate with us and we will try to work with them when possible. Even if they can't afford to stay at the home, we can frequently regain possession quickly and in great condition, allowing us to turn the unit quickly and keep the home performing with as little expense as possible. We don't allow tenants to get behind several months in rent but we are always willing to find ways to work with tenants as long as they are making progress and not missing any payment arrangements.

I think efficient and effective property management goes a long way. A lot of this is just experience, training, and having systems and policies in place in advance. Property management is not too hard when everything's going right, but if you wait long enough... there's always a hiccup down the road. Being prepared and proactive is always the best course of action. Evictions can be very costly for investors. Ensuring that you have the right team in place can be vital.

I let my tenants pay late as long as they pay the late payment fee of 10%, and they don't carry over the balance to next month. A lot of them appreciate the landlord like that, than some a$$h01e who will evict them at the first sight of late payment. Vacancy is one of the biggest expense landlord has, not to mention the money you almost always have to put in the property when someone leaves to get the property ready for the next tenant. 

C'mon BP - What's wrong with a cuss word or two... Lets not try to be so sanitized.LMAO...

For sure evicting tenets in San Francisco is harder, it might be the hardest of any city in the country.   Basically you cant do it for anything other than failure to pay rent or taking the unit off the market permanently.   But even in SF they evict people for non-payment of rent (eventually).  

I would consider @Ross Denman another data point towards the thesis that rents are at the top of the range.    The lowest eviction rate in the city is 10%.  WOW!!   That is just crazy to me.   And Indy is supposed to be one of the hottest buy and hold/turnkey markets in the country.   

For me personally, it is just another reason that my choice to go with syndications over direct ownership was the right choice for me.   Data like this shows even experienced landlords with great screening criteria are going to have to deal with the issue more than occasionally.  I am happy to pay someone else to do it.

@John Nachtigall our eviction rate is about 2.5%-3% annually. We have about 9-10% late rental payments each month. Most of these are paid within a few of days, but it seems to be the same homes/tenants that are late each month. Most of our late rental payments are actually homes at or slightly lower than the median rentals as well (another reason to consider better homes.) We have a lot more late rental payments from $650-$800/mo rentals than we do our $2000-$3000/mo rentals. The problem is that it is nearly impossible to get adequate ROI on rentals higher than $1,200/mo. All but one of our "A-Class" rentals are homeowners who were unable to sell their homes, not investors. I usually recommend my clients to target homes in a rent range of $900-$1,200/mo as I find that to be somewhat of a sweet spot balancing ROI vs liabilities and headaches.

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