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| | | Source: U.S. Department of Housing and Development |
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NEW YORK (CNNMoney.com) -
Small fortunes have been made during the past few years by investing in rapidly rising real estate...buy, rent out, flip, repeat. But now stagnating home prices and a bad rental market threaten to end that -- and put the holdings of small landlords in jeopardy.
Signs of a slowdown in the housing market keep coming, with drops in housing starts, sales, and more than a few dire forecasts (see: House party is over.)
Rental markets have soured as well. Rents in most cities have been either flat or down in 2005.
In Boston, a net loss of about 180,000 jobs in the past few years drove rents down about 10 percent in 2005, according to the U.S. Department of Housing and Development (HUD).
Rent declined even more in San Francisco, about 13 percent. Chicago and Houston rents are down about 3 percent. (See table for how the rents on two-bedroom apartment in selected metro areas have changed this year.)
What's more, rental vacancy rates have soared -- to about 10 percent, according to the latest Census Bureau data, up from about 7.5 percent 10 years ago.
Jane Garvey, a small landlord in the Chicago area, says so much emphasis has been placed on home ownership that most everyone who could afford to buy a home already has. That has shrunk the pool of tenants and made it hard to find reliable, qualified renters in many locales. "You're looking for the 'cream of the crap,'" says Garvey.
Do the math
The double whammy of a falling rental market and slowing prices puts the squeeze on real estate investors who plunged into the market during the past year or two.
An investor who bought a two-bedroom, condo apartment in Boston last year, for example, might have spent about $800,000 for it.
If he financed 80 percent of the purchase price for 30 years at 5.5 percent, his mortgage payment is about $3,600. Add in $500 in common charges and $200 in property taxes and insurance, and the monthly nut comes to $4,300.
Even if he can rent for substantially more than the Boston metro-area average of $1,266 for a two-bedroom apartment, he's still in a deep hole. And if he was counting getting bailed out by rising prices, forget it; the latest housing price data shows Boston housing appreciating only in the mid-single digits, and the growth rate may slow even more in 2006.
Of course, the numbers may not be quite so bad in other U.S. markets, but many will at least grow much more slowly than they have the past few years.
Coping with a slowdown
How can real estate tycoons protect themselves from the double whammy of stagnating prices and declining rents?
Katherine Brookins, who owns several rental units in Boston, has advised other landlords to pay down their mortgages if they can. "You aren't going to be getting the rents," she says, which make it difficult to keep cash flow positive. Eliminating a mortgage payment can turn a monthly loss into a profit.
Karen Pio, a landlord in Bristol Connecticut, says it's important to tighten up rental requirements. "When [landlords] hungry they'll grab at anybody," she says. But renting to the wrong person may put a landlord's whole enterprise at risk. Pio knows some who have lost entire properties because of problem tenants who trash apartments, pay no rent, and prolong the eviction process.
She recommends that landlords screen all tenants dutifully. Pio does a credit check, a criminal check, and an eviction screen. And she calls all the references on the tenant's application.
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