By Emily Koelsch
With changing economic and market conditions, some Landlords are deciding to sell their rental property with Tenants in place. There are various reasons to do this – for example, wanting to take advantage of strong markets, needing cash for other opportunities, or no longer wanting to be a Landlord.
There are some distinct advantages and disadvantages to selling a property with Tenants in place. If you decide to buy or sell a property with Tenants, you must know and respect your Tenants’ rights.
To help you do that, here’s an overview of those Tenant rights and tips for making the process go smoothly.
Notice Requirements When Selling a Property With Tenants in Place
Tenants have a right to receive an official Notice of Sale of Property. This Notice should be detailed and include specifics about when you’re putting the property on the market, the notice Tenants will receive before showings, and any other Tenant rights or responsibilities.
When drafting this Notice, look at your Lease Agreement and state laws. Some states have specific timelines for when Landlords must give notice. Additionally, good Lease Agreements include language about Notice of Sale and Notice of Showings.
Here are some tips for drafting this Notice:
- Review your Lease and make sure you comply with all terms;
- Review state and local laws to ensure compliance with all requirements;
- Include as much detail as possible;
- Tell Tenants how much Notice you must give before showings;
- Discuss the Tenants’ rights and responsibilities;
- Encourage Tenants to contact you with any questions or concerns.
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The Lease Agreement Is Enforced Even if Ownership Changes
One of the most essential things for Landlords and Tenants to understand is that a fixed-term Lease Agreement remains in effect even if ownership changes. The Lease isn’t tied to the Landlord; instead, it remains with the property and is in full effect until the end of the Lease period.
Here are some Lease-related tips when selling a property.
- Tenants are understandably anxious when they hear that their home is being sold. To ease their concerns, let them know that their Lease terms won’t change.
- A strong Lease Agreement can make your home more attractive to investors. Investors are bound by the terms of the Lease. They’ll be more comfortable with a thorough, state-specific Lease Agreement.
- To protect your Tenant, put everything in writing. For example, if the Lease doesn’t include a Pet Addendum or address pets, the new owner could tell your Tenants their pets are not allowed. Add any needed Addendums to your Lease before selling the property.
- At the end of the Lease term, Tenants are entitled to their security deposit. At the time of the sale, Landlords should transfer the deposit and any accrued interest to the new owner.
Effectively Marketing & Selling a Property With Tenants in Place
Even with proper Notice and a good Lease, it can be tricky to sell an occupied rental property. The process is stressful for Tenants and presents uncertainty for buyers. Thankfully, there are some ways to make the process go smoothly.
With that in mind, here are some tips to help you market and sell an occupied rental.
- Make sure Tenants are current on rent. If Tenants are behind, it makes your property less attractive to investors.
- Offer incentives to encourage Tenants to be cooperative during the selling process. Tenants can help by keeping the property clean, leaving during showings, and staying current on rent. To encourage cooperation, consider offering incentives like gift cards to local restaurants, a night at a hotel during an open house, or a rent discount while the house is on the market.
- Communicate well with Tenants throughout the entire process. Good communication includes coordinating showings around their schedule. Ask your Tenants when it’s convenient to show the property and, whenever possible, schedule showings during these times.
- Even if you don’t plan to sell a property, your Lease should always include language about a Landlord’s right to sell a property.
- Tenants are not required to clean or prepare the property for showings. To ensure it’s in good condition, offer to have it professionally cleaned.
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So, a few years ago we bought a 4-plex that was located within the confines of an HOA or Homeowners Association.
And the numbers worked, so that was great,
And we were told that they handle a lot of the landscaping and care for the parking and deal with all the trash again, which was great.
But we made a crucial mistake and did not thoroughly read the bylaws, which is all on us. There was one item in there that made a really big difference on how well this new purchase would play out.
So, this week on the podcast, we are talking all about what it means to own a rental property within an HOA.
There are several pros and cons to Homeowners Associations. Some aspects can be fantastic when owning a rental governed by them and others can really affect the value of your rental and the ability to rent it.
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By Jason Sorens
The Washington State House has passed a bill to cap rent increases at 7 percent a year. The Senate has yet to vote on it, and the governor has not taken a position. If enacted, this law would hurt renters, including low-income renters.
Advocates of the legislation call it “rent stabilization” rather than “rent control,” because “rent control” has gotten a bad name over the years (and for good reason). But in practice, it works the same way.
Capping rents means lots of people will want to rent at the capped rate, but fewer units will be available to rent, creating a shortage. After all, owners of apartment buildings can put their units to alternative uses, selling them off as condos, converting them to office spaces, occupying the units themselves, or simply leaving them vacant.
In the long run, rent caps encourage apartment owners to skimp on maintenance as well. So fewer units are available, and they are of lower quality
The Washington legislation exempts apartments built in the past 10 years. But the law could still discourage new apartment construction. After all, builders have to keep in mind the possibility that 10 or 15 years from now, those new units themselves will be added to rent stabilization. This is precisely what has happened in New York over and over again.
Once a place adopts rent caps, it’s very hard to un-ring the bell and make investors feel safe again about building new apartments.
Advocates of rent stabilization say that “vacancy decontrol” — letting rents adjust when a tenant moves out — makes the legislation less harmful. But rent stabilization makes tenants less likely to want to move out. That makes it harder for young people and workers moving to an area to find a place to rent, and keeps people locked into locations where it might not make sense for them to live anymore.
