My family and I have spent the past few weeks looking for a home to rent. It’s been a really enlightening experience. I’ve gotten to see other landlords in action. I’ve definitely picked up a few things from their showing/application processes.
What’s been most interesting is the business model around high-end rentals. Why would these landlords pay $250,000 for a rental house, when you can buy 5 houses for that price in Birmingham? It never made sense to me. But, now that I’ve seen it first hand, I’ve noticed some major benefits to this business model. I see how it could be a great fit for lots of investors.
12 things I’ve learned about luxury rentals
- What makes a high-end rental? I would define high-end rentals, for the Birmingham market, as priced over $1,600 in monthly rent. The ones we’ve been looking at are single family homes with retail values from 200k and up. They’re in mostly owner-occupant areas, with good schools. We’ve looked in Homewood, Hoover, Vestavia, and Mountain Brook.
- These houses are relatively easy to manage – With such desirable houses, they can raise their requirements for tenant quality. Their tenants mostly have stable, white collar, executive type jobs. I spoke with one high-end property manager who claims he has never had to evict.
- Mostly newer construction neighborhoods – I would say the average age for houses we’ve looked at is about 20 years old. The average age for the 8 houses in my rental portfolio is closer to 60 years old. There is a huge difference in terms of maintenance requirements based on the age of the house. Owning a “younger property” will have far less costs for maintenance and cap-ex.
- These owners have a long term perspective – This strategy is great for wealth. It’s a great way to build equity. It’s not great for cash flow. For example, It’s a real possibility that these owners could end up coming out of pocket $1,000 this year, but grow their net worth by $20,000 based on mortgage principle pay-down and market appreciation.
- A form of house hacking – Many of these landlords built their portfolio by moving from house to house. Once financing is in place, tenants pay down the rent for them. In 20-30 year’s they’ll own the property free and clear.
- Less price sensitive strategy – When I buy flips I’m looking for at least 30% off the retail price. It’s not easy to find. For high-end landlords, trying to get the best deal possible won’t matter as much. They’ve stretched out their time frame to let time work on their side.
- A couple national “hedge fund” type buyers – We’ve viewed a few properties owned by institutional landlords. I think we may begin to see more of this in Birmingham.
- Easily financed – It’s hard to get financing on a property worth $50,000. It’s way easier to get financing for a $250,000 property. As investors, it’s great to be able to leverage your returns.
- More interest and depreciation write offs – Many of these landlords have, or had, high income earning jobs. Owning higher priced properties, will give them more tax benefits than if their portfolio was in lower end neighborhoods.
- Lower management costs if you use a manager – Some property management companies acknowledge that higher end properties require less management, and discount their prices accordingly.
- Vacancy costs are less – Vacancy is the largest drain on landlords portfolios. Obviously rentals sitting empty are bad. But, there are some hidden vacancy costs. Vandalism of vacant properties is extremely costly. This not much of a concern on high-end rentals. Evictions are a form of vacancy. If screened properly, high end properties have almost no chance of evictions.
- When you go to sell a high end property, it’s pretty easy – Most likely a homeowner will buy it. They’ll use a mortgage, and probably pay close to the list price because they love the home. It’s much smoother than trying to sell to an investor who only cares about the numbers.