E-Renter News

The economy has people all across America rethinking much of what passed as common opinion just a few years ago:

• A home is the best investment you can make
• Being a manager in a stable financial institution means a secure career
• College is worth the tuition investment
• Working hard and playing by the rules pays off

These ideas seem almost laughable now. After what the U.S. economy's been through, you'd be hard-pressed to find anyone who'd agree.

For income property investors, the writing has been on the wall for some time. Landlords know that  investing wisely, not taking on a lot of debt and being in control of your own financial future is a better way to go.

And that thinking is becoming more popular. Owning a home is not the path to financial freedom it was thought to be. And renting is in.

Economic advisors and pundits agree that “people shouldn’t look at a home as a way to make money because it won’t.” That quote is from Dean Baker, co-director of the Center for Economic and Policy research. He estimates it will take 20 years for Americans to gain back $6 trillion losses in housing wealth.

The generations that came before saw buying a house as a way to have stability—not as a way to get rich quickly. Housing values rose slowly and steadily over longer periods of time. Experts maintain that prices will again rise—but not like they did from the late 1970s to the late 1990s. “The experience … was an aberration,” says Barry Ritholtz, of Fusion IQ, an equity research firm.

The new reality is that home values can go down. People can become trapped in a house they cannot sell. And the rate of homeownership is declining. That means renting will be on the increase for some time to come.

And that’s good news for the landlords who’ve been thoughtfully investing in rental housing all these years!

A recent article in the Wall Street Journal describes the best and worst markets for conservative real estate investors, based on data from Local Market Monitor in Cary, NC.

The report, focusing on potential price-appreciation, rather than rental income, looked at just single-family homes. It analyzed data similar to that used in the firm’s housing-market forecasts—“equilibrium” home prices, which predict what a market’s home values should be in relation to incomes, job growth and population.

The new report says if you’re a conservative investor, the best markets are where there is a low probability that home prices will fall further. The top five are:

• Durham, NC
• Huntsville, AL
• Indianapolis, IN
• Knoxville, TN
• Lexington, KY

In these markets, according to the report, income is growing moderately and employment is stable because a large percentage of jobs are in healthcare, education, rather than construction and financial services.

Experts caution that education and healthcare jobs could see cuts later in the economic cycle, so these areas could yet experience some downturns.

The so-called speculative markets are those where investment housing values could continue to fall but then could appreciate more than 3% – 5%, according to the study. These are better for investors willing to take more risks, and include:

• Hagerstown, MD
• Jacksonville, FL
• Port St. Lucie, FL
• Modesto, CA
• Myrtle Beach, SC

“Dangerous” places for real-estate investors, where home prices are still falling and local economies are unstable, include:

• Reno, NV
• Las Vegas, NV
• Naples, FL
• Orlando, FL

Rounding out the “10 Worst” markets for single-family real-estate investment properties are Phoenix, AZ, Prescott, AZ, and four Florida cities: North Port, Fort Myers, Daytona and Lakeland.

The rest of the “10 Best” markets are Jackson, MI; Oklahoma City, OK; Little Rock, AR; Greenville, SC and Winston-Salem, NC.

As with any investment, real-estate investors must do their homework—especially when buying in areas where they do not live, know the local market or have good real estate contacts. Caution is always key!

Just when you may have been thinking that U.S. sales of existing homes could not get any worse—they have. Even cynical economic forecasters were surprised by the seasonally-adjusted rate of 3.83 million reported today by the National Association of Realtors. That’s drop of 27.2% from June to July, more than twice the expected drop—and a 25.5% drop from July 2009.

The news comes during a week of stagnant economic reports, where unemployment refuses to budge and home buyers stayed home, despite the lowest mortgage rates ever and more reasonable housing prices than we’ve seen in some time.

Said Scott Brown, chief economist at Raymond James & Associates, as quoted in The Washington Post: “this is a pretty dicey time” for the U.S. economy. Another economist, Paul Dales, said the numbers “…suggest that without the housing tax credit, housing market activity is very, very weak (and) would eventually lead to a double dip in house prices.”