In markets that have had rent caps for many years, there’s even a well-known scam, described in Tom Wolfe’s Bonfire of the Vanities, whereby a renter pretends to still occupy a unit, while subletting it to someone else, to avoid vacancy decontrol.
Advocates of rent stabilization also say that a high rent cap, like one that limits a one-year increase to 7 percent, is less harmful than traditional rent control. But it’s no defense of a policy that it might cause only a little harm. And in any case, a 7-percent cap could cause a lot of harm.
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Why might a housing provider need to raise rent more than 7 percent in a year?
First, inflation might run above that rate. We just went through a year in which inflation topped 9 percent. It could happen again.
Second, even if inflation doesn’t run that high, rent inflation could run that high if land-use regulations have choked off housing supply and demand is growing. Again, the recent pandemic is a case in point: Americans’ demand for housing went up because people were spending more time at home, but a lot of places did not let property owners build lots of new units. Last year, annual rent growth topped 10 percent in several markets that have limited the supply of new homes.
Third, repairs and renovations can be costly for housing providers, and the value of these improvements, especially after a tenant has stayed several years and if building codes change, could justify a rent increase of much more than 7 percent.
Fourth, the city of Seattle requires a court order to evict a tenant. For instance, if the tenant is involved in drug activity, the housing provider has to prove it in court. But a housing provider might prefer not to get the police involved. Sometimes a rent increase is the only realistic way to get rid of a problem tenant. In this way, just-cause eviction laws and rent stabilization laws interact to make it extremely difficult to remove tenants who are damaging the property, annoying their neighbors, or engaging in illegal activity.
The economic research on rent caps shows unequivocally very large economic losses, even for tenants of those units themselves. A recent study of San Francisco rent caps shows that after adoption, corporate housing providers reduced supply by 64 percent, while individuals reduced supply by 14 percent. Perhaps the definitive study of the welfare effects of rent control in New York, published in Journal of Urban Economics, found that even tenants in rent-capped units suffered from the policy.
Thus, it’s no surprise that only 2 percent of top economists agree that “ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing,” while 81 percent disagree.
Rent caps also have unintended consequences in other markets. Rent caps reduce the value of multifamily properties, because owners and investors expect to earn less. In New York, a recent tightening of “rent stabilization” drove down multifamily properties’ values by more than 30 percent, leaving some housing providers with negative equity and encouraging foreclosure. As a result, a major housing lender has incurred large losses, and investors are worried it could go bankrupt.
Instead of rent caps, cities and states can make housing affordable by letting people build more of it. That’s just what has happened in the last year in several Sunbelt markets. Investors are even complaining that multifamily has a “supply problem,” meaning too much supply, resulting in rent declines.
Just about the worst way to “help” renters is by punishing property owners for providing rental housing, which is just what rent caps do, regardless of whether they call them “rent control” or “rent stabilization.”
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In People vs. Commons West, LLC, the Cortland County New York Supreme Court ruled the New York Source of Income Antidiscrimination statute (“SOIA”) to be unconstitutional. The New York Human Rights Law (Executive Law article 15) was amended in April 2019 to make it an unlawful discriminatory practice to refuse to rent or lease housing accommodations to any person, or group of persons, based on their “lawful source of income “
As defined in the Human Rights Law, “lawful source of income” specifically includes “any form of federal, state, or local public assistance or housing assistance including … section 8 vouchers … whether or not such income or credit is paid or attributed directly to a landlord” Pursuant to section 8 of the United States Housing Act of 1937, the federal government operates the Housing Choice Voucher Program that provides housing assistance to eligible low-income families by giving subsidies to landlords who rent apartments to them
Respondents own and operate numerous residential rental properties in the City of Ithaca. The New York State Attorney General (“NYSAG”) commenced a proceeding alleging that respondents’ refusal to participate in Section 8 constitutes impermissible source of income discrimination in violation of the Human Rights Law, and seeking (1) a permanent injunction enjoining respondents from refusing to rent or lease apartments to recipients of Section 8 housing assistance; (2) restitution for consumers injured by respondents’ conduct; and (3) the imposition of penalties and costs. Respondents moved to dismiss the petition or alternatively, for an order granting discovery.
Respondents first contend that SOIA is unconstitutional because it compels landlords to participate in Section 8 — which is a voluntary program under federal law — thereby impermissibly requiring landlords to waive their rights under the Fourth Amendment of the US Constitution. A landlord cannot accept a Section 8 housing voucher as payment for rent without agreeing to participate in Section 8 by entering into a Housing Assistance Payment (“HAP”) contract with a Public Housing Agency (“PHA”) .The HAP contract must be in the form required by the Department of Housing and Urban Development.
The HAP contract requires a participating landlord to consent to inspection of “the contract unit and premises at such times as the PHA determines necessary,” and to provide the PHA, the Department of Housing and Urban Development, and the Comptroller General of the United States “full and free access to the contract unit and the premises, and to all accounts and other records of the owner that are relevant to the HAP contract,” which includes access to “any computers, equipment or facilities containing such records”.
The “premises” are “[t]he building or complex in which the contract unit is located, including common areas and grounds”. Respondents contend, therefore, that SOIA violates a property owner’s Fourth Amendment rights by giving the owner no choice but to consent to these inspections by entering into a HAP contract.
