Foreclosure Rental Strategies
New appliances. Upgraded bathrooms. Plasma televisions. Granite countertops. High-end fixtures.
These are some of the perks foreclosure landlords are offering their tenants. With the market for home sales slowing and prices declining, real estate experts anticipate many homeowners and investors will rent out their properties and wait for the market to improve, fueling competition for tenants and driving investors to outfit their rental properties with upscale furnishing, high-tech devices and posh perks. That’s what veteran foreclosure investor Steven Morris discovered when he switched from flipping foreclosures for a profit to renting his Michigan investment properties.
‘I put the highest-quality materials in my foreclosure rentals,’ said Morris, who owns 17 properties in Warren, Mich. ‘I try and make it something I would love to live in. My goal is to keep my tenants for as long as they want to stay. I pull out everything when I rehab my properties. Anything that’s questionable is gone. Then, I replace everything with high-quality stuff, including solid brass fixtures, new appliances, new tile, new plumbing, new AC and furnaces.’
Morris got started purchasing foreclosures back in 2003, when he bought his first property with his credit card and quickly flipped it for $15,000.
‘I’ve been hooked ever since,’ Morris said.
It’s not just Michigan. From the white-sand beaches of Florida’s Gulf Coast to the rain-soaked shores of Seattle, foreclosure investors and real estate professionals say it’s a great time to be a foreclosure landlord. With hundreds of thousands of former homeowners losing their homes to foreclosure, the number of renters scrambling to find a place to rent is climbing in states such as Arizona, Florida, California, Nevada, Ohio and Michigan, said Stacy Coltrin, a real estate broker in Lake Havasu, Ariz.
‘Now’s a great time to purchase a foreclosure and hold it long-term,’ said Coltrin, who works with many second-home buyers and vacation property buyers. ‘If you can get cash flow and build equity, there’s no way you can lose as a landlord.’
Competitive Rental Market Ahead
Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies, predicted a competitive rental market in the months ahead. ‘I expect that we will see rents rising steadily over the next two to three years -- possibly even into the next five years,’ said Retsinas. ‘Foreclosures are transforming owners into distressed renters looking for affordable places to live.’
According to a recent Harvard center report, competition for rental properties has pushed up average rents nationwide to a record $775 a month. Hundreds of thousands of homes and condos have gone back to the bank, but they sit vacant because lenders don’t want to be in the property management business, according to Retsinas.
Nova Shank, a real estate broker in Seattle, Wash., said that rents are rising rapidly in the Pacific Northwest, given the growing demand among people who cannot qualify for mortgages or those waiting out the declining market.
‘Rental rates are skyrocketing in Seattle,’ said Shank, noting that tenants often snapped up rental properties in one day in the Seattle market. ‘Landlords don’t need to give renters incentives here. Landlords easily get the first and last month’s rent, plus a deposit. It’s insane.’
Indeed, competition could get worse considering that foreclosure filings were reported on 290,631 properties in February 2009, up 51 percent from February 2008, according to RealtyTrac. Homeownership, meanwhile, fell to 67.8 percent in the first quarter of 2008, down from a peak of 69.3 percent in the second quarter of 2004, according to the U.S. Census Bureau.
All these factors are favorable to landlords, but rental rates and vacancies vary by region. Landlords are cheering in San Francisco, New York and Seattle, where rents are skyrocketing. Florida, however, is home to some of the worst rental markets for landlords over the past 12 months, according to real estate research company Reis, Inc.
Seth Weinger, a real estate investor who owns 10 rental properties in Hemet, Calif., said rents are tumbling in his region and the rental market is softening in Southern California.
‘Unscrupulous speculators are collecting rent from tenants and not paying their mortgage for six months or more here in Hemet,’ warned Weinger. ‘They’re low-balling rental prices and they don’t even do background checks on the renters. I can’t compete against these crooks. The rental market is clearly softening here.’
Weinger said the speculators are hurting real estate investors, as well as the renters, who are not aware that the properties are in foreclosure and are lured by the prospects of no security deposits.
Some landlords, anxious to fill their properties with paying renters, are sharply dropping rents to spur demand. Others are offering perks. And some are looking to increase rents.
Shari Springer, a broker who runs a real estate firm in Las Vegas, Nev., said her region was facing a housing shortage, causing rents to rise.
‘One thing that I’m noticing here in Las Vegas is how fast rents are raising,’ said Springer. ‘There’s an area by the Red Rock Casino, where I own a rental. It’s a new 2,700 square foot home that I’m currently renting for $2,100 a month. I could easily rent it for $2,800. When the currently renter moves out, I’m raising the rent.’
Tax Benefits From Rental Property
Regardless of whether you are in a stable or unstable rental market, one of the major benefits of owning rental real estate is the myriad tax breaks available to investors, according to Stephen Fishman, a tax lawyer from San Francisco and the author of ‘Every Landlord’s Tax Deduction Guide.’ Fishman says there are more deductions and tax-related strategies available for rentals than just about any type of investment. Whether you own just one foreclosure rental or hundreds of rentals, Fishman claims that owners of income producing properties need to know and understand the ‘hidden deductions’ in investment properties.
There are, he says, the obvious deductions like mortgage interest and operating expenses. But many investors may not know that they can also deduct expenses when conducting their real estate business at home, or that there are different ways to depreciate the cost of a their property even as its value increases.
For example, Fishman emphasizes the very important difference between a real estate investor and a real estate business owner. Owning a real estate business offers far greater tax breaks than being a real estate investor. The business owner can claim more deductions, such as home office deductions, which the real estate investor can’t claim.
Bret Logan, a firefighter and foreclosure investor in Dearborn, Mich., has a unique approach to finding renters and buyers. Logan said the glut of houses in the Detroit market has made it hard to sell his foreclosure property in Detroit. So, he placed both a ‘for sale’ and a ‘for rent’ sign -- and everything changed.
‘I have a very unusual strategy,’ said Logan, who lives in one foreclosure he purchased in Detroit and is selling another investment property in Dearborn. ‘After I placed both a ‘for rent’ and ‘for sale’ signs up, I got a deluge of calls from renters who wanted to rent the property. I ranked the renters based on their credit scores and ability to purchase the property and I qualified them. I’m helping the renters repair their credit so they can qualify to purchase the property.’
