Monday, June 5, 2017

Renting by the Year, the Month, the Week, or the Day?

Should you rent your property by the Year, Month, Week, or Day?

We live on a resort island and many properties on the island are privately owned but rented out to tenants.  Some are rented full-time, by the year, using yearly leases to residents who live and work here on the island, or are retired.  These are pretty conventional rental agreements and I have covered them before in my Landlord 101 article.

Some friends of mine own duplexes which they rent this way.  They tell me they prefer the steady income from an annual lease, paid in monthly installments, to the uncertainty of having tenants come and go.  However, the amount of money they receive in rent is not very much.  Although rents have increased dramatically in recent years, some of these duplexes rent for anywhere from $700 to $1,100 a month, which is not a lot of money for a duplex that might sell for $150,000 to $250,000.

We also have what are called winter residents, people who come to visit between November and May, or sometimes just December through April, or in some instances, just through March.  Some property owners offer special rental rates to these winter residents, which are higher than year-round rental rates but lower than rates offered by hotels.

The same duplex that rents for $700 to $1,100 a month on a yearly lease might rent to a winter resident for $1,400 to $1,800 a month for the three to six months they wish to stay.  This can be nearly double the full-time rental rate.  As a result, some winter residents actually rent a property with a yearly lease and leave it vacant for half the year rather than pay the winter rates.

For the landlord, these winter rates are a pretty good deal as the property is only occupied half the year, and the wear and tear on the property is less.  There's also the option of being able to rent the property during the remainder of the year.  Renting for 3 to 6 months at a time is very similar to a full year renting process.  You can vet your tenants by doing a credit check which can cost only about $25 or so to process, the fee being charged to the tenant.

Of course, these seasonal and vacation rentals often require you furnish the property, not only with furniture, but also utensils, plates, bedding, and the like, as well as provide Internet service and cable TV.   There are additional costs but additional profits to be made.

The highest rents, however, are obtained by renting a house or duplex by the day or week.  People come to the island on vacation and want a place to stay with their entire family and hotel rooms are very expensive.  Thus, they're willing to pay $1,000 to $3,000 per week (or more!) to rent a house or duplex.

Needless to say, this incurs additional expenses as there is a lot more wear and tear on the property. Often, we see that an entire family will come and rent a house, parking six cars on the lawn, along with a boat trailer and a small buggy trailer for their golf cart.  And as might be expected, they have parties and have a good time which can disturb the other neighbors, unless the other neighbors are also vacation renters.

Which brings us to an additional point.   Airbnb and other vacation rental outfits are making waves in that some people are renting out homes in residential neighborhoods which is causing strife with the neighbors.   Here on a resort island this is not an issue - and in fact the island authority has no problem with it, provided you pay the hotel bed tax and that your property meets certain minimum standards.   In a residential neighborhood, you may find yourself in conflict with the neighbors or local authorities.

The local real estate offices here on the island manage vacation rentals, lining up tenants for the property owners, collecting the rents and making sure the properties are clean and maintained.   Rather than manage the property yourself, you can hand it over to one of these agencies and they take care of everything.   As you might imagine there are greater expenses involved in renting this way. The property management company wants a percentage of the rent. The island authority collects the bed tax which is normally charged hotels.  There is increased wear and tear on the property as well as breakage in minor theft of items.   I have found, personally, that renting out a property, even full-time, using a rental agency, basically sucks up what little profits you may make on the property.  Remotely rented properties are even worse - you have no opportunity to use "sweat equity" to make minor repairs and improvements.

And you can expect difficulties with furnished vacation rentals.  For example, one young landlord told me that he had furnished his rental unit with all-brand-new glassware, cutlery, dinnerware, and bedding.  After the first summer rental season was over, he was chagrined to come back to the property and find that people had brought their broken and mismatched sets of dinnerware, cutlery, and glassware and taken all of his brand-new pieces.  Even the brand new pillows had been taken and replaced with lumpy and moldy substitutes.

Since the cleaning staff was instructed only to count the number of dishes, number of forks, number of glasses, and so forth, they did not report anything missing.  Of course, this is the cost of doing business, particularly when you are renting to the public.  And that is one reason why the vacation rentals charge more per week than most people pay per month if they had an annual lease, sometimes twice as much.

