Hot rental markets are spreading all over the country. With the stock market and real estate market both on fire, the rental market is also heating up.
More people are allowed to relocate to lower cost areas of the country thanks to the permanent trend of working from home. Meanwhile, the strong real estate market is pricing people out of buying.
Hot Rental Market In San Francisco
Due to the pandemic, there’s been a fanning out of residents in my city of San Francisco. Residents are moving from the more dense east side of the city to the less dense and more affordable west side of the city. As a result, the demand has been strong for my rental houses.
I listed my property on Craigslist and in two days, I received 36 serious inquiries. The address was left off because I wanted to weed out the looky-loos and those who don’t read and follow instructions. I also didn’t want any psycho-killers. As a result of the demand, I decided to have an additional open house on Saturday, instead of just Sunday.
Surprisingly, 10 out of 10 interested parties who said they’d come Saturday came. The world is full of flakers, and I was expecting at least 30% of them to not show up. Maybe penguins can fly.
Some people are still scared of buying and some are probably unable to qualify for loans given stricter lending standards. I worry about the sustainability of this rental market, but for now, landlords should be taking advantage by raising prices.
For those renters out there who keep missing out, here are some thoughts from a landlord’s perspective of what worked, and what raised red flags during the open house.
Advice For Renters In A Hot Rental Market
* Do not bring your girlfriend or boyfriend if they are not going to be on the lease. There were two one year out, male MBA students who make roughly $290,000 in combined income. One of the guys brought his girlfriend. Although the two guys were nice, all I could think about was the girlfriend staying over, and the place being occupied by three people instead of two. As I questioned them further, the boyfriend finally admitted that his girlfriend visits for 2 months several times a year from Europe, and that she will stay with him until end of November. Those guys are not getting the apartment.
* Ask if you can take off your shoes. By asking the landlord/owner/agent whether you can take off your shoes before entering, it shows the owner respect. It also shows that you care about cleanliness, which should translate into caring for everything else in the apartment. If the owner says “no need” to take off your shoes, it’s up to you. It just shows great courtesy that you’ve asked.
* Smile a lot. The last thing I want to do is rent my place out to someone who looks depressed and grumpy. This one woman looked like she was constantly pissed off at something. That’s not someone I want to deal with in this long-term relationship. Smiles are free! Do it more!
* Follow directions. For some reason, there are a lot of morons out there who do not follow directions. If you e-mail me and ask when the open house is, when it’s in bold in the ad, you won’t be considered. If you ask if there is parking, when it says so right then and there, you will not be considered. Spend as much time possible reading the ad and looking around before asking bad questions.
* Come with all your documents prepared in a manila envelope or folder. Having all your paperwork before coming shows that you are organized and serious about the place. Include a picture too, so the landlord can remember who you are. You don’t have to give the paperwork to the landlord, if you decide after the open house you are not interested. You will impress the landlord tremendously, because so many people don’t do this. Include in your paper work your credit score report, employment verification, a drivers license, resume, and at least one bank account that shows you’re not broke.
* Do some research on the owner and property. You should inject some commonality in your discussion with the owner/agent. If you know the owner/agent went to UCLA and the open house is Saturday, you should know who UCLA is playing against in football. You don’t want to come across as creepy. You just need to bring up a topic where you think the owner/agent will enjoy discussing about. Build that bond.
* Discuss long term plans. The more visibility you can give the owner, the more s/he will appreciate it. If you can tell him that you plan on staying for 4 years, that’s music to his ears. Owners don’t want turnover, so anything less than 2 years is a turn off. Moving is a pain in the ass, and finding the ideal new tenant is also very painful. Minimize their pain, because landlords are already thinking about the next tenant.
* Make at least 40X the monthly rent a year. If the rent is $2,000 a month, you had best make a minimum of $80,000 a year. Otherwise, you are living it up more than you can afford. I generally shoot for tenants who make 80X the monthly rent to ensure they will be able to comfortably pay. At 80X the monthly rent, one could be saddled with sizable debt, and still come out OK.
* Show at least 10X the monthly rent in cash savings. Again, if you don’t have at least $20,000 in liquid cash savings for a $2,000/month rental, you need to lower your standards. Every landlord thinks about what would happen if you suddenly lose your main source of income. Landlords need to feel assured that you have enough assets to cover your full year contract before he starts thinking about filling out eviction forms. If possible, shoot for 20X monthly rent coverage.
* Don’t arrive at the very beginning. With every single open house I’ve hosted, 70% of the interested parties come at the very beginning. As a result, you won’t get as much air-time as you should with the landlord. Instead, consider coming in the middle of the time frame. Coming at the end is not recommend either since the landlord will probably be tired by then of talking to everyone.
* Follow up over e-mail. I can’t emphasize enough how important it is to follow up over e-mail, thank the landlord for hosting, and reiterate why you think you are perfect for the place and love it. All a landlord wants is someone who will take care of their property as if they owned it themselves. Landlords really just wants a tenant who are excited to be there.
Winning In A Hot Rental Market
All a landlord wants is someone who will always pay their rent on time, be self-sufficient, stay for at least two years, and love living there as much as the landlord loves having you there.
It’s a competitive rental market out there for those who live in bigger cities. Make sure you have all your financials in order and show your enthusiasm if you really want the place. The X factor really is about the follow up and attitude.
If you look at the chart above, you’ll notice that rents are flattening or declining in many markets. You can afford to be pickier now, but the most in demand markets and properties will always have multiple interested parties. Follow my advice and good luck in a hot rental market.
And one day, I recommend you finally buy your primary residence. Housing prices have long increased faster than wage income. Therefore, you want to at least get neutral housing by owning your primary residence.
Wealth Building Recommendation
* Shop Around For A Mortgage: Credible enables you to compare offers from multiple banks from their huge network of lenders to find the best offer for you. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using Credible to get multiple offer comparisons in a matter of minutes. When banks compete, you win. Mortgage rates are at all-time lows! Take advantage.
* Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.