Archive for October, 2009

What matters most in rental home investing in the Phoenix area? Everything!

I represented tenants for my first two years as a real estate licensee. I walked into — and walked right out of — hundreds of homes that were amazingly inappropriate candidates for tenancy.

Horrible locations, with no access to jobs, schools, shopping, entertainment, transportation.

Still worse, horrible homes, dingy, run-down testaments to the perils of deferred maintenance.

And still worse, many of these homes would be filthy — stained carpets, smudged walls, debris everywhere. In many cases, the carpets had not even been vacuumed, and often the back yards were shoulder-high jungles of weeds.

Would you want to live in a place like that?

Why would you expect that a tenant would?

Here’s a better question: What kind of tenant, do you suppose, would settle for a rental home like that?

Landlords can be penny-wise and pound-foolish. They will buy a dump of a property because it’s cheap, convinced that their salvation will be low rents. But bad properties attract bad tenants — by repelling all of the good tenants.

The wrong rental property is the worst kind of real estate investment: It will rent slowly, with long vacancies between tenants. And the tenants the landlord will be forced by circumstance into accepting may be slow-pay, no-pay eviction candidates who may do damage or steal the appliances on the way out. And, of course, because the house is repellant, it will attract nothing but low-ball offers on resale.

But take heart. There is a better way of doing things.

First, what you want is the right location — a built-out suburb with its own job base, with schools and shopping and entertainment already in place. And don’t buy a dump. Nobody wants to live in a dump. The house you’re looking for should be appealing to tenants, but also to owner-occupants. Why? Because owner-occupants will pay more than investors when it’s time to sell.

But even then we’re not done. We’ve got the right house in the right location, but we also need to refurbish the home to turn-key condition. Why is that? Because tenants — especially premium tenants — have choices. We want for our home to be first on their list of candidates, when they go out shopping. That way, you will have your choice of top-quality applicants: Good jobs, good income, good credit, good payment histories, good real estate references.

A home like this will rent quickly, will stay rented, and — if you continue to maintain it in turn-key condition — will suffer little vacancy between tenants. Moreover, your tenants will treat your home as if it were their own, so your costs between tenants will be lower. And because we chose the property with resale value in mind, it should sell quickly and at a premium price, ideally to owner-occupants.

This is a sound business strategy. Your objective is to make money. This is the way to make money in the suburban-Phoenix rental housing market.

I’ve written a guide on how to make money by investing in rental homes in Metropolitan Phoenix. It covers these issues in more detail, with a video explaining my thoughts on home selection. There are also before and after photos of a real rental home, to illustrate what I think is necessary to make a property appealing to premium tenants.

If you want to discuss Phoenix-area rental home investment in more detail, you can phone me at 602-740-7531 or just shoot me an email.

Being a landlord is not easy, and very often it is decidedly not fun. But it is potentially very lucrative — if you go at it the right way.

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The news media may insist that the real estate market has turned the corner, but my attitude toward work is simple: “Just say yes!”

This from my Arizona Republic real estate column (permanent link):

We represented the buyers for a million-dollar house, our first, that closed this week. A week from now, we will be listing a million-dollar home, also a first for us. We are carrying two listings at $450,000 right now, with another to come, and we will be listing another home at $800,000 shortly.

But also this week, I sold a property for $65,000. Just a few weeks ago, one of my listings sold for $27,000.

Am I schizophrenic? I hope not. But I am scared to death to say no to anyone right now.

Salespeople like to say yes. It’s not in our nature to turn people down. We like to make people happy if we can.

But I have no idea when this recession is going to end, so I don’t want to pass on any opportunity that might present itself.

Here’s the funny part: We’re living with a foxhole mentality, but 2009 is going to be our second-best year since we came into the real estate business. We’re not rich by any means, but we’re making more money than we have in the past three years.

But here’s the unfunny part: Virtually all of our income for 2009 is coming to us in the second half of the year. Our business was all-but-moribund in the first two quarters, and we came much too close to losing our own home.

So I am not proud, bashful or shy. If you have a real estate problem, I’m ready to talk about it. We’re working sixteen hours a day, at least, seven days a week. We haven’t taken time off in three years, and I don’t know when we will take our next vacation.

The job is survival right now, and I know we’re not alone among Realtors in thinking this way.

I’m nobody’s bear, and I would love to believe all the cheerleading I hear in the news about the real estate market. But my strategy for now is to just say yes to every opportunity I get to earn a living.

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Despite the hype, the long-term trend of home prices in Phoenix is still steadily downward

This from my Arizona Republic real estate column (permanent link):

With all this activity in the Phoenix real estate market, prices must be going up, right?

Wrong.

Sales prices for bread-and-butter single-family homes in Metropolitan Phoenix were down in June, July and August. They were up in May, and it looks like we’ll finish higher in September. But the net effect is to put average home prices right back where they were in March of 2009.

That’s right. We just worked our way through six very busy months, with the $8,000 first-time home-buyers tax-credit as a huge incentive to buy houses, but sales prices for those homes are virtually unchanged.

How can that be? Haven’t we heard about shortages of homes, about frenzied bidding wars? If you’re trying to sell a home right now, market activity can look like manna from the heavens. But if you’re trying to buy, what you’re seeing may look more like a plague of locusts.

But taking account of the bigger picture, none of that matters. The Phoenix real estate market is over-built, especially at the lower end of the market. The long-term systemic trend of prices is downward, and it will be for quite a while. Incentives like the tax-credit can stimulate activity, but until demand eclipses supply, prices will continue to deflate slowly.

When the tax-credit lapses, the pace of that deflation will quicken. If banks start to reintroduce foreclosed inventory at a faster rate, prices will drop even more. Arguably, we are two or three years away from reselling all of the homes that will have to be repossessed and resold by lenders.

And prices could be low and trending generally lower that whole time. New home builders are not able to compete in this market, so we’re not adding new inventory. But until the supply of foreclosed homes is fully absorbed, prices probably will not go up.

And even then, don’t bet your life savings on dramatic upswings. It took us a long time to dig this hole, and it could take a long time to dig our way out.

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