Threats to property owner

5 Replies

Hi BP,

Question about owning buy and hold single family homes. Is there such a thing as having too much rental property as passive sources of income? The reason I ask this is I am wondering how macroeconomic conditions such as the 08 crisis affected vacancy rates and those holding and renting out single family homes.

If for some reason, I cannot find a tenant for a long period of time 6+ months, what are my exit options? I can pay for the mortgage out of pocket, but what other exit opportunities do I have? 

Thanks!

I don't think there is such a thing as too much passive income. 

However, there is such a thing as growing too fast.  Or worse still mismanaging your financials.  

Run your personal numbers.  That is how you know what you can do. 

My partner had me run a theoretical vacancy rate of 25%, on two small multi-families we are looking to buy, just to see what the numbers looked like.    Good news is, we were still in profit.  Narrowly.  

Yes you can and depending on your financing be expected to pay the mortgage out of pocket.  Other exit strategy would be to sell.

Too much passive income?  Is this rhetorical or a trick question?  You "can" get in over your head but what if you're counting on $200 per door and the market shifts downward and you average $100 a door?  That would be the time to buy even more.  A six month vacancy means you are charging too much.  It's OK to break even on some properties or even lose money on a few if your portfolio is moving in the right direction generally.  The market ebbs and flows.  Buy carefully but jump in and ride it out if you are investing for the long term as a buy and hold investor.  You can prune the dead wood every year but the transactional costs in real estate are to be avoided if possible.  Hope my opinion helps and good luck!

Too much property is possible . . .

As noted by others, if your rental market goes south or your properties become un-rentable for some reason, several vacancies could get you in trouble pretty fast. Adequate reserves are very important and a thorough study of your market is essential.  That said, most successful investors I know jumped in with both feet and made adjustments as needed.

Multiple options are always the best plan. If you cant seem to rent a property can you fix the problems fast? (i.e. improve curb appeal, add a bathroom, add a bedroom, renovate a kitchen, increase your marketing efforts, drop the rent).

Other options also include lease-options, seller-financing a sale, selling with an agent.

Have fun and make your own luck!

Microeconomic considerations are certainly valid in RE, understand the concept of the marginal propensity of consumption and you can apply that to rent levels and valuations.

While you can have various exit strategies, highly leverage properties are the ones you get caught in as the demand may decrease thereby decreasing value, it doesn't usually happen but as we have seen it certainly can.

Understand external obsolescence factors as well, changes in social perceptions of an area can effect your holdings over time.

Be careful with the assessment of market value and assessed tax values as taxes lag on a depreciating property, if it goes down at all, taxes increasing or remaining the same while rent levels drop can cost you.  You may see this in more mature neighborhoods where they are beginning to lose favor in the market, it becomes that concept of marginal consumption again.

With rentals a cash reserve is necessary, the more properties held which are in different locations (eggs in one basket) actually require less reserves as a total of a portfolio as risks of a catastrophic loss (physical or economic) are reduced. For one property you may want 6 months expenses on hand, if you have 30 properties your reserves may be equal to 6 months reserves on 8 of the highest expensed properties. You also need to consider your ability to borrow to cover costs in an emergency as well as the marketing time required to dispose of holdings in a declining market. Don't forget you recapture depreciation when you dispose of a property and doing so changes your yield earned over your holding period. :)      

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