Real Estate Investing

It was with great interest that I read a post on Active Rain by Ken Cash of Incline Village, Nevada.  He poses the question of rent v. own - a question Realtors regularly face in this market.

This past week, I had the usual buyer who says, ‘why buy?  Shouldn’t I just rent?  After all look at the costs of owning.  Sure the interest rates are low, yes I have good credit and can qualify.  Yep, I have 40+% for the down.  But why?  I mean look at the costs.  I am going to pay $3000 month in payments, the taxes are $19,000 a year, the homeowners association is $385 a month.  OK, I have $60,000 in deductions.  So what?  I can rent this same place for $2000 a month.”

After seeing property taxes of $19,000 per year and knowing my own are under $1500, I think I’d definitely rent, too!

There’s a web site that I won’t say the name of here (not so G-rated name), but it touches on some of the myths of home ownership that are valid.  For example, the writer says it’s a myth to think that when you buy you build equity through forced savings of paying your mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

I have refinanced my home about two or three years ago and very much regret it.  It was when home values were climbing like crazy, so we thought we suddenly had $40,000 in equity after just two and a half years.  We refinanced and paid off credit cards, two cars, and consolidated our 80:20 mortgage into one mortgage. Now if we want to sell, we’re in upside down because our home is worth only about $20,000 more than when we first bought because of dropping home values.  We plan to ride it out, though.  Or see if our bank can do a refinance at its current value.

Welcome to the reality of the popped housing bubble.

In a very unscientific survey - I talked with a friend of mine who is an apartment manager - I found it fascinating that the jump in home foreclosures did not provide a big boost to apartment and other property rentals. In fact, many companies that specialize in tenant housing saw the foreclosure problem coming and BUILT to accommodate the displaced homeowners in advance.  Some are still building.

Instead of renting, people are doubling up.  They can’t afford their mortgages, much less rent payments, so they’re moving in with family and friends instead of leasing somewhere else.  Between this and the new construction of apartments, some rental communities are struggling to find tenants.  For example, in Phoenix you can find some really great incentives to move into apartments according to the Arizona Republic,

At Papago Crossing Apartments, 4530 E. McDowell Road in Phoenix, Daniels is offering a $99 move-in special that covers a new tenant’s first month, which is fairly typical in today’s market.

The company is also promoting a drawing it plans to have in June for one lucky tenant to win six months’ free rent.

What can a current resident do when they see their neighbors moving in at a hugely discounted rate?  Not a thing.  They are still in a lease obligation until the contract expires.  However, they may be able to renegotiate the terms of their new lease when the first one expires.

Finally, many possible renters may not realize that apartments and other property managers EXPECT renters to have low credit scores…. it’s a sign of the times.  What’s most important is they have the income to pay the rent and they have a good reference from the apartment BEFORE the place they are now living.  (Current landlords may give a great reference in an attempt to get rid of a problem renter).

It’s definitely worth the application fee to see if you can rent before you move back in with Mom and Pop.  You may just find yourself living in a place with a swimming pool and no home maintenance fees!

Photo by CincyProject through Flickr Creative Commons.

Last week, I took a photo of a family who had been evicted after their home foreclosed.  The sheriff car had pulled up to the driveway and the deputy calmly handed them the notice that they had to vacate immediately.  The family was, of course, upset.  The piled all their belongings on the front lawn and made a sign that said, “Please help.”

Later that night, my friend who lives behind the house saw another family stuffed into a van at our local gas station. Also in the van was  furniture, boxes, clothes, and a couch strapped to the roof.  The driver asked my friend to help him - I suppose they wanted money to find a motel room for the night.

Foreclosures are on the rise - up 53 percent this June compared to this time last year.  Bloomberg is reporting that one in every 501 homes entered into a stage of foreclosure marking the worst time in history since the Great Depression that this has happened.

“We’ll have 1 million bank-owned properties by the end of the year,” [Rick] Sharga, [RealtyTrac’s vice president of marketing] said in an interview. “That will represent between one-fourth and one-third of all home sales.”

This means that one out of every three or four houses being sold today is being sold by a bank - home owners will have some stiff competition when it comes to pricing and selling as most buyers will be looking for a “deal.”

Meanwhile, there are at least one million displaced homeowners who’ve lost their houses.  Another one of my former clients called me today wanting to short-sale their home and they had the mortgage holder’s permission.  They haven’t made a mortgage payment in months and months and months because the bread-winner had bone cancer and ultimately lost his job while battling the disease.  She asked, “Do you think we should go ahead and try to find a place to rent?”

The image of the evicted family came immediately to mind.  I told her it would be a really good idea to find another place to live, especially since their lender has said they could try the short sale, but foreclosure may be imminent. 

The former buyer said she heard that landlords now check credit reports and she was very worried about this.  Indeed they do.  Both a foreclosure and bankruptcy can cause serious damage to your ability to rent a place to live.  I’m not sure former homeowners can be too picky about where they’ll move to, but LaToya Irby highlights on About.com how to find a rental after foreclosure. Some of her advice,

“…look for houses, condos, townhomes, duplexes, and small apartment buildings that are owned by a single landlord. These types of landlords are less likely to do credit checks.

If you apply for an apartment before the foreclosure is updated on your credit report, you have a better chance at getting approved. Timing it is tough since most people don’t realize foreclosure is inevitable until it’s happening.”

A parent of a scout in my Girl Scout troop lost her home several years ago.  She swears that the smaller complexes and single landlord homes are the best places to search for rental opportunities.

I think the rental market could benefit, though Reuters reports the apartment market is stable.  I hope so for my would-be short seller.  They’ll need all the luck they can get.