I recently had a tenant utter the phrase “greedy landlords”. Ironically, it was out of frustration for what was in fact a tiny rent increase of less than 3%, raising the rent to a rate still about $75 less than market value. It was one of those “no good deed goes unpunished” moments that property managers frequently experience. More about my philosophy of rent increases can be read in a previous blog post on that subject.
But for this article, I want to talk about just who in fact your landlord is if you’re an Austin Tenant living in a single family home. I don’t mean the identity of your property owner, but more generally, what caused the owner to own a home that needed to be rented.
Owners fall into the following general categories.
Pure Investor – These are pure investors who purchased the property from the outset as an income producing asset. Many have maxed out retirement plans, or simply lost faith in the stock market and need a way to invest. Investing in real estate is very risky, fraught with uncertainty and surprise expenses. But for those with the right attitude toward proper care of the property, holding longterm, and treating tenants fairly, it can be one of the best ways to build wealth. They also need to have the financial and emotional strength to weather the ups and downs of owning rental property. All of our “investor” owners fall into this category, else we don’t take them as clients. But most of our clients are in fact not “pure investors”. Most fall into one of the categories below.
Transferred Home Owner – These owners bought the home to live in, and did live in it. Then came a life change that necessitated a move. One of my owners moved to another city to care for her aging mother who is in her 90s. She isn’t sure how long she’ll be away from Austin, but when she returns, whether 3 years or 7 years later, she wants to move back into her own home instead of having to purchase a new one. She doesn’t want to be responsible for dealing with a tenant, handling repairs, etc, as she’ll be busy full time with her mom. So she hired me to manage the property and handle everything turnkey.
Some owners move away to be near grandkids, but don’t want to give up their current home just yet. One of my clients moved away to take a leap of faith in a new relationship, to live with her boyfriend out of state. It’s been a few years now so I guess it’s working out.
Another category of Transferred Home Owner are those who bought the home to live in, did live in it, then received a job transfer out of town. Same logic as the above scenarios where the owner doesn’t want to sell because there is at least a chance they will want to return and re-occupy the home at a later date, and they don’t know how to be a landlord nor do they want to be one, so they hire a property manager like me to handle everything turnkey.
All of those in this category are really “non-investors” who simply need to rent their homes for an undetermined period of time.
Involuntary Landlord – As real estate markets have ups and downs, sometimes an owner-occupant is “stuck” with a home because they literally can’t afford to sell it. They also did not buy the home as an investment and would rather sell. These are usually first time buyers who purchased with low down-payments during a peak in market prices and are now “upside down”. Often the home is in a “starter home” neighborhood that already has a high percentage of renters. “Upside down” means the home will not sell for enough to pay off their loan and all the selling costs. They are employed, and thus not in dire straights, thus not able to meet the “hardship” requirements to do a “short sale”. And they don’t want to ruin their credit with a foreclosure, so they decide to keep the house and rent it out because it’s the only option that makes sense, even though it’s not really what they want to so.
I generally don’t take “involuntary landlord” clients because they are notoriously sensitive to repair costs and more difficult to deal with. They don’t have a lot of extra money on hand, else they could have brought money to the closing table and sold. So, when your A/C craps out and I tell the owner they need to send me money for a replacement unit, they may not have it. Worse than a “greedy landlord” is a “broke” landlord. If you’re renting from me, your owner can afford to properly maintain the property, otherwise they couldn’t have become my client because I screen owners for this.
Elective Investor – I have a number of these clients as well. They purchased the home to live in, did live in it, but purchased and moved up to a bigger, better home after a number of years. This is a normal progression for a growing family with increasing earning power. They were in a financial position that made it possible to buy the move-up home without selling their current home first, which makes the logistics of moving much easier. Then after moving, decided to retain the first home as an investment instead of selling.
This is in fact one of the best ways to become an “investor” as the loan is already in place and equity has usually already built up. This owner is now technically an “investor”, but didn’t buy the home initially as an investment. Some also retain it to possibly hand down to a child someday.
Accidental Investor – These landlords usually inherited or somehow “ended up” with a house. It happens a lot. More than most people know. If we could all be so lucky! Many will go through the same thought process as the Elective Investor. If they don’t actually need the money that would come from selling the home, it can make sense to retain it as an investment property and hire a property manager to take care of it.
Who is Your Owner?
Probably less than 25% of my owner clients are “pure investors”. And within that category of investors, mine are the best to rent from. The truly “greedy landlord” types that many tenants assume most landlords to be are often driven solely by cash flow potential when purchasing investment property. Single family homes do not offer as good of a cash flow as can be obtained (on paper at least) from duplexes and 4-plex properties. Many homes don’t even rent for enough to cover the mortgage payment. The worst of the worst “greedy” landlords tend to own rundown 4-plexes, duplexes and small “Class C” apartment buildings. I don’t manage those type of properties because I don’t like those kind of owners. I also don’t like dealing with the tenants that run down properties attract. Yes, there are penny pinching greedy investors who own single family homes too, but none of them are my clients.
So, the next time you receive a below-market rent increase for the well-maintained home you are renting in SW Austin at below market rent, that renewal letter does not qualify you as the “victim” of a “greedy landlord”. Good grief. It’s just me saying that I think you’ve been a good tenant and would like you to stay for another year at a fair rental rate that’s good for both you and my owner client, who probably isn’t even an “investor”.
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