A reader asks, how one can vet these tenants to ensure your property won't be damaged?  This is a difficult task.  We have never rented a vacation property by the week or day, in the past but rather for winter residents on a monthly basis.  We performed credit checks on the prospective tenants as a means of screening out bad tenants. We also met with the tenants and we able to use our personal judgement.

For example, in Florida we advertised a condominium for rent on a seasonal basis from November through May for winter tourists.  We were almost immediately approached by a Florida local who wanted to rent the property full-time.  We explained to them it was a vacation rental and the rent was very high because it was designed for a seasonal tenant.  They immediately agreed to pay this high rent, but while we were discussing the matter, their child was pulling up the pavers from the deck and throwing them into the pool.

They also kept changing their story as to the number of people who would be living in the apartment and the reason why they were moving.  Moreover, they didn't want to pay for the credit check nor the deposit, giving excuses as to why those fees could not be paid.  It was quite clear that these tenants were con artists trying to weasel their way into the property, establish tenancy, and then wait for us to evict them.

The Canadian couple that rented the condominium, on the other hand, merely wanted the property for a few months, and their credit check was more than satisfactory.  They were very happy with the property as everything was brand-new, the rents were very competitive, and the place was clean and tidy - unlike a lot of other vacation rental properties in the area.

We also rented our other condominium on a monthly basis to some other vacation tenants as well as to State Farm insurance adjusters who came down for the various hurricanes. We were very fortunate with the latter, as this allowed us to rent out the property during the non-productive summer months when it would usually be vacant (or occupied by us).

We used VRBO to rent these properties.  Today there is also Airbnb to allow you to rent a property for even one night.  We used this service to rent someone's boat in Jacksonville to stay the night to see a Broadway show.  It is an interesting concept, however you are taking more of a risk of having problems or property damage.  As the boat owner explained to us, the previous tenants had invited a dozen of their closest friends and had a party on the boat, disturbing other people in the marina.  The marina owner threatened to throw the boat owner out of the marina if such an event was repeated.

The Airbnb site is interesting in that it works like social media.  Once you rent a property on Airbnb, you are reviewed by the property owner and you may leave a review for the property as well.  Thus, your reliability as an overnight tenant is evaluated and scored, and perspective landlords can evaluate whether or not to rent to you.   However, like most social media schemes, it could have its flaws.

You should be familiar local laws concerning landlord tenant rights, and it pays also to at least make an acquaintance with a local landlord-tenant attorney in case you need assistance down the road.  For long-term renters, a tenancy may be formed, and if they don't pay or cause problems you may have to evict through a legal eviction proceeding, which can take months.  For shorter-term tenants such as those through Airbnb, you may have additional rights as you are considered more of a hotelier than a landlord.  When renting out space in your personal home, you may even have additional rights. Again, it pays to learn what the local laws are rules and rules before proceeding.

As I've noted before, being landlord in is not for sissies.  You have to be very hard-nosed and hard-hearted.  For example, the Florida lady who wanted to rent our vacation condo full-time, gave us a sob story about how her husband had left her and how she needed a place for her and her child to live - the same child who is vandalizing the property as we spoke.  Later on, she changed her story to say that her husband will be coming to live with her, which was way too many people in a one-bedroom apartment.

We've actually sold that condo to young man whose mother who was a real estate agent.  The mother was going to manage the property and they were going to make lots of profits in this booming real estate business, or so they thought.  The mother was a very religious woman, and another Florida local came to look at the place, she spied the cross around the real estate agents neck and said, "We'll have to pray about this"

The mother decided that it would be "less hassle" to rent full-time than to make more money with vacation rentals as we did, and seeing that her prospective tenant was supposedly Christian, she rented the place immediately to her without doing any background check or even receiving a deposit. You can imagine how that worked out - they never received any rent and eventually have to evict. Eventually the property went to foreclosure and they became another one of the victims of the real estate meltdown of 2008. However, they were less victims of circumstance than victim of poor judgment and poor planning.

