Residential Rentals in the Housing Bust

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Jager06's picture
Jager06
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Residential Rentals in the Housing Bust

With the news of the arrival of the long anticipated second dip in the housing market, I am wondering about the affects on the rental property market.

 

I currently own 3 rentals, and expected to be full as a tick year round as a result of the housing downturn and increase in foreclosures. I have not seen this expectation come to fruition....

I have also recently read all of my mortagage documents on these rentals and was shocked to find that what I thought was a 15 year fixed note, is in fact a 15 year ARM, with a balloon payment. I had planned on this structure with the 1st mortgage, and got a 30 year ARM with 7 year expiry. Now looking at the potential for interest rate adjustments upward and the decrease in value, I do not see a way to refinance 200% of the value of the properties after the ARMs kick in and the banks demand balloon payment. The first one expires in 3 more years.

So what are the smart folks around here thinking about this predicament?

What is the likelihood of increased rental income due to increased foreclosures?

Now that I am aware that I am paying interest only on all of this and will have 0 equity at the end of the headache, what are the options?

Does living in California have any affect on the options?

 

 

soulsurfersteph's picture
soulsurfersteph
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Re: Residential Rentals in the Housing Bust

I live in Los Angeles and I can tell you the rental market has gone really soft here. My landlord has a very hard time renting places out and I got my current place at a discount because of the soft rental market. The unit next door to me sat empty for 6 months, which used to be unheard of.

It of course depends on the area, but the reason why rents have been actually going down here since the housing bubble collapsed is that people are either doubling up (moving in with roommates) or moving home with family. I previously had a two-bedroom apartment for myself and was very close to getting a roommate but ended up downsizing to a one-bedroom. 

If things got really bad my next "downsize" would not be to a single but would be to move in with family. So as you can see, this economy does not help the rental market much at all.

When I was looking for this apartment, just last October, I walked around and there were for-rent signs on almost every apartment building in the area. I had too much to look at. There are still for-rent signs on every block. Now I've also noticed for-rent signs on commercial buildings where they used to be all filled. Certain commercial blocks in LA are starting to look downright ghost-town like. There's one strip 5 minutes from here where the entire block is for rent except for one bar that's been there 20 years.

In all my years of living here I've never seen anything like it.

 

Nate's picture
Nate
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Re: Residential Rentals in the Housing Bust

Jager06,

This week on Financial Sense Puplava interviewed an individual from RealtyTrac.  It's a relatively short listen and worth your while.

Nate

 

Jager06's picture
Jager06
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Re: Residential Rentals in the Housing Bust

Thanks, I will take a listen right now.

 

Jager06

Poet's picture
Poet
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Re: Residential Rentals in the Housing Bust
soulsurfersteph wrote:

I live in Los Angeles and I can tell you the rental market has gone really soft here. My landlord has a very hard time renting places out and I got my current place at a discount because of the soft rental market. The unit next door to me sat empty for 6 months, which used to be unheard of.

It of course depends on the area, but the reason why rents have been actually going down here since the housing bubble collapsed is that people are either doubling up (moving in with roommates) or moving home with family. I previously had a two-bedroom apartment for myself and was very close to getting a roommate but ended up downsizing to a one-bedroom. 

If things got really bad my next "downsize" would not be to a single but would be to move in with family. So as you can see, this economy does not help the rental market much at all.

When I was looking for this apartment, just last October, I walked around and there were for-rent signs on almost every apartment building in the area. I had too much to look at. There are still for-rent signs on every block. Now I've also noticed for-rent signs on commercial buildings where they used to be all filled. Certain commercial blocks in LA are starting to look downright ghost-town like. There's one strip 5 minutes from here where the entire block is for rent except for one bar that's been there 20 years.

In all my years of living here I've never seen anything like it.

Soulsurfersteph:

I agree with you about the "folding in" of households. Some reports have shown that 1.8 million households disappeared in America in just the past two years. That's obviously not 1.8 million householders and their families committing suicide. That's adult children (and sometimes their own families) moving back in with their parents, relatives moving in with one another, roommates shacking up, college students attending closer to home or staying out of the dorms, etc.

That said, some cities and downtown metropolitian areas will experience less hollowing-out than others mainly because people in the exurbs may be quitting their homes to find apartments closer to work. In Southern California, I'd expect eventually-foreclosed homeowners in exurban communities like San Bernardino or Riverside would "fold in" but also may downsize into apartments in Los Angeles and Orange County in order to be closer to jobs even as the aforementioned "folding in" occurs amongst residents of the latter two counties.

A co-worker recently negotiated a $250/month decrease in rent simply by offering the landlord a chance to lower their rent after citing the lower rents in nearby units and their willingness to move out.

The consumer economy is actually somewhat kept up because people now have more disposable income from "folding in" or just not paying their mortgages since it may take 1 to 2 years before a bank foreclosures.