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NYSAG agrees that Section 8 is a voluntary program, but contends that the Human Rights Law does not mandate participation in Section 8 because the law “merely prohibits [respondents] from denying an applicant for an apartment based on their source of income, which includes Section 8 vouchers”
In 1967, the United States Supreme Court established the principle that administrative searches of buildings to ensure compliance with a municipal housing code are significant intrusions upon the interests protected by the Fourth Amendment The New York Court of Appeals specifically held that laws which authorize inspections of residential rental properties without either the consent of the owner or a valid search warrant violate the Fourth Amendment, and specifically noted that a property owner cannot be indirectly compelled to consent to a search.
The court ruled that the NYAG’s argument is fundamentally flawed for the simple reason that, a landlord cannot accept a Section 8 housing voucher as payment for rent without agreeing to participate in Section 8, which, in turn, requires that the landlord authorize warrantless searches of the rental property and the landlord’s records. The NY Appellate Division has expressly held that similar SOIA statutes adopted by municipalities prior to the April 2019 amendment of the Human Rights Law required a landlord to accept Section 8 vouchers, effectively compelling the landlord’s participation in the otherwise voluntary program Thus, although Section 8 is a voluntary program at the federal level, the source of income protections provided by the Human Rights Law would necessarily compel a landlord to participate in Section 8 to obtain reasonable rent for an apartment rented or leased to a person who is eligible to receive Section 8 assistance.
A law may not coerce property owners into consenting to warrantless inspections in derogation of their constitutional rights by conditioning their ability to rent real property on providing such consent, which is precisely the effect of the source of income antidiscrimination statute. Thus, by requiring landlords to accept Section 8 vouchers, SOIA necessarily compels landlords to consent to warrantless searches of their properties, in violation of the Fourth Amendment.
Similarly, SOIA further violates the Fourth Amendment by compelling landlords to consent to warrantless searches of their records. The NYSAG has not identified any law or regulation requiring respondents to maintain specific business records, and renting residential, Accordingly, SOIA is unconstitutional to the extent that it makes it an unlawful discriminatory practice to refuse to rent or lease housing accommodations to any person, or group of persons, because their source of income includes Section 8 vouchers.
Based on the foregoing, respondents’ motion to dismiss was granted, and the NYSAG’s petition was dismissed, with prejudice.
Source: Friedman & Ranzenhofer
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By Grant Brissey
From budget-friendly rentals to pet-friendly policies, these home characteristics are among top priorities for future tenants.
What can you do to minimize vacancies? The first step is knowing what features renters want. Then, identify which of those features your property offers and highlight them in your listings. Our survey data from the Zillow Consumer Housing Trends Report shows that renters are pretty specific about what impacts their home decision. If your property can boast any of these most-desired features, make sure to call them out in your listings.
More so now than ever, affordability is key.
1. Staying within budget
Hands down, rent prices that keep them on budget is the top concern for most renters: 80% say it’s highly important.
2. Pet-friendly policies
Lots of renters acquired pets during the pandemic. Since 2018, the percentage of renter households that reported owning a dog has risen to more than a third, and those reporting a cat rose to almost 30%. Overall, 59% of renters in 2022 reported having at least one pet, up from 46% in 2018. Breed restrictions, whose efficacy has been questioned, may be barring a cohort of high-quality tenants.
3. Online rent payment
Demand for online rent payment capabilities has steadily grown over the last few years. In spring of 2019, 57% of renters said they’d prefer to pay rent online. By summer of 2022, that percentage had increased to 68%. Meanwhile, only 56% of renters reported having the ability to pay rent online in 2022.
4. Cost-saving amenities
Shared amenity features have taken a backseat to affordability issues for many renters. Emphasize the cost-saving factor instead. Remind tenants that a community gym means they’re saving money on membership at the fitness center down the street. A rooftop deck or garden space means they can entertain instead of going out. Appealing to the ways your property can help reduce their spend in other areas of their life could increase your perceived value.
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5. A walkable neighborhood
With outdoor spaces among the safest spots to gather over the last two years, it’s no surprise to see that 57% of recent renters valued a walkable neighborhood when searching for an apartment.
6. A short commute time
How Americans work has changed since 2018, but the desire to be close to work or school has remained fairly constant. 56% of renters surveyed in 2022 said their commute to work or school was highly important, similar to 58% in 2018.
7. Number of bedrooms
Also important to renters is finding a place that has their preferred number of bedrooms. A full 68% of renters say this is at least a very important factor in finding the right place to live.
8. Layout
Having their preferred floor plan or layout is highly important for 48% of all renters. It may be that after a few years of increased indoor time with family or roommates, the right number of walls and doors is now a growing concern.
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Property management professionals are dedicated to ensuring equal housing opportunities, which includes accommodating the diverse needs of residents. A key component of this commitment is understanding and responding to requests for reasonable accommodations and modifications. However, this raises the question: How do property management companies navigate unreasonable accommodation requests?
UNDERSTANDING UNREASONABLE ACCOMMODATION REQUESTS
There are two situations in which an accommodation request is deemed unreasonable. First, if it imposes an undue financial burden on the property. Secondly, if it requires a fundamental
alteration of your program or services. Let’s break down these two different criteria to better understand the implications as well as the best practices to employ when faced with such situations.
Property management professionals are dedicated to ensuring equal housing opportunities, which includes accommodating the diverse needs of residents. A key component of this commitment is understanding and responding to requests for reasonable accommodations and modifications. However, this raises the question: How do property management companies navigate unreasonable accommodation requests?
