BECOMING A LANDLORD IN THE CURRENT REAL ESTATE MARKET

If you are considering snapping up real estate at fire-sale prices and renting them out to all the people who can no longer qualify for a mortgage, make sure that you evaluate all of the risks involved before diving into the market.

The temptation for would-be investors is strong. Thanks to record numbers of foreclosures, short sales, bank-owned properties and homeowners in distress, prices on all markets of real estate are low and getting lower. But despite the allure of covering costs with rent money and (hopefully) generating an increase in value in the coming years, there is a downside to the equation.

Vacancy Rates Are Rising

It seems logical that people who cannot buy a house or have lost their home are going to rent. However, nationwide, landlords are having trouble filling vacancies. The trend is that more and more clients are electing to move in with family members rather than seek out a rental unit. After a foreclosure or job loss, many people do not think that they will qualify as a tenant, so they are looking to their relatives for a place to live while they save money and rebuild their credit. Every market has a different vacancy rate, so be sure to research your area before purchasing a rental property to make sure that you have a good chance of filling that property with a well-qualified tenant.

Incentives to Tenants

The high vacancy rate is prompting landlords to offer tenants incentives to sign a lease. More often than not, that incentive is a discount on rent. It might be a free month of rent, a lower security deposit or a three-bedroom unit for the price of a two-bedroom unit. Among the latest incentives landlords are offering is a deal borrowed from the auto industry: reduced rent for 90 days if a tenant gets laid off. Then, if the tenant does not find a job in 90 days, he can be released from the rest of his lease. Be aware that you may have to offer an incentive to potential tenants if you have trouble filing a vacant unit.

Tenant Credit Histories Are Getting Worse

A credit check is a central element of the tenant screening process, and most applications have a question about foreclosures, bankruptcies and previous evictions. In the past, answering “yes” to any of these questions would automatically disqualify a prospective tenant. Not anymore. Now, if an applicant has lost a home to foreclosure but has a job and good credit otherwise, that applicant will probably get approved by most landlords. Many landlords have started including unemployment benefits in an applicant’s income, which was rarely permitted in the past. Be prepared to see bankruptcy and foreclosure on lots of rental applications.

Evictions Take Longer

With the rise in unemployment and the prevalence of foreclosures on rental properties, eviction filings are up. That means it takes longer for courts to process the necessary legal paperwork, and local law enforcement is backed up on carrying out the evictions. To avoid evictions some landlords are willing to work with tenants who can document their financial difficulties and provide evidence that non-payment of rent will be a short-term situation.

Rental Units Are More Pet-Friendly

Because of the risk of flea infestations, damage from toileting accidents and noise, there is no question that pets are a hassle for landlords. This is why many landlords used to adhere to a “no pets” policy. That “no pets’ policy has changed in a big way. Few landlords are willing to turn away a pet lover with a good job, a good rental history and good credit. Plus, most tenants are willing to pay extra for their four-legged family members, so landlords are much more willing to accommodate.

Prospective investors can get some excellent deals in the current market, but should be aware of the challenges that the declining economy has brought to landlords.