The federal tax credit helped existing home sales increase in the first part of the year, and when it was over, experts predicted that sales would decline, and then recover. Apparently the recovery has yet to begin—and it seems no region of the country is immune to the sagging sales numbers:

• Midwest -35%
• South -23%
• Northeast -30%
• West -25%

Looking for good news? Here’s a piece: home prices held up in July, up .7% from 2009. That trend, experts say, is not expected to continue. Foreclosures will continue to drag prices down and add to the oversupply of homes.

Landlords and property managers, hold tight: it’s likely your good tenants are not going to be moving into their own homes any time soon, and as foreclosures continue, more renters should be hitting the rental market.

Government reports this week reveal that new home construction fell in June to an 8-month low, but there are indications of increased activity coming up. The Commerce Department reported that housing starts fell 5% from May, to a seasonally-adjusted annual rate of 549,000. This is the lowest figure since October, 2009.

Economists had expected a smaller fall to 575,000. The 549,000 figure represents a 5.8% decline from June, 2009.

What do these housing start numbers mean?
Analysts think builders lack the confidence or the financing to ramp up construction. And housing sales and construction are still in a rut—sales even more so, since the government’s home buyer’s tax credit expired.

Any good news in the housing report?
A good sign did appear in the report: building permits posted a gain for the first time since March. May’s permit number rose to a seasonally adjusted annual rate of 586,000 in June, which is a 2.1% increase over May. While down 2.3% for June, 2009 permits, the drop was not as bad as economists expected. They had predicted only 572,000 permits for June.

What do the housing report numbers mean for landlords?
As mortgage rates hit historical lows, along with housing prices in many areas, some people will be able to purchase a home. But unemployment hasn’t eased at all—so the market should stay depressed for the foreseeable future. This means more foreclosures, and possibly more former homeowners who will become renters.

Landlords might also be interested to know that, while multi-family housing starts were down for the third straight month, and down from June 2009, permits issued for multi-family housing were up for the third month in a row—and up from June, 2009. Looks like investors are starting to become active again.

What does Seasonally Adjusted Annual Rate mean?
Glad you asked! Seasonally Adjusted Annual Rate, or SAAR, is a way to remove seasonal variations in data. The number of building permits issued (and ice cream cones sold!) tends to vary greatly depending on the season. So adjusting for seasonality means more accurate comparisons can be made month to month throughout the year.

The SAAR is calculated by dividing the unadjusted annual rate for the month by its seasonality factor. These adjustments are most often used when economic data is released to the public.

Source: Investopedia.com

The news is filled with stories of the foreclosure crisis in America. When the real estate bubble burst, too many homes lost too much value, leaving too many people unable (or unwilling) to continue paying their mortgages.

If you’re thinking of buying a foreclosed home with the intention of renting it, there are risks and rewards—just like with any other transaction. Here are a few things to consider about buying foreclosed homes as rental properties:

Dos and don’ts for dealing with a bank: Purchasing a foreclosed property is different than buying a home from an individual directly or through a real estate broker. You might be dealing with the bank, or the mortgage holder’s representatives or legal team. Expect the process to take longer than you think. Don’t expect to deal with one person throughout the process (although you might, if you’re lucky). And do keep meticulous records of each communication.

Try to buy when the property is in preforeclosure: Preforeclosure is the time after the homeowner receives a default notice but before the auction occurs. You might be able to work with the homeowner, instead of the mortgage holder. This is usually a quicker process, since the homeowner will be anxious to complete the transaction.

Scrutinize the neighborhood: if the home you’re buying is in an area full of foreclosed homes, its value may take a long time to appreciate. And, you’ll have plenty of competition for fewer potential tenants.
Why?

• Tenants might not be as interested in renting in an empty neighborhood.
• Some of those who would normally rent will instead be purchasing foreclosed properties to live in.
• If other rental property owners are purchasing foreclosed homes in the same neighborhood, you’ll be competing with them for tenants as well.

