More odds and ends for smart landlords

Last week I urged property managers to make sure they perform three tasks on a regular basis: raise the rent, keep written leases current and in force, and examine their rent as a percentage of the property’s market value. Each of those topics brings up more issues, so here are a few follow-up questions based on smart landlording practices:

Q. How often can I raise the rent, and is there any limit to rent increases?

A. In Georgia, the landlord and the tenant are each free to negotiate whatever rent they feel is fair and meets their needs. Thus, if the landlord is asking more than the market will bear, the prospective tenants are free to sign a lease at another property with a more competitive rental rate. Likewise, if a tenant wishes to pay less rent, he is free to offer whatever rental rate he feels is appropriate. One of the main purposes of the written lease is to set a fixed rental rate for the term of the lease. Typically, that rental rate cannot be changed during its term except by mutual consent of the parties. Georgia law does not allow rent controls, so there is no legal restriction of rental rates.

Do rental rates always go up?

No, rental rates tend to be a function of supply and demand. For example, several years ago it was quite easy for first-time buyers to purchase a home, even though they had marginal credit and little cash for a down payment. As a result, many renters became homeowners, substantially decreasing the pool of renters. During that period, it was not unusual to see apartment complexes offering “six months free rent” to new residents as a marketing tool. In addition, because mortgage money was cheap, many new rental units were built and placed in service. Rents dropped during that time. Today, the opposite situation exists, with it being somewhat difficult for marginal buyers to obtain financing. Rental vacancies are declining and rental rates are headed up.

What happens when a “one year lease” gets to the end of that year and neither the landlord nor the tenant says anything about it? Can the tenant stay?

It depends on the written terms of the agreement. Most leases provide that the terms and conditions of the lease will continue into the future on a “month to month” basis until one party notifies the other that they intend to terminate, usually 30 or 60 days from the date of notice.

Then why did you suggest that it is important to keep all leases current?

Because once a lease converts to a “month-to-month” basis, the property manager has lost control over the term of the lease, and the tenant is free to terminate upon proper notice. Most property managers prefer to have their leases come due in the summer months when the rental market is most active. A vacancy during the month of August will usually fill more quickly than a vacancy during the month of January.

You warned last week that homes in the Atlanta area worth more than about $200,000 might not be able to generate enough rent to justify their inclusion in a rental program. What is your current target market for rental homes?

Prime candidates for a rental program would be houses that were less than 10 years old and have recently been through the foreclosure process. Because of the slow-selling market and the bad loan on the house, it now is being marketed as a “bank-owned” home. Most lenders require that buyers accept their foreclosures in “as-is” condition, and that the lender not be required to disclose any defects or problem areas. Because these preconditions are unacceptable to today’s picky retail buyers, the banks have been forced to lower their prices on many of these houses.

Today’s ideal rental house would have three bedrooms and two baths, would be purchased for well under $100,000, would require less than $10,000 in repairs, and would be located in a neighborhood of primarily owner-occupants. Proximity to a major employer would be icing on the cake. Such a house could be purchased and repaired, then placed in service with rent approaching $1,000 per month. Then the investor could recoup his total investment in a new fixed-rate loan, and still end up with a monthly profit of $200 or more.

Unfortunately, recent Fannie Mae restrictions have prevented the majority of experienced investors from participating in this activity. These restrictions have slowed the absorption of foreclosed homes in the Atlanta residential market. Specifically, no applicant for a rental property mortgage can be approved if the applicant already shows four or more home loans on his credit report.

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