UNDUE FINANCIAL BURDEN
A request may pose an undue financial burden if it incurs excessive costs relative to the property’s resources. For example, a resident with a disability requests a comprehensive renovation of their apartment unit to make it fully accessible. This includes widening all doorways for wheelchair access, installing a roll-in shower, lowering all countertops and cabinets, and adding specialized accessibility equipment throughout the unit. This request, which involves significant structural changes, can be prohibitively expensive and
may even affect surrounding units. The response depends firstly on the property type. As we know, modifications are paid by the property if it is federally funded or subsidized, whereas the cost would be the responsibility of the resident in a conventional property. Also, the financial capacity of the property management company would come into play. If denying a request for
financial reasons, property managers must be prepared to substantiate the financial burden, a process more challenging for larger companies or properties given their greater access to resources.
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FUNDAMENTAL ALTERATION OF THE PROGRAM
A fundamental alteration to a property’s program is when a request would require a property to provide services outside its existing scope. For example, a resident with a disability requests that the property management company provide on-demand personal assistance services. This includes tasks like cleaning and assistance with getting to and from their parking area. In general, a request like this goes beyond typical property management responsibilities, making
it a fundamental alteration to its program or services offered.
ONE-SIZE DOES NOT FIT ALL
These types of requests may seem to set a particular precedent in the minds of housing providers. But caution is needed. Each request should be evaluated separately and carefully and shouldn’t be arbitrarily denied. Ensure that you are working well within the realms of federal, state, and local laws. If you are unsure, then consulting with a fair housing attorney is always a best practice.
DENYING A REQUEST – THE NEED FOR DOCUMENTATION
Even if a request is deemed unreasonable, it’s crucial to engage in an interactive process with the resident to explore alternative solutions. Documentation of steps taken is imperative. An interactive process can take on many forms but generally includes discussing alternatives to the request to see if a resolution can be achieved. Alternatives usually include moving to another unit or help acquiring additional assistance. Whatever a property chooses to do, they should document their attempts to work with the resident should their actions ever be called
into question.
UNREASONABLE ACCOMMODATION REQUESTS – KEY TAKEAWAYS
While property managers are committed to accommodating the needs of residents, requests requiring extensive and costly renovations that can pose an undue financial burden or a request that would require a property to provide services outside its existing scope may prove to be unreasonable. That being said, when dealing with accommodation requests—whether
reasonable or unreasonable—clear policies and procedures are a must. Treat each one with individual consideration and be sure to communicate each step of the process with the resident making the request. And of course, careful documentation and ongoing training should be part of every company’s requirements.
Provided by Kathelene Williams, The Fair Housing Institute
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- Generation Z, the only renter-majority generation, eclipsed 5 million households in 2022 and will become the largest renter demographic by 2030.
- Gen Z faces more significant barriers to homeownership than their parents did, including elevated interest rates, a higher cost of living, and a limited supply of quality housing.
- One in three Gen Z adults say that homeownership at any point seems to be financially out of reach.
Gen Z Grows Up and Moves Out
Generation Z, a demographic age group of Americans born between 1997 and 2012, includes about 20% of the population, or 68 million members. As they grow up, the members of Gen Z are beginning to move out on their own and form new households. In 2022, there were 5.4 million households of Gen Z renters in the U.S. By 2030, Gen Z is expected to become the largest demographic of renters in America.
In 2022, Gen Z, not all of whom are of working age, made up 12.8% of the total U.S. workforce. But, Gen Z is on pace to outnumber baby boomers among full-time workers by the end of this year, Glassdoor projects.
However, many in Gen Z are rent-burdened and believe homeownership may not be in their future. With an average individual salary of $33,800 per year, many live paycheck-to-paycheck. A 2022 Freddie Mac survey found that about one-third of Gen Z felt that owning a home would not be possible in their lifetimes, up from 27% in 2019.
Sometimes called Zoomers, Gen Z is interacting differently with the rental market than millennials. They tend to be more interested in personal fulfillment and happiness rather than wealth and influence. Bucking a long-standing trend, these young adults have been opting for more space and lower-cost housing located outside of cities.
Zoomers Face Bigger Barriers to Homeownership
As the members of Gen Z reach adulthood, they enter a housing market that has changed considerably since their parents first bought a home.
Elevated interest rates: Since 2022, the Federal Reserve has raised the federal funds rate 11 times to tame inflation. In January 2024, the interest rate on a 30-year fixed-rate mortgage averaged 7.22%, up from near-zero in March 2022 yet below the average rate over the last 40 years.
Higher cost of living: From 1999 to 2022, the average price of rent in the U.S. spiked 135%, while average income increased 77%, according to Moody’s Analytics CRE.
Low supply: Currently, the U.S. has a deficit of about 3.2 million homes.
Higher housing price points: The average new home mortgage payment is 52% higher than the average rent on an apartment, which is higher than at any point since at least 1996.
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Gen Z Sees Renting as an Attractive Option
Today, one in three Gen Z adults believe homeownership is not attainable in the future. But it doesn’t seem to be phasing them. They show high rates of satisfaction with renting. More than three-fourths of those surveyed by Freddie Mac said flexibility was a key benefit of renting, while 63% cited how it can be less stressful than homeownership. Other survey respondents mentioned how renting offers the opportunity to live in attractive locations where the cost of owning a home is high.
Interested in personal fulfillment, Gen Z values the flexibility and reduced responsibilities central to the renting lifestyle, giving them a greater ability to pursue their passions.