Vacation rentals could be very profitable, and there is another duplex for sale here on the island and I've toyed with the idea of purchasing it, refurbishing it, and renting it out as vacation property and as a winter property for winter guests.  However, in order to rent the property out you either have to hire one of the local real estate agencies to manage the property for you, or be here all the time to manage it yourself.  In other words, you can make a lot of money, but it is a lot of hard work.  You have to be on site and ready to intervene if there are problems with the property such as a backed-up toilet, broken appliance, or the like.  This means you might never be able to take vacation.

It also can mean it can be very inconvenient for you personally, even if you are around all the time. For example when we rented the boat down in Jacksonville, the owner was in the middle of a wedding party and had to take time away to meet us at the boat show us around and hand us the keys. You are becoming a hotelier when you do this, and hoteliers work long hours and have to be available at all times.

In an earlier posting, I mentioned that it can be advantageous to rent out parts of your personal residence, if you can, to recoup some of your costs.   Having a roommate can be a hassle, and even a nightmare (particularly if you are in each other's face all the time) but it can almost pay for the cost of your housing.   An in-law apartment can be discreetly rented out for additional income.   Our house in New York, near Cornell University and Wells College, could have been rented out during graduation week to wealthy families from New Jersey for thousands per week - as they came up to see their son or daughter graduate.   I am sorry I didn't take advantage of some of these ideas, as I might still own that property if I had.  While the additional hassle of renting out portions of it would have meant more work, it also would have nearly paid the overhead of owning the place.   It is one of my few regrets in life.

And one reason we never rented the place out was that we were afraid of people damaging our things - the stupid idiotic junk that everyone owns that is worth next to nothing but has "sentimental value" or whatever.   Clean out a few dead relatives' houses sometime, you quickly realize how little the "stuff" we buy and own is really worth - mere pennies.   An estate sale for an in-law netted a little over $3000 for everything - furniture, clothing, bedding, kitchenware, and even unopened food (no, people really buy that stuff!).  What we think is valuable is meaningless - and we put a premium price on silly things and forego huge profits as a result.

But on the other hand, to those who take risks there are rewards, and there are rewards for hard work. If you manage a property carefully and properly, you can end up making a lot of money, even as you do have difficulties with damage to the property and other headaches with renters.

And that is why I say it makes no sense if you are purchasing a property and it costs more to own it than it does to rent it. There should be some profit motive in the venture to compensate you for all the hassles involved as well as the hard work necessary to maintain and rent out a property.  During the Heyday of the 2000's when the real estate market went berserk, people were buying properties that cost $3,000 a month to own and rented them for only $1,500 a month.  All that work and hassle and difficulty and stress, only to lose $1,500 a month - it made no sense whatsoever.  But people did it. People are idiots.

This is why I don't recommend landlording for everyone. Or indeed recommend landlording for anyone.  Or indeed, nor do I recommend anything for anyone. This is not an advice column.  Nor is it a get-rich-quick scheme column or a how-to column.  I am merely writing about my experiences for my own pleasure. Whether you get something out of this or not, I don't know.

So, if  you rent out your spare bedroom to some bum and he ends up eating all your food, breaking all your shit, and then going crazy in your face, don't say I didn't warn you.   Nothing profitable in life is free and easy - if it was, we'd all be Billionaries.
All I can say is, that I've been a tenant and I've been a landlord and of the two, being a landlord is probably a much tougher deal.

UPDATE:  A reader asks, "What skills are best for being a landlord?  Plumbing?  Electrical?  Painting?"   The answer is those are helpful skills to be sure, but the best skill is to be rational and skeptical.   The minute you put a property up for rent, you will be approached by all sorts of sketchy people - and also decent, honest people.  The trick is to know the difference between the two.

Go with your gut.  If something sounds too good to be true, it probably is.  If someone appeals to your religion or race or nationality, they are trying to bamboozle you.  If an attractive young woman thrusts her breasts in your face (yes, it happened to me!) and offers to pay rent in CASH, chances are, something isn't right (might need a red lightbulb for the porch!).

On the other hand, you don't want to be so skeptical as to chase off good tenants.  It is the hardest thing to do!  People skills are harder than mechanical skills - and often what sinks any business!

You have to be rational and dispassionate and think hard and carefully and  not make any snap decisions.   You are gambling a lot of money here, and could go bankrupt if you make some serious mistakes.   That's about all I can say.