Poet

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Re: Residential Rentals in the Housing Bust

I am in Northern AZ, and we are looking pretty good here for the rental market today.  I personally have 4 rentals, and have friends with a few each.  All of us are fully occupied and getting numerous calls when our ads hit the paper. Earlier this spring we were looking shy, but the cycle has turned again.  Not sure all factors in our area are the same, but if you have room to go lower, you may have to settle for the time being.  We'd rather have a bit less on the rent, and have someone in there rather than having an empty place.  Hang in there, those getting foreclosed on need places to live too.  Run their credit and see what their "story" is...meet them in person,  and stick to gut feelings about people.  If they're deadbeats, the credit report will show it.  If they're bad decision makers on only the mortgage, that may be a case where you can capitalize.  Lock them in for 6 mo or 1 year and keep on top of them paying on time.  I had one guy try the late game with me, and I hit him fast with a 5 day notice....he wised up and decided I'm not the one to mess with.   Good luck, and keep believing.  Real Estate is still a good investment.

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Re: Residential Rentals in the Housing Bust

Nate's picture
Nate
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Re: Residential Rentals in the Housing Bust

Jager06,

Article in WST today about real estate.  Smart money (Paulsen) is buying.  FWIW, he shorted RE at the top.  I know the RE market is very local, but this is one guy I would never bet against.

Nate

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Re: Residential Rentals in the Housing Bust

I had 24 units in Orange County, CA. Sold many off in 2006, a few in 2007, and traded some for large office buildings. Commercial real estate is a bust. My rents are just starting down this year. I would hold off buying for another year. We are  not yet ready. My take is there are so many foreclosures and household shrinkage that we won't be at the bottom for a while. The whole process so far has been to deflate the real estate bubble slowly. It's still going down. When inflation starts again, the prices will go down. As inflation starts, the interest rates rise. Jobs and cash available to buy lag. Price goes down. That's actually the time to get in. Especially if you can buy for cash. Right now you have the benefit of a low rate. Let's take an example of a 600k 4plex. You could buy that at 5.5% or less interest, payment after 20% down or so of around 2600 or so. If the interest goes up to 7,8% you will have a payment rise of 400 or more bucks. Building should really be worth 500k or slightly less just eyeballing it. That spread of $4800 a year means it takes about 20 yrs to make up that 100k!

 

To make money in real estate you want to buy in times of high inflation, high interest rates when prices are hammered down and sell in times of low rates. Like stocks, it takes guts to do. You always anticipate the rate going up, value of your asset going down. 

agitating prop's picture
agitating prop
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Re: Residential Rentals in the Housing Bust

My husband and I own commercial/residential mixed use loft space type real estate in Seattle. We went through a real lean spell about 5 or 6 years ago, for about 8 months, and have experienced very short term vacancies, of 2 months duration maximum, when some of the office and manufacturing spaces were vacant, in the meantime. We're really lucky. I think location is pretty important, both by region and neighbourhood.

I would avoid any speculative or investment type of leveraged purchase at this time, though. Our building was purchased about 20 years ago, when it was relatively cheap.

sofistek's picture
sofistek
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Re: Residential Rentals in the Housing Bust

Jager06,

Off on a tangent, here, but do you buy in to Chris's prognosis that the next 20 years are going to be nothing like the last 20 years? If so, shouldn't you simply be ensuring that you get rid of actual and potential debt, and securing your own home? 3 years might not seem like a long way away but a lot can collapse in that time. 15 years away is beginning to look like infinity. I get the impression, though I could be wrong, that you're trying to find a way to make the best returns, in a future which will be rough in the short term but not hugely unlike the past.

As for why rentals aren't picking up business from foreclosures, why would you expect people who can't afford to pay their mortgage, or even reschedule it, to be able to pay rental prices (I don't know about the US, but I wouldn't expect that here in NZ, without social benefits). Isn't it more likely that folks are moving in with other members of the family? I would guess a great many houses are under utilised and could easily stand higher occupancy.

Jager06's picture
Jager06
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Re: Residential Rentals in the Housing Bust

Sofistek,

Thanks for your questions, it allows me to shed a little more presonal light on my actions. When I came back from Iraq in 2006 after 17 years in the military, I knew things would never be the same again. I began preparing for what I sensed to be a very tumultuous time ahead. One of things I chose to do, mistakenly now perhaps, was to take advantage of the easy credit in housing and purchase a property with three rentals on it. As I describe in the initial post I am finding there are more hazards than I had anticipated with the rentals and especially the mortgages themselves as it seems I may have been duped with regards to the total liabilities on one of them. My bad.