Find out whether the home was a rental or owner-occupied: 40% of foreclosures were purchased as investment properties. Find out if yours is one of them, and if you’ll be inheriting tenants. Ask how they cared for the property, and if they paid the rent on time. If the home was owner-occupied, make sure the fixtures are still in place (disgruntled people often strip the home prior to moving) and that there are no squatters to deal with (an increasingly common problem). If the place is trashed, you’ll spend a lot of your profit making it habitable before you even get to rent it.

A realistic view of a foreclosed property can help you determine whether or not to purchase it, and whether or not you’ll have a successful experience. Not all bargains turn out to be good rental property investments!

A new ruling will lock would-be homeowners out of new mortgages--and keep them in rental housing--for years to come. This week, mortgage giant Fannie Mae enacted a new measure, making homeowners who intentionally default on their mortgages ineligible for a new Fannie Mae-backed loan for 7 years after they abandon their property.

This ruling could keep tens of thousands of former homeowners in the rental market for the next decade. Since Freddie Mae is the nation's largest mortgage backer, would-be homebuyers who default now could face great difficulty obtaining financing in the future.

Fannie Mae’s executive vice president, Terence Edwards, said that the new lockout policy “is meant to deter the disturbing trend toward strategic defaulting,” which is “bad for borrowers and bad for communities.” Fannie Mae intends the penalty to discourage borrowers from walking away from their homes and mortgages. Those who stay in their homes and cooperate with mortgage companies could be considered for loan modifications, short sales, or other alternatives to foreclosure.

Borrowers who default and walk away while they have the capacity to pay their mortgages, or who do not complete a workout alternative in good faith, are affected by the ruling. Those with “extenuating circumstances” may be eligible for new loans in two to three years.

Fannie Mae will also be pursuing legal means to recoup mortgage debt from borrowers who strategically default on their loans.

Fannie Mae and sister company Freddie Mac Federal were taken over by the U.S. government in September of 2008 as a result of huge losses and plunging investor confidence.

Freddie Mac currently bans walk-away mortgage holders from receiving new Freddie-Mac backed loans for five years.

In Chicago, new downtown apartment buildings are filling up fast. These luxury accommodations, with amenities like spas and state-of-the-art workout facilities—plus the personal trainers to go with them, are drawing affluent tenants and are expected to be 90% occupied within 12 to 15 months.

In San Diego, apartment vacancy rates are finally turning around, and rents should rise again with the next 12 months.

Why the good signs of recovery in these two markets?

• Home buyers came out of the woodwork during the federal government’s first time homebuyer’s tax credit program. But that ended in April, so one incentive to buy rather than rent is gone.
• Home prices have not started rising again in many markets, so potential home buyers may be scared that their home or condo will lose value if they buy now. In Chicago, condo and town house median prices have dropped almost 10% since January.
• Borrowing requirements have tightened up to the point where some potential home buyers aren’t qualifying.
• Renters who prefer flexibility are biding their time, and turning to rental housing until the home market stabilizes again. They’ve seen their friends become stuck in condos they can’t sell, while they have the freedom to move where they want and upgrade when they want.
• People who may have spent the last six months or year looking for work are relocating to land jobs—so they’re more likely to rent until they put down roots in their new communities.
• Tighter supplies will lead to fewer vacancies, just when the job market will begin its recovery. In San Diego, the military and biotech industries are strong, which is leading to more demand.

Experts expect free rent, lower security deposits, and incentive give-aways like big-screen TVs to start going away—all good news for rental housing investors!

Despite the common idea that owning a home is the American dream, it’s turned out to be a nightmare for millions of homeowners. But some people have always felt it’s better to rent than buy, and financial advice websites and television shows are echoing that alternative.

Moneywatch.com recently reported on why and where people should rent, rather than buy a home. A few examples of why they should rent:

• They are either unemployed or think they might be soon;
• Their credit has been hurt by the economic downturn, and they’re not likely to get a favorable mortgage;
• They can’t afford the extra expenses of home ownership, like property maintenance, emergency repairs, and property taxes;
• They aren’t ready for the responsibilities of home ownership;
• They are not planning on staying in one geographic location;
• They're in a state of flux with career, partner, children, or finances;
• It’s cheaper to rent than to buy.

