With Terry Story, 29-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL
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We’re Still In A Seller’s Market
Terry kicks off Real Estate Roundup by noting that there still is a shortage of homes for sale. Homes priced near $300,000 are most in demand. Homes between $300,000 and $600,000 also attract multiple offers. In general, homes priced below $600,000 are in a seller’s market.
As home prices rise above $600,000, they become less affordable. Terry sees $600,000 as a transition price between a seller’s market and a buyer’s market. More expensive homes attract fewer offers. As a result, buyers have more bargaining power.
Six months of inventory signals a normal market. When housing inventory dips below six months, there are fewer sellers on the market than buyers. This signals a seller’s market. When inventory rises above seven or eight months, buyers have greater bargaining power and can negotiate prices down more aggressively.
Home Ownership Costs On The Rise
Harvard University recently released its 2018 State of the Nation’s Housing report. The report states that nearly a third of U.S. households (38.1 million) paid more than 30% of their incomes for housing.
Mortgage lenders go by a 28% rule of thumb. According to this rule, monthly mortgage payments should not exceed 28% of the borrower’s monthly income. Terry attributes the report’s 30% ratio to the steady rise in home prices over the past decade. In addition, an uptick in mortgage interest rates from 3.75 percent to 4.75 percent has also contributed to rising homeownership expenses.
The report’s 38.1 million number includes 20.8 million renters. Compared to homeowners, renters are paying a bigger share of their incomes to meet monthly rent expenses.
Softness In Rental Pricing
One upside for renters is that rental prices appear to be flattening out. This is partly because a large number of newly constructed units have now become available for rent.
With rents coming down, one would expect there would be less demand for houses. Yet, home prices continue to rise. As a result, it’s cheaper to rent than to buy in most housing markets. In such cases, Steve recommends investing the difference to build up your portfolio, something most renters don’t do.
6 Rental Tips To Help First-Time Landlords Succeed
In closing, Terry lists six rental tips to help first-time landlords succeed.
- Screen tenants—and screen them some more
Screening tenants is very important to your long-term success as a landlord. Your tenants will either maintain your property nicely or trash it. So verify their rental history, check their income and credit history, and do criminal background checks.
Steve adds that it’s important to know your tenant’s debt obligations so they do not fall behind on the rent. If the rent costs them 50 percent of their income, they likely will not make good tenants.
- Know your tenants’ rights up front—and yours too
Make sure you’re up-to-date on landlord-tenant laws. For instance, Florida has laws that are very specific about what a landlord is obligated to do. So make sure your rental agreement has been developed by an attorney.
- Choose the right money-maker property
Not all properties make for good rentals. Pick a property that is priced to make you money. Skip properties that are too expensive because they are harder to rent. Expensive rentals also reduce your margin of safety.
- Expect to spend thousands on maintenance
Rental units need maintenance, such as a new paint job or carpet before the next tenant. In addition, landlords face other routine maintenance expenses. Rental units could also be empty for months before you find a suitable tenant. Be prepared for these expenses and budget about at least $2,000 per year for them.
- Improve it while it’s empty
Take care of rental repairs and upkeep right after your tenant moves out. Don’t wait for the last minute because delays will reduce your rental income for the year. Moreover, it’s easier and more efficient to get this work done when the property is empty.
- Plan for vacant months but try to avoid them too
Finally, a property without tenants reduces your effective rent. For example, if a $2,000 rental is vacant for a month, your effective annual rent drops to about $1,800. Landlords are often better off retaining good tenants with minimal rent increases than finding tenants willing to pay more.
If you’re thinking of becoming a landlord, keep these rental tips in mind to make the most of your investment.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent, Terry Story. Terry is a 29-year veteran with Keller Williams located in Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: So, Sherry, Sherry.[LAUGH]
Terry Story: Sherry, do you want me to continue singing?
Steve Pomeranz: No, absolutely not. Thank you. I’m having trouble pulling it together without you singing, thank you. So, Terry, what’s going on in your world? How’s business?
Terry Story: Business is awesome.
Steve Pomeranz: Yeah?
Terry Story: It’s always awesome. [LAUGH]
Steve Pomeranz: [LAUGH] You don’t change.
Terry Story: No, no, no, no.
Steve Pomeranz: [LAUGH]
Terry Story: Good market, awesome. Bad market, awesome.