The Outlook
As many Americans delay homeownership, Generation Z is embracing renting as a lifestyle choice and the commercial real estate industry has taken notice. In communities across the country, new single-family rental and build-to-rent communities are being built with features attractive to young people, including high-speed internet connections, green spaces, and dog parks, which aim to improve tenant retention and ultimately strengthen the rental housing market’s supportive tailwinds.
Source: Arbor
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Partnering with a local utility provider can help increase energy efficiency, streamline operations, and reduce resident turnover.
While amenities have been a popular way to attract prospective residents of multifamily properties, some of today’s most important features, including those focused on health, energy efficiency, and proptech, can make all the difference.
And there is a huge opportunity to meet these growing resident demands. According to the American Council for an Energy-Efficient Economy, the potential exists to improve the energy efficiency of U.S. multifamily properties by 15% to 20% and save $3.4 billion in utility costs.
Save Energy and Reduce a Property’s Carbon Footprint
According to the 2022 National Multifamily Housing Council/Grace Hill Renter Preferences Survey Report, about 2 out of 3 renters say smart thermostats and water-saving systems are essential, and that energy-efficient appliances, enhanced indoor air quality, and healthy building certifications sway their decisions to lease.
Keeping up with these growing demands from residents for sustainable and proptech solutions can be tough, especially when budgets are slim and buildings are older. However, there are helpful programs, rebates, and energy assessments offered from local clean energy providers like National Grid.
With programs and incentives designed for property managers to meet the needs of air sealing, LED lighting, Wi-Fi thermostats, heat pumps, low-flow showerheads, and more, National Grid helps their customers transform buildings into smarter, lower energy-consuming high-occupancy properties.
For example, Selah Realty wanted to reduce the natural gas consumption for water heating at a multifamily dwelling in Brooklyn, New York. With the help from National Grid’s Direct Install program, they installed low-flow showerheads, faucet aerators, and thermostatic radiator valves, and reduced use by up to 30% with an annual estimated savings of 16%.
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Improve Resident Experience
The worry about how a home can negatively affect health is real, with 54% of renter households reporting concerns about indoor air quality, according to Harvard Joint Center for Housing Studies-The Farnsworth Group Healthy Homes Surveys. (And this concern isn’t just because of the COVID-19 pandemic, as indoor air quality was the greatest area of concern in the group’s 2018 survey.)
In addition, nearly 2 out of 3 Gen Z renters say apartment technology—smart locks, solar-powered systems, smart thermostats—is extremely important, according to ButterflyMX. Plus, 40% say they won’t rent a property if it doesn’t have green practices, according to MRI Software.
Streamline Property Operations
Years ago, Fannie Mae released a study that showed efficient properties spent an average of $165,000 less in annual energy costs, and that median energy use was higher when owners paid for all energy costs. With the recent rise in fuel costs, those numbers haven’t improved for property owners. And, just in the two years from 2020 to 2022, total operating expenses have increased 13% for multifamily properties.
With so much pressure to upgrade to smart systems, budgets are strapped for many. By taking advantage of energy assessments and rebates from a local utility provider like National Grid, not only will the future annual energy consumption be reduced, property management staff can save time—another crucial competitive advantage.
Any extra time that property managers can spend on residents may be the best way to retain them, with a great property manager being the biggest reason why renters renew leases. According to an AppFolio report, 57% report it’s the main reason why they would renew. Plus, 2 out of 3 potential renters say that the property manager’s reputation is important when evaluating a potential property.
By delivering the desired proptech, energy-efficient, and health-focused amenities—and taking the time to connect with those residents—multifamily property managers will be in a stronger competitive position to attract and retain their residents in the future.
Source: Multifamily Executive
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Should you aim for diversification in your real estate investments? What about your stock investments?
Oddly enough, many real estate investors never bother to ask that question. They just assume that all real estate investments require a lot of money and that each niche requires so much skill that you can only master one.
They’re wrong on both counts, and it adds risk to their investment portfolio.
Warren Buffett’s Take
Berkshire Hathaway CEO Warren Buffett famously said, “We think diversification is—as practiced generally—makes very little sense for anyone that knows what they’re doing…it is a protection against ignorance.”
I disagree.
Don’t get me wrong: I have nothing but respect for the Oracle of Omaha. He’s built an incredible career out of choosing stocks and other investments.
But guess what? You’re not the near-prescient investment analyst that Warren Buffett is, and neither am I. Most of us can’t pick winners with the consistency that he can.
That goes for professional investment managers, too, not just part-time or retail investors. It’s why actively managed mutual funds historically perform worse than passively managed ETFs.
And don’t tell me about how different real estate investing is from stock investing or how the same principles don’t apply to you. Most novice real estate investors lose thousands of dollars on their first few deals. It’s tuition to learn the ropes. Even after getting some expertise under your belt, real estate investors still end up making costly mistakes sometimes, or have market conditions fall out beneath their feet.
Real Estate Lends Itself to Narrow and Deep
Real estate is expensive. If you buy a property by yourself, you’ll likely need $50,000 to $100,000 between the down payment, closing costs, cash reserves, and possibly the initial repair costs. And if you invest passively in real estate syndications, you usually need a similar amount for the minimum investment. That makes it hard to diversify when each individual asset requires so much capital.
