In discussing ways to stimulate the housing market, Felix Salmon wonders why we aren’t seeing more landlords buy up cheap homes to rent:
The backstory here is basically the big secular shift that Richard Florida talks about a lot, especially in his latest book. In order to have more renters we’ll need more landlords, and they don’t seem to be buying, record-low mortgage rates notwithstanding. What’s going to entice them into the market?
One way to encourage more landlords in some areas would be to remove rent controls. Allowing landlords to raise prices increases the value of the investment to them, and thus increases their willingness to pay. In most places in the country this has gone by the wayside, but according to the most recent American Housing Survey there are still 529,000 housing units subject to rent control. That’s nothing to sneeze at.
Are there any other regulatory burdens preventing people from becoming landlords? The legal documents required are pretty lengthy, but I can’t picture that being a serious impediment. Any suggestions?
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Friday ~ August 27th, 2010 at 9:17 am
Felix
Actually, I don’t think that would help. The housing units subject to rent control are, pretty much by definition, *already* owned by landlords. AFAIK nowhere imposes rent controls on newly-bought houses.
Friday ~ August 27th, 2010 at 6:23 pm
Adam Ozimek
Felix,
Yeah I think that’s probably correct, and does essentially nullify my point. As far as I can see, it doesn’t look like there’s any serious regulatory barrier to landlords that could have much of an impact.
Friday ~ August 27th, 2010 at 9:53 am
Apex
I am such a landlord. Been buying houses for 2 years. The largest obstacle is the Fannie Fredie limit on mortgages. They lowered the limit to 4 back in the credit crunch. They have since raised it back up to 10 but with larger restrictions on mortages 5-10 such as no cash out re-fi’s for previously cash owned properties (this one hits me) and higher cash reserve requirements (if you are cash strapped from buying with cash after hitting the limit of 4 this also hits you).
Further more after Fannie and Freddie went back to 10 with higher restrictions almost all banks in the U.S. decided they weren’t interested in the extra paperwork or whatever there reasons were so it is nearly impossible to find a lending institution that will lend to a buyer who already has 4 mortgages. I have had literally a dozen or more institutions tell me they understand that Fannie and Freddie now allow it but they simply don’t do it.
The government’s programs still seem dedicated to the proposition that anything that helps the housing market has to get individual home owners into owning houses, rather than just getting houses off the market and owned by people who want to take care of them and put families in them (i.e. – me as a landlord).
If they want to improve demand for houses I have an easy solution, allow landlords to get 10 or even 20 mortgages through fannie or freddie and allow them to refiance cash out of existing cash owned properties to get the down payments to buy more. If Fannie made this easy and backed the mortgages the same way they do the first 4 the banks would lend the money. I am reluctant to suggest too low of a down payment because I believe that is a contributor to how we got here but FHA will still let people buy properties with 3.5% down. Landlords cannot get a mortgage at less than 20% down. Lowering that to 10% would also help greatly. I know that myself and others are looking to buy properties, we can’t get anyone to lend us the money even though we can show very good cash flow in advance. The rules just won’t let us buy the properties and we simply aren’t sitting on 2 million dollars of cash so we can’t buy them.
Friday ~ August 27th, 2010 at 10:40 am
rjs
with 19 million vacant houses, it could become pretty competitive for occupants…
Friday ~ August 27th, 2010 at 3:29 pm
Dominic Pazzula
I echo what Apex says, it is not exactly easy to get financing. On top of that, the uncertinty with 10% unemployment makes it hard to find economic properties. You need to find a property that gives you a positive cash flow after taking into account vacancy time and default risk. It’s not easy.
Friday ~ August 27th, 2010 at 3:58 pm
Apex
I am not sure what Dominic’s experience is with vacancy but so far mine is that I don’t have trouble renting out the properties I buy and at a nice cash flow. I would seriously buy 50 if they would loan me the money. As it is I am stuck at 8. I know of many many others who feel exactly as I do. If the fannie would back them and the banks would loan we would buy. That rush would create an increase in demand and drive up prices to a point where after the initial rush us landlords would probably slow down our buying and equilibrium would be reached. But I think that is the point. If you give us access to captial we will bring housing demand to the market and drive up the price to an equilibrium that represents the access to capital. Without it we have willing demand that is trapped and cannot be released into the market. I have a 780 credit score by the way. So it’s not like I am a bad credit risk on paper. It’s just that the banks think everyone is where 4 years ago they thought no one was.
Friday ~ August 27th, 2010 at 4:54 pm
Dominic Pazzula
I currently own 0. I’ve been looking into it and have had troubles finding reliable data on vacancy rates. All I have is prior experience where I could expect a 2-3 months vacancy every 2 years.
Do you have a good source for data?
Friday ~ August 27th, 2010 at 5:57 pm
Apex
Sorry but I do not have a source of data, only my anecdotal experience. All real estate is local including rentals so its going to depend on your area. I buy in the Minneapolis/St. Paul suburbs and only buy nice properties that don’t rent to section-8 tenants. I have heard rental rates may be seeing a slight increase over the flat to down rates of the last couple years but its hard to verify if that is occuring or not. I just know that I don’t have trouble finding decent tenants for what I am buying.
Friday ~ August 27th, 2010 at 6:25 pm
Adam Ozimek
Apex and Dominic, thanks for sharing your experiences. Is my impression correct that the paperwork and legal barriers to becoming a landlord are low?
Also, I would not qualify a lack of government backed loans as the government getting in your way, but it’s interesting nonetheless.