Steve Pomeranz: Okay, so how’s business?
Terry Story: Well, besides being awesome.
Steve Pomeranz: Yeah, thank you.
Terry Story: What we see out there is still a shortage of inventory.
Steve Pomeranz: Yeah.
Terry Story: The buyer demand is still there.
Steve Pomeranz: Are you seeing people bidding up for homes as much?
Terry Story: Steve, it’s all about price point. If you look in our marketplace, for example, anything under $600,000, we’re still in a seller’s market. It kind of starts to transition when we get over $600,000. And then the higher you go up, it’s really more of a buyer’s market than a seller’s market.
Steve Pomeranz: So how do you define a buyer’s market?
Terry Story: So buyer’s market will go with the six-month level. So if there’s six months of inventory on the market, it’s really considered more like a normal market.
Steve Pomeranz: Yeah.
Terry Story: Anything less than that amount, it’s a buyer’s market.
Anything more than say seven, eight months, it’s very much a buyer’s market.
Steve Pomeranz: So buyers have leverage, that’s what you’re saying-
Terry Story: Buyers have leverage.
Steve Pomeranz: So they get to negotiate more actively or more aggressively.
Terry Story: Correct, in our marketplace, really, when you get to million and above, we’re seeing very much a buyer’s market.
Steve Pomeranz: Cuz it’s softer, it’s softer.
Terry Story: It’s softer.
Steve Pomeranz: Okay, all right.
Terry Story: More inventory-
Steve Pomeranz: But under 600-
Terry Story: Under 600-
Steve Pomeranz: Sweet spot.
Terry Story: Sweet spot, 300 home run.
Steve Pomeranz: Okay.
Terry Story: Multiple offers.
Steve Pomeranz: But there’s been recent reports which have stated that 38 million of us here in America are paying too much for our monthly housing expenses.
Terry Story: Well, there are some safeguards. When you get a mortgage, the traditional is 28, 36, so they don’t want to lend you more than 28%. Actually, that’s not a 100%. Those numbers will be pushed, but traditionally 28% of your-
Steve Pomeranz: Of your income.
Terry Story: Of your income. And that should be the rule of thumb that you follow. People are pushing 30%, pushing a little bit higher than that depending on their debt. That’s because things have gotten more costly.
Steve Pomeranz: I know, well, housing prices have gone up, I think 6 or 7% in our area last year. Interest rates have gone up, so the cost of a mortgage, it’s still historically very low. But if you’re pricing, your ability to buy a home based on three and three quarters percent mortgage rates— and they’re now at four and three quarters—that changes the equation.
Terry Story: Right, that takes a chunk out of it for you.
Steve Pomeranz: Yeah, yeah.
Terry Story: And now you’re looking at nearly 21 million renters paid more than 30%. So the renters actually are getting hit harder than the-
Steve Pomeranz: The homeowners.
Terry Story: The homeowners.
Steve Pomeranz: I’m noticing that there seems to be some softness in the pricing of rental properties, meaning that since so many rentals have been built over the years and are coming on line now…
Terry Story: Right.
Steve Pomeranz: That prices are softening a little bit or they’re flattening out.
Terry Story: Yeah, I’m seeing more of a flattening.
Steve Pomeranz: So it’s starting to turn a little bit into the favor of renters, and yet home prices have been rising and getting more expensive. So it used to be the other way around.
Terry Story: That’s right.
Steve Pomeranz: It’s cheaper to buy a house, now it seems renting, not yet.
Terry Story: We’re not quite there yet.
Steve Pomeranz: But there are other reasons to own a house, other than price, right? I mean, you have family there, you have control over your own destiny, nobody is-
Terry Story: That’s right, build equity over the long term.
Steve Pomeranz: Build equity over the long term, and so on.
Terry Story: Pride of ownership, stability.
Steve Pomeranz: But in pure dollars, just doing the math, it’s starting to turn more in the favor of renters a little bit.
Terry Story: if you could be a renter, and you can actually live cheaper as a renter than you can as an owner. Now the things is, you’ve got to be disciplined to take the difference between what it would cost to rent versus own and sock that in the bank.
Steve Pomeranz: Yeah, good luck with that.
Terry Story: [LAUGH] And most people aren’t able to do that.
