Landlords Should Re-think Their Game Plan

If you are a landlord, whether by choice or by default, these are times when conventional rental property management strategies need to be taken back to the drawing board for modifications.

It seems horrific news flows out of our HDTVs and Blackberries daily with no end in sight, at least for the near future. One failing market seems to drag others down with it. I recently heard an advisor state the bad news is creating more bad news. Maybe we need to disconnect from all forms of news feeds and try to concentrate on the business at hand one day at a time. If we ignore it, will it go away?

How is the Rental Market?
Almost daily I'm asked, "How is the economy affecting the single family rental business"? With home prices falling and mortgage rates going lower you'd think buyers might start hitting the pavement to shop for good buys. Not so. Buyers appear to be holding out just out of fear of the unknown. A house purchased today may not have any equity tomorrow. Lenders are also requiring more money down. The days of "no money down" or 2 or 3 percent down may be over. Sales of existing homes are down. Median prices are falling. Some forecasts predict more drops this summer. One thing is for certain, prices have got to fall low enough to entice buyers to take the risk. No one knows where that price is. The market has to seek its own level. Then there will be movement.

Lawrence Yun of the National Association of Realtors reported 45 percent of all home sales for November were "distressed sales". Not a good sign. Yun also says this may be the largest price drop since the Great Depression (there's that D-word). Right now, distressed sales are making up most of the market. People are deciding to stay put.

Good News - Bad News
There is enough daily bad news items hitting us, so try the following "good news - bad news" for relief:
- Good News: Orders for durable goods (a vital statistic) fell last week (but not as much as expected and yes this in this economy this is good news).
- Bad News: The jobless claim peaked at a 26 year high last week.
- Good News: Mortgage applications increased last week as homeowners shopped for refinancing at low interest rates.
- Bad News: Credit is still tight due to stringent qualifications.
- Good News: Orders for durable goods increased for November.
- Bad News: Signs of confidence are rare.
- Good News: Oil supplies increased in the US and the barrel price is dipping.
- Bad News: In Time Magazine Robert Chew writes of the Madoff scheme, "It harks back to December of 1929 and the image of bodies falling from buildings.
- Good News: Consumer spending was up for the month of November.

In these uncertain times, as the economy grinds to a halt and markets are rocking and reeling as fast as news hits the web, as an owner of a rental property are you asking yourself, "What should I do"? Do you have a plan in place? Are you in the red with your property? Are you a potential jumper ready to bail out at the next round of bad news? Or are you going to sit down, take a deep breath, and surmise a plan.

Rental Increases Slowed
In my observations owners have slowed down requests for rental increases. Many are afraid they will lose their tenants over a few dollars a month. If an owner has a tenant in place who is caring for the property and paying rent on time, asking for a rent increase may be a far fetched idea. I have seen tenants move for a few dollars less than they are presently paying. Tenants are also finding there are larger and better properties on the market for less than their current rent. Tenants are moving up and saving money.

If a tenant informs me they are thinking about moving instead renewing their lease I ask them, "What would it take for you to stay in the property"? Most answer lower rent.

My advice to owners in this market: If your tenant is serious about moving to another property for less money, you may need to think about offering the tenant a discount to keep them in the property. This may seem contrary to good advice, but with properties staying on the market for nearly three months or longer the owner will loose three months of rent compared to several hundred dollars offered as a discount.

In a recent drive to fill vacant properties in our management portfolio owners were asked to lower rents on properties that were on the market for many months. After dropping the rents more than half of the units were rented within two weeks and the owners began receiving cash flow.

Stop the Bleeding!
Rental inventories are increasing and will continue to increase until spring 2009. A vacant property on average costs an owner approximately $3,000. This is not chump change. We are talking real bucks here. A vacqant property that is over-priced will remain on the market even longer. There are more properties than there are tenants to go around. Rental shoppers need to have something that is an additional attractant in order to persuade them to consider a property. Price is the driver in this market.

A good plan for the present market does not have to be a complex strategy, but it does require taking the time to think outside the box. That box being conventional landlord reasoning.

10 Tips
Here are 10 tips that may help insure consistent income throughout this market:
1. Rethink rental increases.
2. Offer discounts if your tenant wants to move.
3. Keep the property in good condition.
4. Make repairs in a timely manner.
5. Invest in improvements, but don't over-spend on needless items.
6. Remember that a vacant property can cost you $3,000.00.
7. Make sure your tenant has a current lease.
8. If your tenant is paying late, consider working something out rather than beginning an eviction.
9. If your property is vacant, ask a professional what can be done to start some cash flowing from the property.
10. Keep in mind - every month the property is vacant you loose a month's rent. Strive to place a qualified tenant.

Dump and Run - think first
Occasionally I talk to an owner who is considering the "dump and run" method of disposing of a property. They think the only way out is to allow the property to go into foreclosure. Think more than twice about that strategy. Consider taking less for the property. Talk to a tax professional and an attorney about foreclosure and about the possible benefit at years end if you have a negative cash flow. I've seen too many owners take advice from the wrong people, or worse, fail to heed the wisdom of professionals and experts.

These are uncertain times and uncertain times call for unconventional thinking. When the market turns, you can revert to a strategy that produces more income during a market of more demand and less inventory.

Try Some Magic
Magic Johnson, NBA player for the Los Angeles Lakers had this to say: "When I'm under the gun and I've got pressure on me, I don't panic. I look for the right solution, and then I go for it".
As an owner of a rental property use Magic Johnson's logic:
- Don't panic.
- Look for the right solution.
- Go for it.

Consult with professionals whose organizations have proven track records and history. Develop a new game plan. Until the market turns, keep the cash flowing from your occupied property, even if you have to put up a few dollars to cover the mortgage and expenses. The alternatives can be devastating.

Jack McSwain, PRM, Realtor®
Managing Broker for Walter Williams Property Management, Inc.

Jack is a member of the National Association of Residential Property Managers, the Florida Association of Residential Property Managers and is past president of the Northeast Florida Association of Residential Property Managers.

Landlords Should Rethink Their Game Plan is copyrighted by Jack McSwain, PRM. For reprint information contact Jack at jmcswain@cbwwcorp.com