Likewise, active real estate investing requires niche expertise. If you invest in Section 8 properties, mobile home parks, self-storage facilities, or in any other niche for that matter, you need to master the skills and knowledge required to succeed in that niche. That, too, makes it hard to diversify—you can’t just learn a new niche overnight and expect success buying up luxury retail properties in primary markets.
Andrew Helling of Helling Homebuyers sums up the consensus argument:
“Diversification limits your ability to understand specific market niches and often causes you to miss out on opportunities that come with a concentrated investment strategy. While it’s riskier, I prefer to go all-in on local deals that I really understand. These are easier to manage, quicker to visit, and require less work, since I know the local market very well.”
You can see why real estate investors typically opt for a handful of similar properties in a few markets. In other words: narrow and deep, as opposed to wide and shallow.
Contrarian Take: Why I Go Wide and Shallow
Markets are unpredictable, and my crystal ball is no clearer than anyone else’s. In fact, every time I’ve tried to get clever with investments, the universe has served me up a big slice of humble pie.
I’ve seen real estate deals go south after all the numbers on paper looked great. I’ve seen syndicators fall apart after many people I respect recommended I invest with them. And I’ve seen white-hot housing markets collapse in value after nothing but positive buzz from pundits and investors alike.
So, I invest $5,000 in a new passive real estate investment every month as one of hundreds of members of SparkRental’s Co-Investing Club. In the last year, I’ve invested in multifamily properties, mobile home parks, retail, storage, industrial, and more—all with different syndicators and investors in different markets across the U.S. Most of the deals we review each month are real estate syndications, but some are funds or notes.
“Spreading investments amongst various property types can protect your return when certain sectors retract or underperform,” explains Ryan Martinson of WhatsMyPayment.com. “When a particular segment booms, diverse investors participate in the upside.”
Risk Mitigation Strategies
Specifically, my diversification strategy protects me from risk in the following ways.
Markets
You might scoff now, but in 2006, big real estate players from New York and Washington, D.C., were plowing huge amounts of money into Baltimore real estate. The city had a renewed sense of optimism at the time, with crime rates slowly but steadily decreasing and lots of money pouring into low-income neighborhoods.
As a Baltimore native and a naïve young real estate investor, I, too, jumped on the bandwagon. Then I got my butt handed to me in 2008.
All that outside money disappeared virtually overnight. Up-and-coming neighborhoods slipped back into decay. And a few years later, in the wake of riots, crime rates increased again.
The details differ as you look at other real estate markets around the country, but the lesson is the same: Sometimes, markets reverse course unexpectedly. I lived in San Francisco briefly in 2009 and loved it (even if it already flashed warning signs for sociopolitical issues by then). Everyone speculated on San Francisco properties for two decades—only to see values crumble over the last few years.
Austin, Texas, and Boise, Idaho, were white-hot a few years ago and then had a terrible 2023. In the ‘90s and ‘00s, people had written off Rust Belt cities in the Midwest, only to have them resurge later.
The bottom line: You can’t always predict where a market will turn next. So don’t put all your eggs in one basket.
Property types
After the Great Recession, everyone said self-storage was the ultimate risk-free real estate investment. In a recession, people downsize and need storage, right?
Until you overbuild them and the fundamentals of supply and demand catch up with you.
As an aside, it actually turns out that while self-storage isn’t very correlated with home prices or unemployment, it is heavily correlated with home sale volume. People rent storage units when they move, and in the near-record-low transaction volume of the last year, storage has suffered.
Again, I can’t predict what will happen in a specific industry or for a specific property type. To be frank, I actually just recently learned about how dependent storage is on home sale volume. But it goes to show you that even the big Wall Street institutional funds, which have poured money into storage over the past few years, often get it wrong.
And if they often get it wrong, you better believe you will sometimes, too, and probably more often.
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They want you to succeed so they give you one hour of training to help you navigate their site and migrate your properties from any other software.
Pricing is $29 per month for the basic which is fine for most self-managing landlords. If you want to integrate QuickBooks, upgrade to the pro membership at $59 a month with the 20% off annual billing. Prices do not increase until you exceed 21 units, which is a really nice feature!
General partners/syndicators
When we first launched our Co-Investing Club, I asked a lot of experienced real estate investors, both active and passive, about the sponsors (syndicators) they recommended. I heard a lot of names, but two names kept coming up again and again. These two big names had an immaculate reputation and plenty of experience and deal volume.
Guess what? They’ve been by far the two worst-performing syndicators we invested with in our investment club. In fact, they’re the only two that have given me any cause for concern.
You can look at an investor’s track record and ask others in the industry about them. But you just can’t predict how a general partner will perform when market conditions change. And spoiler alert: They always change sooner or later.
Today, the rule of thumb we try to follow in the Co-Investing Club is a one-year “probation period” after our first investment with a sponsor. We want to see how well they communicate, how they handle hiccups, whether they start distributions on time, and so on. We don’t mind investing again with a sponsor we know, like, and trust, but we try to space them out because diversification spreads out risk.
The wisdom of crowds
I’m no longer so arrogant as to think that I can spot winners every time or even most times. This means I rely on the wisdom of thousands of other investors.
Before investing with a new sponsor, I ask about other passive investors’ experiences with them on the Left Field Investors or BiggerPockets forums. Then my cofounder from SparkRental and I get on a “pre-screening” call with them. If we still feel good about them, we invite them in front of our Co-Investing Club so we can all grill them together.
