I'm concerned about rental market. You??

[Rich Weese]

I started a thread with an article about rent decreases nationwide. The replies seemed to substantiate the concern with properties taking longer to rent, and reductions in rent as well as other bennies needed to rent up. It made me think a bit.
Here is my concern. I'll use a comparison with commercial property. Currently, there is vacant commercial everywhere. Of the 1.4 BILLION in commercial loans (on mostly new, vacant properties) due to recast or become due in next couple years. 700 million of those loans are now considered "troubled assets", and likely to flood the market soon.
If you are able to purchase these at 50% of loan, would you? Probably not. Why? NO TENANTS. How long will you be able to wait for the market to change and tenants return, and businesses to start up? Yet, you can buy at 50%.
Now residential. A couple years ago, residential imploded and continues to struggle. Smart investors saw the opportunities and swooped in. Properties were purchased, renters were found and good returns were generated. Now, properties are still avaliable at discounted prices, everyone is jumping on the bandwagon and throwing caution to the wind. Is this still smart? Remember the last time everyone jumped on the bandwagon? How has that worked out?
The majority of these sfrs currently (in many areas) are bought for cash by investors. They can afford to reduce rents to find tenants. Less cash on cash return, but no concern with loss of property. The other buyers that are leveraging, and analyzing returns based on rental rates that may be wishful thinking, or need to be adjusted downward. These will need to compete with the cash buyers. How can they?
Law of economics is supply and demand. The supply of rental properties is continuing to increase at an alarming rate due to many reasons. The time needed to rent a vacancy is getting longer, and rates are retreating. Realty Trac has done the projections in rates, and vacancies. It doesn't look good. It appears there are many more rentals available than ever before. Even with all the foreclosed families needing housing, we MIGHT be reaching a saturation point of renters. This will cause further needs to decrease rents. How will this affect your bottom line? If highly leveraged, or overextended, you need to visualize the potential problem and adjust for it now, imo.
I return to my comparison with commercial properties. Would you buy at 50% level , knowing that tenants are few and far between in commercial buildings and strip centers, etc. Might we be approaching the same scenario in many areas with residential? It is something we should probably think about in most areas of the U.S. Everyone thinks this buying process can't fail. I've heard that before... How did that work out for many?
I think cautiousness is the better part of valor, currently. We might have a problem coming down the track that we've NEVER faced before in oversupply of rentals. Sounds like another problem we had recently(foreclosures and 35% decrease in values), that we said could never happen. Boy, were we wrong to think that last time. What about this time??? Rich

[Bill Gulley]

Hi Rich, as you said it's supply and demand that sets the price. As commercial owners are strapped at higher mortgage requirements and the limitations facing possible tenants, rents demanded are are too high. Those with large portfolios of commercial properties don't view the bottom line based on performance of a single holding rather on a aggregate basis. An empty building is better rented at it's expected rate but even if it is empty it's still contributing to the portfolio from a tax angle. The book value remains the same. I have held properties as non-earning assets, one for just over ten years!

It's not really reasonable to expect to command 2008 rent levels when market values take a dive. Rents have a direct relationship to market value. Right now, I think the perception of value is lagging by tenants. They see a home rental value as they have been accustom to paying in the past few years. Buffalo, Ny. for example has properties that are renting at a 60/70K level that are being picked up for 12K! For the near future, we are in an adjustment period. Not saying that rents will fall to a level reflecting a 12K investment, lucky for investors there are intrinsic values at play as well and investors will be charging what the rental market will bear, not what they have invested. For those properties rented profits will provide a much higher return but those will likely be offset by vacancies held arising from the over supply of properties.

In my opinion, most "investors" (real estate operators) have a gross misconception of market value. Saying that one is buying at 50% of market value is guru accounting, better described as Enron accounting methods! Just because a property sold for 100K two years ago and I buy it for 50K today does not, in anyway, shape or form justify me saying I made 50K! Any property is only worth what it actually sells for under fair market conditions. Commercial, residential, agricultrual, industrial or recreational, it does not matter. If I can compete in the rental market keeping in mind the current value (not just the dollar value but the intrinsic value it offers) of my property and rent it for it's expenses with a reasonable profit for my efforts, then it's all good!

Commercial rents move slowly compared to residential, mostly out of market conditions. Many areas already have an oversupply of commercial properties. For an investor to access the situation at a macro level is not really relevant for any property. As I'm in the process of acquiring a commercial property, in the Ft. Worth area, looking at a macro assessment is nothing more than fuel for conversation, totally irrelevant to that property. Assessment is always done at a micro level, supply, demand, current values, interest rates, taxes, etc.

Not worried at all. I'm not worried about the losses of big banks (to a point). I'm more concerned about how the government manages thoses losses. As far as I'm concerned, Bank of America can close it's doors, take a hit in the market for the short term and have other institutions fill the vacum, it's the American way! The key is as it has always been , know your local market! IMO Bill