According to Moneywatch.com, and based on a formula developed by Rent.com, here are the top five cities where it’s better to rent than to buy:

1. San Francisco: it can cost twice as much to own as to rent in the Bay City.
2. New York City: It's notoriously expensive to live anywhere in NYC, but rents are stabilizing.
3. Honolulu: Prices for a 3 BR/2 BA home in a sample gated community are around $540,000. Renting is a better deal at $1,875/month.
4. Tucson: Because Tucson’s housing boom led to overbuilding, new homes for rent are plentiful. More supply than demand means bargains for renters: as little as $740--$1,270 per month for a single family home.
5. Los Angeles: From foreclosures on $790,000 Beverly Hills condos to lower-level 3 BR/2BA homes at $300,000, the housing bust hit the area hard. Renting in the city can cost as little as $1,000, while near the beach might be as much as $6,700. Prices are everywhere in between, and depend completely on the neighborhood.

This is good news for landlords; as it becomes more acceptable to be “just” a renter, rather than a homeowner, fewer people will feel the pressure to own and will do what you’re hoping: call you to lease your vacant rental property!

RentBits.com recently conducted a survey of over 1,000 renters. The results show few surprises, but it’s good to know what your tenants—and potential tenants expect!

First, an astounding 72% of renters start searching for their new rental home or apartment online. If you’re not advertising with the online rental search engines, Craigslist.com, and your local news site’s online classifieds, you’re probably missing the majority of your market. And do advertise on as many as you can. 93% of searchers look at 2 sites, and 25% search on more than 10 sites.

And not only do they start the search through Google or Bing or Yahoo’s search engines, rather than going straight to the rental site or Craigslist, they are using specific keyword phrases. For example, a typical rental housing search will begin with the person entering “St. Louis apartment pets $650.” So make sure your ad headline includes what people are searching for. Don’t use “For Rent” or “Apartment For Rent” as your headline.

Price and location continue to be the most important factors to potential tenants. Then they look for photos, lease terms, deposit amount, whether pets are allowed, and if there is a washer and dryer included. Be sure to include plenty of photos of your rental unit—especially the bathrooms, kitchen, and closets. Multiple photos keep people on the site longer and get more attention. They also get more click-throughs, where instead of leaving the site, the user takes action, like asking for more information.

Be responsive—potential tenants expect a response to their inquiry—whether made by telephone or online—within 24 hours.

Houses are more in demand than apartments, according to 83% of respondents. It could be because of the many foreclosed homeowners who are back in the rental market. With more apartment inventory than ever, that’s not the best news for apartment property owners and managers!

The National Association of Realtors recently released a report that shows 2009 vacation home sales rose, but most purchases were personal use—not for rental income.

Vacation home sales rose 7.9% in 2009 to 553,000. In 2008, the sales figure was 513,000. Investment home sales fell nearly 16% in 2009 to 940,000. An NAR spokesman said that typically vacation home buyers are looking for a place to spend family time—although one in five buyers want to allow family members and friends to use their home.

Only 25% of vacation home buyers have plans to rent the property; while 20% of investment home buyers plan to use the home for vacations. The study shows that 26% of vacation home buyers and 8% of investment home buyers plan to use the residence as their primary home in the future.

Investment home sales in 2009 (at 940,000) represented 17% of the total market. This figure is down from 21% in 2008. It looks like rental property investors took a break in 2009, as inventories soared and rents declined.

Median prices for investment homes were $105,000 in 2009, a decline of 2.8%. Notable details from the report include an increase in investment sales in the West, with California showing a high percentage of cash sales in the lower-price range. Overall in 2009, 50% of investment buyers paid cash for their purchase.

If you’re wondering what a typical investment home buyer looks like, he or she is about 45 years old, has a 3 out of 4 chance of being married, earns about $87,000 per year, and bought an investment home close to their primary residence—the median distance was 24 miles. And 25% of investment home buyers purchased more than one home in 2009.