All signs lately have been pointing toward some good story angles in the resurging residential rental market, and now the Federal Housing Finance Agency has served up a timely news peg with the announcement last week that it will sell foreclosed properties to investors who promise to fix them up and rent them out.
Here’s the prospectus for the pilot program, which is limited to fewer than 2,500 houses across selected U.S. markets. But even if the program is not taking place in your region, it’s a reminder to take a look at how the “flight from homeownership,” as this MultiFamily Executive trade journal calls it, is affecting construction, prices, selling activity, rental rates and other real estate matters in your market.
One perplexing issue you might explore is the irony of a surge in multi-family dwelling construction – see the trend in the Census Bureau’s monthly New Residential Construction report - even as vacant single-family homes sit idle or even half-finished thanks to overbuilding, foreclosures, failed speculation by builders and other fallout of the mortgage market meltdown. How ironic that communities are worried about the upkeep on foreclosed or abandoned houses even as bulldozers rev up to build more apartment complexes. Why is it more cost-effective, for example, for a developer to build a new rental compound from scratch rather than snatch up idle houses and rent them? No doubt there are profits to be made along the way in the construction process, and later economies of scale in operating a densely populated building – but asking specifically what these advantages are and who benefits from the land acquisition, lending, construction, etc. of new apartment units could be quite an interesting story.
And what happens to all of the idle single-family units as more prospective tenants are sucked away into new rental units? What does the new construction bode for the old?
Do local banks have any programs – formal or informal – akin to the FHFA pilot plan? What are they seeing in terms of investment property? And what effect does the influx of renters have on property values, ambience, etc. in established neighborhoods? A more transient population can be a problem — are local ordinances keeping pace?
Another angle to the rental boom is property management; from large commercial companies to jacks-of-all-trades who handle a few units for private landlords, a lot of people make their living collecting rent and maintaining properties in good repair. What are the pros and cons for small real estate investors of hiring professionals or casual caretakers? Here’s an amusing essay from the New York Times about the pitfalls of landlord life; despite its humorous tone it’s full of fodder for thought if you decide to run a “Should you be a landlord?” personal finance piece.
New or would-be landlords may be licking their chops over the opportunity to acquire rental houses on the cheap, but be careful about generalizing that to all who own rental property. Those who bought at peak prices are suffering, and it’s a distinction you can make by seeking out grass-roots landlords who thought they were building their own nest eggs.
A month or so ago I interviewed a real estate agent who had accumulated eight single-family houses in a modest but stable blue-collar suburb; she figured the sure-fire rental income would cover mortgage payments until she was ready to sell at appreciated prices and use the profits to fund retirement. Then the residential housing market crashed and along with it her income – and her renter based was devastated by auto-industry downsizing. Now she’s getting by on one-quarter of what she used to make and is underwater on six of the eight properties. Before 2008, she said, she could’ve realized a $300,000 profit based on the difference between what she paid and what those houses were later selling for. (And based on what I know of that market, her estimates are reasonable, but this would be a good claim to check out with sales histories.)
Now, she’s $200,000 in the hole – a half-million swing in her net worth. At age 72, she’s mowing, shoveling, painting and even doing minor electrical repairs to the eight houses because she can’t afford a handyman.
It’s a cautionary tale indeed and an interesting counterpoint to the “investment property boom” angles.