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.)
Download Your FREE copy of ‘How to Rent Your House!
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
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:
- 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.
- I will be more flexible about allowing tenants to have small pets. Of course, they will have to pay a larger damage deposit.
- I might allow the tenants to pay the damage deposit over a period of several months.
- 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 4th.
- The eviction notice goes out on the 8th.
- If they then pack up and go by the 15th, 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