Every time we vet a deal from a sponsor, we collectively ask better questions. We focus more on risk and how many ways the sponsor is mitigating it than on the potential returns.
In one deal, a member happened to live five minutes away from the apartment complex in question. She gave us a local perspective on the neighborhood and the demand for this type of housing there.
In another deal, a member who works in the insurance industry pointed out just how badly the sponsor had underestimated insurance costs.
Lean on others as you diversify. Through group investments with others, I get to benefit from their expertise, not just my own.
Dollar-Cost Averaging vs. Timing the Market
I practice dollar-cost averaging in both my stock investments and my real estate investments. Every week, my roboadvisor pulls money out of my checking account to invest in a broad portfolio of ETFs. And every month, I invest $5,000 in a new passive real estate deal.
I don’t have to worry about timing the market. When other investors ask me if now is a good time to invest, I basically reply that they’re asking the wrong question.
I can’t predict the stock market or the real estate market. Either could collapse tomorrow or shoot for the stars. But by continuing to invest month in and month out, I make sure I maximize my time in the market rather than timing the market.
Plus, I enjoy cash flow in the meantime, rather than sitting with a ton of cash on the sidelines waiting around for a dip that may take years to appear.
A Numbers Game and The Law of Averages
Last year, our investment club invested in 13 deals, in line with our goal of around one a month. One or two of these investments will likely underperform or lose money. Others will overperform and exceed expectations (some already are). Most will fall in a bell curve in between and average out to strong annualized returns in the long term.
At the end of the year, I didn’t wring my hands and worry about how this or that deal was doing. They just added up to numbers on a page, all averaging each other out.
But if I had invested all of my funds in a single property or deal, you better believe I’d be thinking about that one deal all the time—especially if it was losing money or underperforming.
“By abiding by the law of averages, investors are typically able to lower the risk of downturns in fluctuating markets,” explains Nate Johnson of NeighborWho. “Instead of an ‘all or nothing’ approach, diversifying helps give investors a financial safety net while helping to ensure a consistent trajectory towards financial growth.”
And hey, even Warren Buffett can’t pick winners every time. For all his talk about how diversification is for investors who don’t know any better, Berkshire Hathaway owns stakes in over 60 businesses.
By spreading smaller amounts across many property types, in many markets, with many syndicators, I can sleep at night knowing that the law of averages will protect me. Call me an ignorant investor if you like, but I feel pretty good about a bell curve of returns on my many investments.
Provided by Bigger Pockets
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By Meghan Wentland
Because your primary expense on rental properties will be maintenance and repairs, a home warranty can save a lot of time and money—as long as you read the policy thoroughly.
Q: I have both homeowners insurance and a home warranty on my primary residence and require that my tenants carry renters insurance for my rental properties. Does a home warranty for rental property make sense, or is it an unnecessary expense?
A: The security deposit you collected from your tenants and the renters insurance they carry will protect you financially from damage caused to the unit while the tenants are in residence, but just like in your primary home, a home warranty for landlords covers different expenses than homeowners insurance does. Think about why you carry both on your primary home: The homeowners insurance covers damage and loss that result from weather, water, fire, theft, and other covered events, while a home warranty is essentially a service contract that covers repair and replacement of major home systems and appliances that fail due to age or normal wear and tear. Together, they form a kind of security system for your investment and your business. As a landlord, you know that one of the bigger expenses involved in rental properties is maintenance—unless you’re very knowledgeable and managing your rental properties is your only job, the near-constant need for plumbers and electricians for blown circuits, leaky water pipes, and bigger problems such as broken washing machines and HVAC issues can be crushing both financially and in terms of the time it takes to choose and hire qualified technicians. As long as you’re on top of regular maintenance and read your contract carefully, choosing to home warranty rental property you own might save you quite a lot of money, especially if you find yourself wondering “Does renters insurance cover appliances?” and realizing that the answer is no.
A home warranty covers appliance and system repairs or replacements—to a certain extent.
Home warranties come in several different packages. Normally home warranty companies offer one package that covers whole-house services, such as electrical, plumbing, heating, and cooling; one package that covers major laundry and kitchen appliances; and one that covers both. If you own a number of rental units that are all about the same age, the ovens, refrigerators, dishwashers, water heaters, clothes washers, and dryers in those units—all of which are your responsibility to keep in good working order—may begin to fail around the same time, from basic hard use. Financially, this could mean that you’ll experience a disastrous sequence of expenses as one appliance after another needs repair and/or replacement, and that in some cases you might pay for a repair and then a replacement of the same appliance. A home warranty purchased for each unit you rent can cover the majority of those repairs and replacements for roughly the cost of one or two repairs or replacements.
The landlord has to purchase the rental home warranty for renters; because they aren’t responsible for the upkeep of the property and don’t own it, the renters can’t opt to purchase a warranty on their own. You’ll pay the cost of the warranty contract, usually for a period of 1 year. Written into that contract will be the appliances and systems covered, the maximum payouts, and the cost of each service call. A plus here is that the service call, while an added expense, will cover the entire cost of the assessment, attempted repair, and if necessary, the replacement of the item. You won’t have to pay a plumber to try to repair the water heater, only to find out the problem is electrical, then pay an electrician to check it out and tell you that the unit needs to be replaced. The service charge will cover the repair or replacement to the extent the contract allows.
