Charlotte Property Management Weekly: Lessons Learned from Holding Expensive Rental Homes Way Too Long: Why 1 -5 Years is Ideal
I wanted to share a dilemma I’ve had with an expensive rental home I’ve kept. But before I start, a good place to begin is my overall philosophy on “expensive versus cheaper rental homes”:
Expensive rental homes are ideal and appreciate greatly (cha-ching!!) in rising real estate markets, yet are more expensive to maintain, cash flow every month, and pay the mortgage during vacancies. Cheaper rentals are the opposite; they don’t tend to go up in value much, but are much cheaper to fix up, maintain, and positive cash flow every month.
And without further ado, here’s my personal tale of dealing with my big, expensive rental home:
It is a really nice home! When the economy and real estate market were soaring, my paper net worth (cue laughter) was awesome! Comparable sales in the subdivision kept going up which made me look like a genius with my home investment (I bought a pre-foreclosure at a great discount).
As a property manager, I put this home up for rent-to-sell and rental to a number of tenants over the years. The cash flow more than covered the mortgage and I was pretty happy with myself. The tenants kept the home in relatively good condition so maintenance and upkeep was minimal. I was living the real estate high life as prices in the subdivision continued to go up, and up, and up!
However, there was always normal “wear and tear” on the property. And as the years rolled by and tenants moved-in and out, the minor damages started to add up. Then it came to a point when I realized that the home needed to be updated, as tenants and buyers started turning their noses at it when it went on the market. So I mentally knew it was probably time to pay the piper; unfortunately, the costs started disturbingly revealing themselves (new paint, new carpet, new appliances, etc.). For larger homes like this one, it became clear that real money ($10-$20K) would need to be expended. What wasn’t clear was where this money was supposed to come from.
In a down economy, the expensive home becomes a weight wrapped around your neck; it’s much like the old Mighty Mouse cartoons where every episode had someone (something?) locked in a weighted treasure, sinking to the bottom of the ocean (of financial ruin). It’s tough! The clear answer is to sell the home, but stomaching the “investment” of all of this money to fix it up, waiting months (minimum) before it is sold at a depressed price, while paying the (expensive) mortgage every month is certainly not ideal. It’s also a question of remaining solvent while this selling process drags on.
That’s life, right? Suck it up! But maybe there are some lessons to be learned from this experience when buying an expensive investment home:
- Always buy at a significant discount (preferably in a down economy, like now)
- Target to sell it in 1-5 years, or before a significant fix-up investment is required
- Selling it should be the ultimate, short-term goal. First, try to flip it if it is feasible. If it’s not, try the rent-to-sell method of selling (placing a rent-to-own tenant into the property who is targeted to buy it in 1-3 years); sell it to them, or put it on the market when they move out.
- Don’t be greedy. Making money instantly is better than losing money perpetually.
Buy low, sell high, and don’t get caught fixing up expensive homes! Keeping cheaper rental homes for long-term investments is less risky, less stressful, and easier on the wallet in the long-term; use expensive rentals for a short-term (1-5 years) bounce in income.
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Weekly: Delayed Rental Walk-Throughs Cost Everyone Money
Unfortunately, I’m yawning as I’m writing the title of this article. I’m not sure how to jazz it up a little (maybe “Lindsey Lohan falls for property manager during rental walk-through! Then she heads back to rehab.” I’m intrigued at least.
Learn MoreCharlotte Property Management Weekly: The Top 3 Reasons Why Good Property Managers Matter More Now (Reason #3)
3. The skills needed for selling a home have (and will continue) to trend to more of a solution-based, “cash now, sell later” approach; outright sales are becoming scarcer as there are less qualified buyers available in the market
Learn MoreBest 2 Rental Strategies in this Economy with Help from Ashley Judd
Worried Charlotte landlords are asking, “How do we keep the rental cash flow coming in? My tenant’s lease expires in a few months and I don’t have the cash to spare for the mortgage payments if they leave. What to do?”
The answer lies in the timeless story of true love. Much like a tearful Val Kilmer in the movie, “Heat”, when his wife is about to leave him says, “I can’t let her go. My sun rises & sets with her, man…” Or Romeo and Juliet, who would not leave each other despite their disapproving families… This needs to be the relationship between you and your current tenant.
“What??” you are probably saying. “Val Kilmer was shedding tears because he was about to lose Ashley Judd, man; what guy wouldn’t be crying? And, didn’t Romeo and Juliet both die because they were too stubborn to go out and meet other singles?”
That non-withstanding, your Top 2 strategies to weather this rental storm:
1. Like Val Kilmer not allowing Ashley Judd to leave him, you must keep your tenant if they are paying somewhat regularly. If you let them go, you are looking at many costs (let’s see if I can list them alphabetically- fix-up, miscellaneous, mortgage, property management tenant procurement fees, utilities, vandalism). And from a revenue perspective, the rent you can now command will be 10-20% less.
However, if you keep your tenant, you can avoid these costs and keep the rental rate constant. The truth is, your flexibility at this point is limited- you need to get through 2009 and survive until the end of 2010; the improved economy should allow you to raise rents or sell your rental at that point. To be proactive, we contact our tenants 75+ days before the end of their lease and try to incent them to stay. This approach has put our lease renewal rate at 90%+ in 2009 thus far. As much as you do not want your tenants to move, they don’t really want to move either (it’s expensive!). Get them to stay! If they are planning on leaving, find out why and try to make it right.
2. The economy is against you; don’t let seasonality get you as well! If your tenant is going to leave no matter what you do, don’t leave yourself in a ditch. When writing leases, don’t have them end 7/31 (kids going back to school), 8/31 (kids), 11/30 (holidays); I know this is sometimes easier said than done. However, there is no rule that says leases have to be 1-year long; when not offer an 11-month lease or a 14-month lease to steer clear of bad rental months when few people move?
It’s time to play defensively and hunker down! Don’t let Ashley Judd walk out on you!
Brett Furniss is the President & Owner of BDF Realty, “Charlotte’s Most Innovative Property Management & Investment Company” (www.BDFRealty.com and www.RentToSell.com). You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://twitter.com/bdfrealty. He is the author of the FREE E-Manual entitled “How to Rent-To-Sell Your Own Home” (http://www.renttosell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.
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