This is my column for this week from the Arizona Republic (permanent link).
Investors are coming back to the Phoenix rental home market — and with the right business plan they’ll make money
Rental home investors are coming back into the Phoenix real estate market, and this is a good thing.
The last time we had a substantial run on rental housing, results were not so sweet. Investors came to Phoenix with the idea that price appreciation would make up for any monthly losses they might take on their rental homes. It’s plausible they were right — in the long run. In the short run, negative cash flow and declining values, coupled with adjustable-rate or negative-amortization loans, drove many of these homes into foreclosure.
And this accounts for much of the inventory the new wave of investors is drawing upon. The difference is, the prices for these homes have declined enough that they can be — at least potentially — cash-flow positive.
Why only potentially cash-flow positive?
Because too many investors adopt the worst of the cartoonish characterizations of capitalism when they resolve to become landlords. They pick the cheapest properties in the worst locations and rent to the least-qualified tenants, living through one eviction and repair nightmare after another.
Here’s a strategy for making more money from a rental home — much more peacefully.
There are dozens of costs associated with rental housing, and your business plan should take account of all of them. But your biggest potential losses are always going to be vacancy, tenant acquisition, repairs and resale value.
It makes much more sense to me to buy a property that can command premium rents and will sell at a premium price when you’re ready to move on. Location matters, as do the livability and lifestyle factors of the specific home. You want to pick a home that will stay rented.
I think it’s a good idea to charge something less than the market rent. This will give you a broader array of tenants to choose from, which will enable you to select tenants with good credit who will treat your property like their own.
With the right house and the right tenants, you should have very little vacancy, no evictions and no costly repairs between tenants.
Technorati Tags: arizona, arizona real estate, investment, phoenix, phoenix real estate, real estate, real estate marketing
Chris says:
Good post, I agree with it all but charging slightly less than market. I want the rents to be right at fair market.
Around here you can become a slum lord and get cheap 2-3 family’s in crap areas, they do cash flow. But you need a Glock to collect rent and as Trump said, make sure to stand on the side of the door and knock so you don’t get shot. The tenants will trash the place and are usualy out of work, so rent must be chased.
I prefer the rentals that attract young college educated professionals that work in NY. Rent’s get paid on time, no Glock needed, and generaly they don’t trash the place.
June 21, 2008 — 10:17 am
Deryk Harper says:
Good post Greg.
We own several rental properties in Alpharetta Georgia area and manage others for a small group of clients. We screen tenants thoroughly, disclose all terms and fees up front and treat everyone with the respect we would like in return. Just by getting the right tenant in place we are able to keep most of our other costs down. Vacancy rates, turnover and late payments are very low. Properties are maintained properly by tenants and everyone is happy. And so far, knock on wood, we have never had to evict a tenant. Many of our tenants become good friends and either refer business to us or end up buying an home in the future.
We look for good blue collar neighborhoods with noticable pride of ownership and decent homes when investing in our rentals. If you have a good product to offer, in a good location, you can easliy attract the right kind of tenant.
June 21, 2008 — 10:30 am
Colin Stafford says:
We have much of the same experience here in Florida and I couldn’t agree more with your comments about focusing on properties that command a premium rent. It’s even more applicable to the specialist short-term rental market here.
Without a doubt, in short-term rental, those owners who adopt a hands-on businesslike approach are the ones who are the happiest with their investment. Sometimes it’s very hard to convince potential clients that a professional approach by them is vital.
June 21, 2008 — 11:42 am
Joseph Bridges says:
If more soon to be landlords adopted your suggestion of “Buy Right & Charge Less than Market” they would be well served in the long run and should be writing you back years from now.
I always tell my clients if you charge less then the market rent you will always have your pick of tenants and that never is a bad thing.
June 21, 2008 — 4:14 pm
Robert Kerr says:
Rental home investors are coming back into the Phoenix real estate market
Based on what, Greg? Sales?
June 21, 2008 — 7:06 pm
Robert Kerr says:
I always tell my clients if you charge less then the market rent you will always have your pick of tenants and that never is a bad thing.
As a former landlord, I can tell you first-hand just how badly that can backfire.
I don’t know about in this market and economy, but when I was a landlord, lower rents often drew a lower class of applicant and kept the better ones away.
June 21, 2008 — 7:10 pm
Gordon Baker says:
Greg,
I agree that the speculative aspect drove the prices so high that many investors were burned and got caught up in the frenzy. The bottom to this market will be determined in part when price come down to a point where rental properties can yield a positive cash flow.
June 21, 2008 — 9:39 pm
Rick Belben says:
Prices in Orlando have come down to the point where an investor can purchase a good single family home and be cash flow positive from the start.
I agree with you totally that it is better to buy in a good area that can command the rents now and will be in demand in the future when it comes time to sell.
The key is having a long term outlook. It was speculators that drove the market in 2005 but true investors have an excellent opportunity right now.
June 22, 2008 — 9:27 am