One reason some homeowners balk at buying a home warranty is that they’re concerned that they won’t be able to choose the style or quality of the appliance that they prefer and have it covered by the warranty. As a landlord, you’ll certainly want to keep the units modern and up to date, but you might not be as worried about the style or color as you would be in your own home, so the warranty is an even more sensible idea.
If you have a rental unit in the same place as your primary residence that is less than 750 square feet, you can cover it with a Guest Unit add-on to your own home’s warranty.
This can be a great savings for the landlord renting out a part of their home or a small apartment in a separate unit on their home property. If the unit is small (especially if it’s the only one you have), paying full price for a home warranty contract might not be cost-effective. Luckily, if the unit is less than 750 square feet, you can add it to the home warranty policy you carry on your own dwelling as a Guest Unit line item for significantly less cost than purchasing a separate policy just for the unit.
Cost considerations will depend on a number of factors, including the age of the property and its systems.
If the rental unit is older and the mechanics and appliances haven’t been updated recently, a home warranty is a straightforward protection of your investment; these units are more likely to have age-related issues that a an insurance policy won’t cover. But don’t discount the benefits of a home warranty for newer homes as well. While a newer home with more recently installed systems and appliances is less likely to suffer from age-related wear and tear, newer units are often built with computerized control panels, automated systems, and smart-home integration, all of which can fail if a single component fails. These technologically advanced units offer convenience and efficiency, but they can also be extremely expensive to repair and are less likely than older appliances and systems to stand the test of time. You’ll want to weigh the cost of the warranty and service calls against the repair and replacement costs of the units you currently have in place to see what financial benefit the warranty would provide.
A home warranty for a rental unit is tax deductible.
Depending on how you’re registered as a landlord, your entire premium and service charges may be considered an operating expense. These expenses can be claimed on a tax return as a deduction from your total income, thus reducing your tax burden. Especially if you have a large number of rental properties, this total can add up quickly and add to the money you save on repairs and replacement by reducing how much tax you owe. State tax deductions will vary based on where you are registered as a landlord, but it’s likely that you’ll be able to save some extra money through federal and local deductions.
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A home warranty on a rental unit can save you a lot of money on repairs and maintenance.
By covering repairs, maintenance appointments, and replacement, a home warranty prevents you from having to shell out cash on demand whenever something goes wrong at a property you’re renting out. If you make one or two claims against the warranty, it will have come close to paying for itself (one significant system replacement might more than cover the tab), and when the tax benefit is added to that, you’ll start saving real money.
In addition, though, the warranty will save you time. A landlord is always on call when a tenant’s toilet clogs or bathtub backs up, the AC goes out on a hot summer day, or the dishwasher won’t drain. The tenants might feel bad about calling and potentially disrupting a family birthday party or vacation, but they’ll call, and it’s your responsibility to make the necessary arrangements for a service call and repair, or to go check out the problem yourself before you incur a charge from a professional. The best home warranty companies take care of that for you; either you or the tenant make an initial call, and then the home warranty company takes it from there, arranging for the professional repair person to contact your tenant for scheduling and handling the rest of the repair in exchange for a service fee. If you live far away from your rental properties, this service is even more valuable, potentially saving hours on the phone and making it less likely that you’ll end up hiring a contractor who takes advantage of your distance by doing shoddy work. That peace of mind is provided to you, not to mention the return of potentially full days of coordination and shopping for replacement parts or appliances (or even whole systems). And, you’ll save money.
When choosing a home warranty for a rental property, be sure to read the fine print.
This is a critical point, because failing to read the contract carefully can result in unpleasant surprises at the worst moments—surprises that are often the reason people are suspicious of home warranties in the first place. They don’t cover everything. First, the warranty only covers the systems and appliances listed in the contract, and nothing else. Second, the cost of the service visit is also set in the contract, along with how many individual visits (or what length of time) is included in each visit. Third, every warranty has coverage limits. There are two kinds of limit: a maximum payout per event, usually specific to the system or appliance, and a maximum payout per policy annually. This can cause distress if you haven’t read the policy carefully and are expecting that an entire failed HVAC system will be replaced free of charge, only to discover that the replacement will cost $10,000 and the policy states a maximum payout of $7,000. That’s still $7,000 you don’t have to come up with and very much worth the cost of the home warranty, but the remaining $3,000 due can be upsetting if you’re surprised that it’s not covered. Similarly, some policies will cover insect infestations—but only for certain kinds of insects. It will be a rude awakening when you file a claim for a huge termite infestation and find out that termites are excluded from your warranty—and that it was right there in black and white for you to see.
In addition, most home warranties have requirements that must be met in order to remain valid. If you’re a landlord, you’re probably accustomed to making quick fixes yourself to save the cost of a professional, especially for easy things. Or perhaps you trust that your tenants will take care of common maintenance tasks and cleaning. Unfortunately, those DIY fixes or potentially delayed maintenance can invalidate your warranty and allow the company to deny claims. And perhaps the home you purchased to rent out had been in disrepair for some time; while some home warranty companies have an amnesty program that doesn’t penalize new owners for maintenance failings of previous ones, not all do, so you could find that the years of no maintenance or upkeep before you even owned the property render your claims invalid. Again, these conditions will be clearly spelled out in the contract (and if they are not, you should ask about them to make sure you haven’t missed something).
If, however, you’ve carefully read the contract and are aware of the conditions and limitations, a home warranty can offer financial savings and peace of mind to what many see as the most onerous part of being a landlord: the time and expense of maintenance and repairs.
Provided by bobvila.com
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