Accidental Landlords Boost Demand for Property Managers

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IOWA CITY, Iowa – June 10, 2013 – Chris Wilcoxon and his wife weren’t in a good position to sell their house near Iowa City, Iowa, when they moved to Woodbury in 2011.

Like many Americans whose home values have languished, they would have had to come up with thousands of dollars out of their pockets for closing costs and commissions — money they did not have.

Fortunately, there was another option: Hire a management company to find rental tenants and look after the property. “It’s a moneymaking investment now,” Wilcoxon said. “I’m happy we did it.”

The housing bust that left millions under water on their mortgages has been a boon for rental property managers who can help owners avoid selling at a loss and even squeeze some cash out of a home.

The number of property management companies in the Twin Cities has grown from a handful to more than 20 in recent years, and the trend is similar in other metropolitan areas. Renting became so popular that many Realtors took on a sideline rental business.

The property managers say they are well-positioned in a housing market where many homeowners are reluctant to sell and potential buyers remain skittish about investing in real estate that can lose 30 percent of its value in the blink of a recession.

“People are still suffering the aftershocks of the economy,” said Steve Rajavuori of REI Property Management in Bloomington. “There’s a rolling cycle of people who went through bankruptcy or job loss who would rather rent than take a chance on homeownership.”

Renters Warehouse, a national property management company based in Minnetonka, found that two-thirds of its clients are renting their homes because they can’t sell or would lose too much if they did. Homeowners who were downsizing, relocating or combining homes began to rent their properties while values recuperated.

The company, which has offices in Arizona, Colorado, Maryland, Tennessee and Georgia, is on pace to nearly double its revenue in 2013, said CEO Brenton Hayden.

Other property management companies in the Twin Cities are also reeling in landlords-to-be. Both 33rd Co. in Woodbury and REI Property Management have experienced growth of 20 to 25 percent each year for the past several years. Home Rental Systems in Wayzata is increasing 10 to 15 percent.

Until the local real estate market rebounds into profitable territory and hesitant renters dip back into the market, local property managers expect to ride the wave.

“We’re on track to nearly double the number of properties under management by the end of the year,” said Hayden.

At the end of 2012, Renters Warehouse had more than 2,000 properties under management. By the end of this year, the company is on target to be managing 3,800 properties.

In the right place at the right time, property managers took on the flood of homeowners who had never considered being a landlord, and created a somewhat lucrative niche.

They have kept customers by adding more sophisticated service offerings, including solutions to address homeowners’ fears of deadbeat renters or a home trashed by a wannabe rock star.

Wilcoxon was able to avoid those confrontations with the help of a property manager. “I didn’t want to be the one to hound a tenant if the rent was late,” he said. “And I wouldn’t know where to begin to with an eviction process.”

Property managers are capitalizing on homeowners’ lack of rental experience. Some now offer warranties against property damage and rent and eviction protection.

Renters Warehouse added all three services a la carte on May 1. “These are renters’ biggest fears,” Hayden said.

Property managers have also added software to keep landlords free of day-to-day hassles. Instead of the homeowner taking an urgent Sunday morning call about a leaking dishwasher or a broken window, the tenant sends an e-mail to the property manager.

“They go to the website, click on the guy holding a wrench, and a work order is generated,” said Tom Sedlack, general manager at 33rd Co. property managers in Woodbury.

Statements, 1099s, end-of-year summaries and CRP tax forms also can be generated automatically, he said.

Renting looks better than ever

The number of accidental landlords is expected to remain strong, even though home prices have started to rebound. Between 25 and 33 percent of mortgagees in the metro area still owe more than their house is worth, according to Zillow.

Many homeowners who rented out their homes instead of selling have been pleasantly surprised with problem-free renters and cash flow.

Add the growing number of renters and low vacancy rates for single-family houses and townhouses, and being a landlord starts to look even better. “There’s a huge paradigm shift going on in how people perceive renting,” Rajavuori said.

In fact, homeownership rates in the United States have declined from about 70 percent in 2005 to about 65 percent last year, according to the Census Bureau.

While millions of homeowners are dumping mortgages or losing them to foreclosures, investors have been actively buying homes at bargain prices and record low interest rates. Census Bureau numbers indicate that the number of investment home rentals nationwide increased more than 60 percent in the past two years.

Running the numbers

One of the reasons for the increase is the number of homeowners making a profit from renting their property. What used to be an illiquid burden has become a moneymaking investment.

Landlords who bought a home in the past year are typically netting an 8 to 10 percent return, said Hayden. Most people who bought in 2005 to 2007 can’t rent their home for as much as their monthly payment — including the loan payment, taxes and insurance — but there is often good news at tax time.

“Most people will not cover their [payment] with a monthly rent check,” Sedlack said. “The light goes on when they do their taxes.”

Depreciation, fees, upkeep, utilities and upgrades are all deductible as a landlord. As a rule of thumb most people can count on an extra $100 a month for every $100,000 of house value after taxes, but ask a CPA for confirmation, Sedlack said.

Experts say the trend may reverse if home values keep increasing and interest rates tick up. Many Realtors who got into property management did so only because home sales slowed.

Sedlack said that as home sales rebound, Realtors and even some property managers will go back to their main revenue source. “Property management is not a big margin business,” he said.

Unfortunately for renters, the number of single-family homes available for rent will continue to dwindle as they are sold. Wilcoxon says that his rental home is a moneymaker now, but he worries the cost of repairs could erase that.

“I’m not as handy as I’d like, so we have to pay someone for repairs,” he said. Meanwhile, he’s waiting patiently on the sidelines for values to increase a bit more. “Eventually,” he said, “we’d like to sell it.”

Copyright © 2013 the Star Tribune (Minneapolis). Distributed by MCT Information Services.

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