I have also set up "Teams" of people, like minded individuals, families, Churches etc. We all agree that something is going wrong with our way of life and our financial system. So as people heard me speak publicly about my expriences in Iraq and other places, they began to approach me about circumstances that we recognized as being relevant here at home. I decided to provide a training program that shows ways of identifying various issues that may be relevant, mitigating their initial impacts, setting up emergency plans for events that may cause social disruption, natural or man made. I used Argentina as one of my examples for economic failure. I continue to teach local planning and organization for long term self reliance, food security, energy security and the basis for economy on a local scale. 4th generation warfare is the resilient community concept, cellular structuring to ensure both replicability and survivability over a host of potential problems. These micro communities if you will, can then be joined together at a safer time when they have created excess and have a basis for economy within a small geographical area.

I have aslo developed my own ideas for alternative energy, as I have reduced the consumption of everything across the board in my household. I am experimenting with gasification, hydro power on the creek here on my property, and of course solar. We are now practicing and teaching others composting, gardening, food storage, outreach to local CSA and other production as well as promoting these changes within the context of political stability at the county government level. I am the president of a small group (150+/-) of political libertarians and Constitutionalists who are outreaching to local schools as adjuncts to promote these things at the local educational level as well.

Do I subscribe to the precepts of the Crash Course? I think so. I have working on this for over 3 years, and just saw the CC abour 7 months ago. Am I doing as much as I can to promote the CC and similar precepts? Yes. I am just doing it within a frame of reference that works for my specialized military background.

As far as debt is concerned, I "got to dance with who I brung" and I am saddled with the rental for now, due to the drop in values we all have seen. I am working on various ideas to make it less of a liability, and had hoped for some more specific ideas here. I will continue to noodle it, and the great advice I have gotten from this site. I am backstopping the debt with PMs in off chance I can take advantage of the runaway economic issues and use the PMs for payoff of my long term debts (home, businesses and rental property) while at the same time being self sufficient enough to not need those assets for anything else.

Im sure this way more than you asked for, but in the context of statement I saw somewhere else about "lily white office hands" getting burned and blistered on a plow, some of us never had those hands to begin with. We have changed  our course already and are experimenting with the callouses and the rewards that go with them to find a way forward for as many as we can convince to expand their options and build themselves an "Insurance" policy.

Best ragrds,

Jager

agitating prop's picture
agitating prop
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Re: Residential Rentals in the Housing Bust
Jager06 wrote:

With the news of the arrival of the long anticipated second dip in the housing market, I am wondering about the affects on the rental property market.

 

I currently own 3 rentals, and expected to be full as a tick year round as a result of the housing downturn and increase in foreclosures. I have not seen this expectation come to fruition....

I have also recently read all of my mortagage documents on these rentals and was shocked to find that what I thought was a 15 year fixed note, is in fact a 15 year ARM, with a balloon payment. I had planned on this structure with the 1st mortgage, and got a 30 year ARM with 7 year expiry. Now looking at the potential for interest rate adjustments upward and the decrease in value, I do not see a way to refinance 200% of the value of the properties after the ARMs kick in and the banks demand balloon payment. The first one expires in 3 more years.

So what are the smart folks around here thinking about this predicament?

What is the likelihood of increased rental income due to increased foreclosures?

Now that I am aware that I am paying interest only on all of this and will have 0 equity at the end of the headache, what are the options?

Does living in California have any affect on the options?

 

 

Jager, What tripped you up on the 15 year ARM? If you thought it was a fixed rate, it could have been because it was talked up as being fixed and the documents proved otherwise. If this is the case you may have a case against the bank or lending agency.  Is it actionable? I know a few years ago, I bought a condo and was under the distinct impression that I could lock the mortgage in at any time, at the original rate. This is pretty much exactly what the banker told me, verbatim. At least that's how it sounded. I had to stop her and clarify, I can lock in any time, at 5.3%? That didn't seem right, if interest rates jumped 3 or 4% in a couple of years, for example. Well of course not....etc..etc..I was really amazed by this experience. It was intentionally deceptive, as far as I'm concerned. I caught it the day I took the mortgage out, but barely.  I'm wondering if you had a similar experience.

Jager06's picture
Jager06
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Re: Residential Rentals in the Housing Bust

I thought it was a 15 year fixed. Now that i have spent an evening reading ALL of my documents, I have seen the error of my ways. Both loans have been bundled and sold twice since then. Now that rates have dropped again, I will try to go the cap rate business refi route, and if that does not work, I can always move into the vacant unit and refi as a personal residence.

As far as if it is actionable or not, I suppose that since this is California, anything is actionable. I would need to schedule in some time for a lawyer. The other side of that coin is, I got what I had coming. If I had moved a little slower and read all the fine print including the balloon amount info, I might have had another better idea about it. My morality says, I got what I got due to MY lack of due diligence at a critical moment. I take responsibility for my inaction in this case. I simply wish more people were willing to do the same in more areas of their lives.

 

Jager

sofistek's picture
sofistek
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Re: Residential Rentals in the Housing Bust

Wow, Jager06, I wouldn't have guessed at all that from your opening post. I hope you find a way out of your rentals but good luck in whatever you decide.

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