Steve Pomeranz: All right, so we have six tips to help first-time landlords succeed. I saw this, and I go, wow, that really sounds like something that we’d want to know about.
Terry Story: Sure.
Steve Pomeranz: So what is tip number one?
Terry Story: Screen your tenant. And then screen them again and then again.
Steve Pomeranz: [LAUGH] Okay.
Terry Story: In order to have a successful investment, especially long-term investment, the tenant is key. They’re the ones that are going to live in the property. They’re the ones who are going to either keep the property up or they’re going to trash it. And I honest…to gosh, you think it’s easy to screen them and you think you got it, but they’re not all-
Steve Pomeranz: It’s not predictable, it’s not that predictable. But I thought you were going to talk more about their ability to pay the rent.
Terry Story: Well, that too.
Steve Pomeranz: [LAUGH]
Terry Story: Paying the rent is important too. Obviously, looking at their debt to income. So you’ve got to get their tax returns or their paystubs.
And again, if you’re using a realtor who uses a screening company-
Steve Pomeranz: Yeah.
Terry Story: They’re going to screen for their income and do all of these steps for-
Steve Pomeranz: They’re going to get these drivers licenses, we talked about this a few weeks ago. We’re going to get their social security number, and you’re going to be able to take a look at their credit history.
Terry Story: Right, but keep in mind, if you’ve got somebody coming in to rent your place and it’s costing them 50% of their monthly income to rent, those aren’t going to be good tenants for you.
Steve Pomeranz: Okay, yeah, you made your point. All right, number two, know your tenant’s rights upfront. So this is the other side of the coin.
Terry Story: Right, if you’re going to be a landlord, know what their rights are and certainly know what your obligations are. If there is going to be a problem and when there is a problem, not if, it’s usually when it’s going to come down to technicalities.
So if you ended up in a small claims court, the judge is going to look at your side of the coin because you’re the big bad landlord. They’re going to look at your side and see what did you do wrong?
Steve Pomeranz: Right
Terry Story: So eyes, cross your…
Steve Pomeranz: Okay, number three. Choose the right money-maker property, which I read as do the math, make sure that you’re running this as business and it will be profitable with a margin of safety too.
Terry Story: Right, you need to know what you’re investing in. Not all properties are good rental properties.
Steve Pomeranz: Yeah. Number four, expect to spend thousands on maintenance.
Terry Story: Absolutely. Every time a tenant moves out, chances are you’re going to have to paint the whole place. There’s constant maintenance with any kind of property, so be prepared for it. It should be no surprise. Budget a couple thousand dollars for sure.
Steve Pomeranz: Now, when you own a home you have these maintenance expenses yourself.
Terry Story: Right.
Steve Pomeranz: When you rent, you don’t have them because the landlord has them, but theoretically those costs are in your rent.
Terry Story: Correct, theoretically.
Steve Pomeranz: Theoretically, right?
Terry Story: Yes, absolutely.
Steve Pomeranz: All right. All right, number five, improve the unit while it’s empty.
Terry Story: Take advantage-
Steve Pomeranz: That is some common sense.
Terry Story: It is, but a lot of landlords don’t. The time to take care of all those repairs and what have you is in between tenants.
Steve Pomeranz: Yeah.
Terry Story: Certainly, don’t wait until the last minute, which a lot of them do. Like, I’ve got somebody moving in, so I’ll go ahead and take care of it now.
Steve Pomeranz: Gotcha, and finally plan for vacant months, but try to avoid them too.
Terry Story: Absolutely. Any time you’re going to transition from one tenant to another, you’ve got a vacancy. You’ve got to consider, hey, if it’s $2,000 a month I’m collecting and I want to raise it a bit, aren’t I better off just-
Steve Pomeranz: Got a good tenant. You want to keep the good tenant. Maybe you don’t raise it if you feel like there’s pressure, they could go somewhere else or something like that.
Terry Story: Right, if you have a vacancy, it’s going to cost you a lot more.
Steve Pomeranz: Don’t forget, if you’re receiving $2,000 a month and it’s vacant for one month, now your effective rent is about $1,800 a month.
So that may have not been figured out, figured into your budget.
Terry Story: Correct.
Steve Pomeranz: All right, my guest as always is Terry Story, a 29-year veteran with Keller Williams, located in Boca Raton, Florida. And she can be found at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.