How does competition from accidental landlords affect you?

Question

Hi all.  I have been considering investing real estate (renting) and have been stretching my legs through the neighborhoods to get a sense of things, reading these awesome forums, and generally noodling out my business plan.  In thinking about my market I have a question for the collective knowledge of this forum.

One thing I have noticed in my area is that the rents cap out at 1100-1200.  But within that range there is a huge span of value.  At those rents, SFRs range from 3bd/2bt 1500 sqft to 5bd/3bt 3000 sq ft on a wooded acre with a free horse.

In looking at sale records you can tell that the top rental range is composed of people buying at low prices and immediately renting (i.e. professional landlords) and people who bought their house at peak price before the bust and are now renting it out rather than selling.

So if you're a landlord in your top rental range and competing with accidental landlords what affect does that have on your business?  As a consumer, why would I rent the 3/2 1500 sqft when I could get so much more for the same price?

In particular, since I have no skin in the game yet I am wondering if I should target properties that would cashflow at the 800-900 range where there is much less competition from mcMansion rentals.

Account Closed · Answer

Most of the accidental landlords in my area are losing more money than they realize.  Very few actually take the time to understand the full cost of a rental business and even fewer purchased there home in an area or price range that would make sense as an investment property.

Dan P. · Answer

Thank you all for the great responses.  Its always good to keep in mind that a house rental is a product and needs to differentiate itself like any product.

Shanequa J., I believe that accidental landlords are guided by different decision criteria than income investors and their decisions may therefore appear economically irrational.  As an example, if I bought during the bubble and then encountered financial trouble I may very well rent out at a rate that just covers PITI, or even less, and then downsize.  I would be thinking that my rent is covering the mortgage and once my personal situation improves I can move back into my house.

Dale Osborn, that is a great point since as the above scenario shows that just covering PITI is probably not going to be a viable long term strategy.

As Steve L. points out, income investors have always operated next to accidental landlords.  So I guess my OP is about the times we live in today in which (I think) there are more accidental landlords out there given the housing bust and consequent recession.  How has that trend changed things since 2007? More competition in the higher rent ranges? More opportunities to buy houses from accidental landlords? etc.?

Steve L. · Answer

Dan P. I think you are over-thinking this equation.

Accidental and professional landlords have co-existed for a long-time and will always do so.   Real estate is local and time sensitive.  If an accidental landlord rents his "McMansion" for $1,100 someone will scoop it up and it will be off the market.  That is no longer your competition.

Professionals bring some value to the equation too:
- Repairs get done quicker
- Paperwork/process will be much more professional
- They do much more advertising and don't try to rent to friends and friends-of-friends

Not everyone wants to live in a wooded area with horses and tons of exterior yard maintenance.  I sure wouldn't enjoy that.  I also don't want a 3,000 square foot for just my wife and I (I would  have to clean, pay for utilities and furnish that much space).  That means I would be willing to pay market rent for a 1,600 sq ft house in the City and turn down the other options...  if market rent happens to be the same for 1,500 sq ft or 3,000 what are my options as a consumer?

Why not start with one house and see how renting it goes?  The great thing about single family houses, it only takes one good tenant (per house) to make your world happy.

If you live in a really small area with tons for rent right now, this advise may not be the greatest, but that probably means the market has too much inventory for rent.

Steve Babiak · Answer

Tenants have budgets that they are trying to live within.  Paying to heat space that they don't need is wasteful to them.  I had a 4BR house for rent in a neighborhood where 3BR is way more common, and I had it priced competitive with the 3BR houses (basically, 4th BR is free or bonus).  Square footage of the 4BR house was not much more than a 3BR (extra 100 sq ft or so).  Many just decided that they did not need the extra space and were afraid of having to pay extra to heat that unneeded space.  Sounds strange, but that is how many tenants think.

And if the tenants have to do things like mow the grass, that smaller yard starts to look more appealing too.  And if they have to manage snow removal, less area to clear of snow is more appealing too.

Dale Osborn · Answer

Once you identify the accidental landlords in the area - keep your eyes on them.Eventually they will get burnt out and will be ready to give the property away to the first person that happens to come along. Make sure that person is you!

Al Williamson · Answer

Dan P. sounds like you have a good grip on your market. I like that you're thinking in terms of ranges of prices and rents. Very sophisticated of you - congrats.

The thing about accidental landlords, generally speaking, is that they aren't working hard to compete. You can out market them, out landscape them, out customer service them - with ease.

I would encourage you to think how you could be a game changer if you entered that local market. Make them adjust to you.

Do this by differentiating your rental with curb appeal and a strong value statement so potential tenants understand why your rent is one the higher side of the market.

My 2 cents.

Shanequa J. · Answer

Regardless of how they became a LL, I would think they still would want to keep their rent in par with the market. People that bought at peak should have higher rents due to a higher mortgage. Free/clear and low mortgage balances would be the ones with lower rent. Choose a price range that you can cover the payments if a tenant stops paying. Choose a price range that will be easy to rent. For example in my area, it takes longer to find a tenant once the rent gets higher than $1000 and it usually involves hiring an agent to post. I invest in $850 and under because I can cover the mortgage and it rents fast.

How does competition from accidental landlords affect you?

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