Negotiating with Tenants

More often than not, you will be approached by a current tenant as their lease term is about to expire. They will ask for concessions in exchange for signing another one or two year lease.  And as a landlord, you will feel compelled to give them concessions if they are proven reliable tenants.  Always keep in mind that the market dictates the price. Never let emotions get in the way. If they had a second baby and need a $100 discount per month to make ends meet, only do that if the current market conditions dictate. It is easy to test the market. There are rental ads everywhere, sometimes dozens within your immediate vicinity. Compare square footage, age of building, amenities, etc.

As a young landlord over a decade ago, one reliable tenant said her business wasn't generating the cash flow it used to, and their mounting childhood expenses made it very painful to pay the rent. I offered $25 off the $1,500 monthly rent. She talked me down to $1,425. I was afraid to lose the steady rental stream she provided. I even knew that the going rate for my building was $1,700 and she was already paying hundreds below market. I folded anyway.

And guess what? I should've kept it at $1,500. If anything, she would've stayed even if I raised the rent to $1,550. I know I sound heartless when I say this, but this is a financial business as much as it is a relationship business.

And sure enough, I soon found out that she and her husband took the vacation of their dreams in paris and took a cruise down the Rhine River. An excursion that would've costed at least $10,000 even back in 2002.

They ended up moving out a year later, left a mess, and balked at me giving back "only" 90% of their security deposit. Their kids crayoned all the walls and damaged the hardwood floors beyond "normal wear and tear".

Remember that in the end, it's a business deal.

Another Housing Crash Looming?

I've always been a proponent of buying and holding for the long term, maintaining properties diligently, and establishing productive landlord/tenant relationships. For the past few decades, that formula worked like a charm.

However, times have changed. We are in a period of unprecedented uncertainty with an unconventional monetary policy that has kept interest rates artificially low. Currently a 30 year mortgage can be had for around 4.125%, which is still historically low. Rates staying at these levels for a decade or more is a very unrealistic expectation.

Inflation is starting to tick up, and the Fed officials are getting more heat than ever to start raising interest rates. A true "market" mortgage rate would probably hover around 7% in a sluggish economy. Imagine if mortgage rates crept up from 4% to a still-very-low 5.5%? That is very possible in the near future (maybe 2015?).  Owners on the fence will be rushing to sell their homes, and it would cause an avalanche of pessimism to counteract the buying fervor of 2013.

When I started this blog in 2012, I saw some incredible opportunities with distressed sales and low prices, especially with condos and townhomes. I no longer see those bargains. I don't think the market is "super expensive" like it was in 2006, but some areas are starting to look frothy. The rental parity isn't there anymore.