Can you ever buy a rental property that is too nice? (Hint, the answer is yes.)

Estimated read time 9 min read

It’s possible to have a too nice rental property. I wish I didn’t tell you this because I might not be experiencing it first hand as we speak. But, unfortunately, I do know that there is a possibility of having a too nice rental property. It’s not pretty. The house is actually quite beautiful, but it’s the situation that’s the problem.

Renters are hard to find!

Would you believe this? I was tempted to question my property manager, but I have worked with him for years and I am confident that he is not the issue. The house is just too nice. It is a newer house (2007) with 4 bedrooms/3 baths, a large size for rented houses (2100 ft 2), and ideally located south of Atlanta. It’s a great location because it is only one mile from the main freeway, and half a kilometer away from many major commercial shops and restaurant. But you wouldn’t know that if you stood outside the front doors. It is a quiet, wooded neighborhood that I would describe as upper middle class. My opinion is that it’s close to upper middle class, but not quite. When I first saw it, the location and all of its features were what made me excited. Atlanta was appreciating at the time. I knew that there was plenty of opportunity to gain equity in the market. This property was no exception. The monthly cash flow would be incredible. The house was bought for $94,500, and it was being rented at $1300/month. It was also in great condition and fully renovated so I didn’t expect any major repairs to be needed anytime soon. The cash flow was excellent, the house had a lot of appreciation potential and was a really cute home.

Related: RED FLAGS Rental Properties: Risk Factors

Yeah, well…

When the tenants that were there when I purchased the house, stopped paying rent and were eventually removed, I first thought it was an accident. When the property manager, who was different from the manager of the house currently, brought in a new set of tenants (about 4-5 months after the first ones), which was already stressing me out in and of itself, I was super happy because they paid an additional month’s rent up front. They stopped paying, too. The same tenants were back. This was the first time I used a property management company, so I was confident that this manager would be terrible. He was unable to screen tenants, and I knew he gave them too much latitude to pay late or try to make up for missed payments. This part I should’ve nipped at the bud right away, but I knew in general that it was this guy. Before the second tenants had even left the house, I fired the property manager and assigned the property to my regular PM. I knew that he would be able to fix the problem as he was always amazing and did a great job on my other properties. I was thrilled to have him take on the property, so it could now reach its full potential as an investment.

It was September last year. This is not an April Fool’s joke. It is April and the house still has no tenants.

It was at first that I realized there is always some lag, as it appears, after a property has been marketed, to get people interested in it, and then from these people, separating the good ones. There was a lag. This lag time brought us to the start of the holiday season. If you’ve ever been a landlord, you’ll know that the holiday season can be a difficult time to find tenants. Who looks for a new place to live during Christmas? Not many people. There was also the holiday season. I was excited when we began to come out of holidays and thought it was the right time to get a tenant. I was not hearing anything so I asked. It was just a couple of calls. I couldn’t understand why. This house is my favorite rental property, other than the one I used to own and now rent out. What the hell? I waited another week or so and then asked again. Two applications had been received. When the PM asked for documents, the woman wouldn’t pick up the phone. I always think that the way things end is the same as how they began, so I was against the woman moving in, even if she suddenly picked up the phone one week later. I have no idea what happened to her. The other application I would have approved was for a Section 8 tenant. This one, however, had six young children and a less than stellar background. Nix. The application traffic was over. It was now March. I spoke to my PM intermittently, but we had to sit down and discuss this issue in detail at this point. Let’s be clear: the PM is fantastic. I never once thought that he was not advertising or looking for tenants at the right places. I knew he had done well with my other properties, so there was no doubt that something was different with this one.

My PM said that the property I chose was too close to the owner-occupant end of the spectrum. Fantastic. No interest at all? We discussed advertising the property more aggressively on rent-to own websites, and giving tenants a lease-option to purchase if this would attract more owner-occupants. My PM even ran some comps to determine what he believed the property would sell for. With Atlanta’s 20%+ appreciation over the past few years, I thought it should be able to fetch a decent price. The comps did not seem to support this (have I mentioned that shooting for appreciation can be like looking into a crystal-ball?). Great! I was lost.

Ironically, just a few weeks after listing the property on the market to see what would happen, my PM received an offer for $130,000 in cash. It was the price that I initially wanted to sell it at, as I bought it for just $94,500. I needed to make a profit after paying all of my financing costs and interest. The offer was accepted, I signed and the property has now been placed in escrow. The unsupportive comps make me unsure if the property will close, but I can’t criticize an offer for cash. The property remains listed on rental websites to see if there is any movement on this front. Still nothing.

Related to: Patience in Real Estate Investment: My Story on Getting Started With Rental Properties

Takeaway

I have always been a proponent of higher-quality property. I knew it was not a wise investment to purchase the most expensive properties, as the costs exceed the rental income, but I did not know where the line was in terms of a home being “too nice” to be considered a good renter.

Here are some thoughts that I will leave you with after this experience.

  • Many people I speak to don’t know why they would not want to purchase a home in an A-grade neighborhood. Some A-grade areas could be suitable, but they are usually the most expensive, with the best schools and middle to upper class families. This means that everyone has a greater chance of becoming a homeowner. In markets where the price-to rent ratio is favorable to investors, they will be more likely to become homeowners. It’s likely that if there are more tenants in nicer areas, the price-to rent ratios for rental properties aren’t as favorable to investors. Cash flow can be more lucrative in B-grade areas and neighborhoods than the best. You may want to buy an A-property for its looks, bragging right, and appreciation potential. That’s fine. But at least acknowledge that you are not looking to make money.
  • Ask at least two local PMs about the neighborhood and its rental potential. This is part of your due-diligence when selecting a property to purchase. You can ask them how easy it is to rent there, and what the quality of tenants are like. If someone called my PM to inquire about buying a rental in my neighborhood, my PM could easily say that he had a terrible time renting out the property and this should discourage a potential investor. It turns out that if I had talked to him prior to buying this property, he said he would warn me about the area due to how difficult it is to rent.
  • Never purchase a home based on the potential for appreciation. I did not buy this house with that in mind, as it was expected to have a great cash flow. However, I had high expectations for appreciation due to the rapid rise of Atlanta housing prices and market predictions. Atlanta housing prices rose, but the comps for this home only added about $6,000 on top of what I paid.
  • Even though numbers may look good on paper, they don’t always translate into reality. It was not the case that the 10% cap rate or 20% cash-on -cash return would happen. This house has lost me money, there’s no doubt about it.
  • You can’t account for all potential issues with an investment property, even if you do a lot of due diligence. To avoid this, you should always estimate returns with a good margin. Don’t be too conservative when estimating returns. Leave some margin for error and avoid buying a property if it can’t give you those margins. You can’t be perfect, no matter how meticulous you are. You can’t predict the future 100% no matter how thorough and how much research that you do. Stress will only wear you down and make it harder to make good decisions. Find the fine line between thorough due diligence, accuracy and perfection. The best place is somewhere in between.

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