Sunday ~ August 29th, 2010 at 11:32 am
Dominic Pazzula
Hey Adam,
Capital is the largest barrier. You can get example contracts online for tenents. A lawyer doesn’t charge that much to read through one to make sure it is kosher. You can set up an LLC for next to nothing to protect yourself. So yes, low barriers to entry.
I should have qualified my response. I’m not in the camp that wants all mortgages subsidized. The true cost of risk needs to flow to the source of that risk. You could agrue that a subsidy of rental mortgages is a back hand housing subsidy to people that do not want to or cannot get a house.
I have not attempted to get a loan for a property in a long while, so I cannot say how hard it is to get. Given the lending stats you see, I imagine it is hard.
Sunday ~ August 29th, 2010 at 11:22 pm
Apex
Adam,
I would say the legal and paperwork barriers to becoming a landlord or no higher than they are to simply become a home-owner. If you want to be a multi-unit (greater than 4) housing landlord then they get higher as all kinds of government restrictions come into place and plenty of rules to follow. But if you are buying and renting houses,duplexes,quads, any chump can do it if he can get the capital.
As to lack of government loans, if I gave the impression that I view the lack of them as getting in my way, that is not what I intended. In a truly open market there would be no government backing (via fannie, via mortgage interest deduction for homeowners, via section 8 housing, via anything). If all those things were true house prices would be a lot cheaper today. I can’t say if a bubble would have developed or not but prices would have all been much lower without the subsidies that exist.
In that environment access to cheaper than market financing is necessary to make properties profitable at the existing prices. Go ask a bank for a 30 year loan to buy a property that is not backed by fannie. Not only can you not get one at any reasonable interest rate, you will have a very hard time getting one at all. Banks are not in the business of giving out 30 year loans on a fixed interest rate when they cannot guarantee themselves what their cost of capital will be over the next 5 years let alone the next 30. So then the landlord is stuck getting a short term loan and he has to take all the cost of capital risk which makes the proposition much less attractive.
Now none of that is to say that as an investor you can’t still do some of that and make some of that work without government backing. In fact I have. In addition to my fannie back 30 year loans, I have some very cheap line of credit loans that I am financing some properties with. It’s risky. If inflation comes my cost of capital will sky rocket. But I am trying to keep it to a manageable level so that I can grow my way out of those loans with profits. If it happens of course it will mean my ability to expand will get put on hole for about 5 years. So this is the kind of trade of risks that I have to consider when trying to do this myself. Although I am now at a point where banks just flat out won’t give me much of anything more.
All of that aside, my main point was not to try to argue that the government is somehow in my way. It was simply to point out that past programs seem to indicate a desire by the government to support the housing market. Their choice of a home buyer cash credit appears to me to be a short term tactic that is turning out to have zero long term supportive impact (an situation that I predicted before it was instituted). However if the government were to simply ensure willing buyers would want to make repeated buys could continue to come into the market and make those buys without hitting a liquidity wall, I believe that would have a stabalizing and even slight growth supportive affect (depending on how many of us there are who want to buy but cannot get the funds).
I am not making an argument as to whether or not that is a good use of fannie mae capital or if it is even something the government should do. Only that if they want to support housing prices their current choices appear to me to have been poor and I believe this one would be much stronger and be lasting as it would bring in the demand that is missing to meet the current over-supply.
Monday ~ August 30th, 2010 at 9:19 am
Mark Borok
I own a house in Providence, RI. In order to get tenants, I had to lower the rent and am now losing money on the place. The reason is, a lot of formerly owner-occupied houses have been turned into rental properties, meaning there is a glut of rentals on the market.
Monday ~ August 30th, 2010 at 10:29 am
Apex
Mark,
Did you buy your property specifically as a rental since the housing collapse (2008+) or did you buy it previously either as a rental at higher prices or as a home you lived in that you then turned into a rental. I know plenty of people who bought houses in 2004-2007 as rentals who are making no money.
Buying houses in 2009-2010 as rentals atleast where I am at, thus far is very profitable if you can get the capital to finance them.
Monday ~ August 30th, 2010 at 9:40 am
alkali
Outside of New York and (formerly) Cambridge, Mass., I’m not sure what if any American cities have rent control.
Monday ~ August 30th, 2010 at 10:56 am
wonkster
San Francisco also has rent control, but it it is limited to mult-unit buildings which were constructed prior to 1979 (the year rent control went into effect), and would not apply to a single condo purchased as an investment with an eye toward renting it out, nor to a single family home.
The reason that prospective landlords don’t buy houses or condos in San Francisco has nothing to do with rent control It’s because the purchase prices are still so high that they could never command rent which would cover the investment.
Whoever came up with the “rent control is preventing landlords from buying vacant units and renting them” theory doesn’t seem to have spent five minutes researching the topic.
Monday ~ August 30th, 2010 at 11:08 am
Josh Jasper
“Rent Control” apartments are a minuscule fraction of the market. What mostly exists are rent *stabilized* apartments, where the baseline rent can be raised after an existing tenant moves out. Apartments that lack rent control can have rents increased by a much larger amount when leases end, forcing tenants to move, and providing a path for gentrification at the expense of long term tenants.
It’s possible that ending rent stabilization would help the housing market, but it would force a mass migration of the middle class, and create a situation where renters could never count on a stable living situation. Any politician trying that in New York city would find himself out of a job.
A proposal like this has zero chance of ever happening. You might as well offer free ponies and ice cream with it as well, Adam.
Want to increase home buying? We need to get back to 6% unemployment, and get a stock market that doesn’t look like a graph of an earthquake. At that point, people might buy houses to live in, but the idea of a home as an investment is gone.