Worst Case Financial Scenarios ?

[bearishgurl]

Interesting thread. I haven’t been a landlord in 20 years for all the reasons HLS cited here (had a total of 5 rental units in the past – not all at the same time). And I’m too old and tired now to put up with tenant shenanigans.

I would think the “professional deadbeat tenant” would have gone “mainstream” by now.

My last kid who just graduated from HS had MORE than a handful of classmates (numerous?) whose parents fell into that category. A couple of the “deadbeat tenant” parents were actually RE licensees (albeit not working in the biz). Some parents will do absolutely anything to remain in a particular school attendance area after getting foreclosed upon or forced into short-selling their family’s home.

It seems the deadbeat-renter-stunt-of-choice around here was to rent ONLY from “owners” hoping to list or listing their homes as short sales. They paid well under market rent from an “owner” who wasn’t paying the mortgage, with the understanding that the property would be showed with an advance appt … with the message on the pfl, “`Contingent.’ Showing by appt only. Needs TLC …Do Not Disturb Tenant.”

LOL, all these “deadbeat tenants” had to do was make sure the house was a disaster and there were odors in it during showings to ensure it would never sell for anything the lender(s) would accept. The best case scenario for some of these lucky deadbeat tenants was to have the house they were renting foreclosed upon and get to squat for awhile (most likely already began squatting during the deadbeat seller’s “ownership”) and then either make a deal with the REO lender for continuing occupancy under the property’s present condition (which these tenants had full control over, lol) OR get thousands from the REO lender or FNMA for “relocation expenses” after only leaving the home “broom swept” and their mountains of trash at the curb. Most Big Banks back then just let these “deadbeat (holdover) tenants” stay for years so as not to have the home unoccupied and thus have the City down their throats for broken windows, 4′ high weeds and green/black pools while they decided which homes on which tracts to market first.

My last kid was only 7-8 yrs old when the millenium boom went into in full swing (2004) and has seen some of their longtime classmates move up to 12 times since third grade (often in the middle of the school year), all the while continually attending the same HS or feeder schools into that HS. Today’s average value of the homes my kid’s classmates’ parents rented over the years (ALL SFRs) is $550K to $900K.

It’s unbelievable but true. When a family who bought during a house during the millenium boom that they could never afford under a normal lending environment ends up losing that property, it is very, very difficult for them to “adjust” their lifestyles downward. Some of these local families still have one or more kids in the pipeline (to finish HS) while the short sale deadbeat “owners” are becoming scarcer to take advantage of. But many (most) certainly had a good run of being able to rent upscale and even luxury homes for a fraction of rental cost and ALSO had their fair share of being able to squat for months at a time without even one single eviction blemish on their record.

Oh YEAH. Parent rental applicants with school-age children who have never left the area but have no legitimate rental references (or give friends/relatives names as “fake” references), may have dubious income sources which are unverifiable and have one or more former SS/FC’s on their record which happened YEARS AGO … BIG RED FLAG, folks. SFR owners beware, they’re out there … I imagine still in droves due to much tighter lending stds … still preferring “upscale” areas with good schools and looking for SUCKER owners … preferably those who are upside down or who plan to leave the county/state and attempt to manage the property themselves. Just a FYI.

[spdrun]

Some parents will do absolutely anything to remain in a particular school attendance area after getting foreclosed upon or forced into short-selling their family’s home.

How many of those people would be interested in renting 1/1 condos or apartments? And if they’re living in that level of squalor with children, wouldn’t they be risking an irate neighbor reporting then to Child Welfare Services?

Parent rental applicants with school-age children who have never left the area but have no legitimate rental references (or give friends/relatives names as “fake” references), may have dubious income sources which are unverifiable and have one or more former SS/FC’s on their record which happened YEARS AGO … BIG RED FLAG, folks. SFR owners beware, they’re out there

Why would anyone rent to someone like that? We’re talking about multiple red flags waving atcha.

[an]

HLS, I totally agree that one shouldn’t plan for sunny day scenario. They should be at least cognizant about the worse case scenario or plan for it. I also agree that people who can’t afford to take a few hundred loss a month shouldn’t be in the business of being a landlord. It’s like any other business. The higher your risk is, the higher your return. But you shouldn’t use sunny day scenario and compare it to stable stuff like CD. Which is why I tend to expect a much higher return from my money than some in order to pull the trigger on a particular property.

Though payout is not guarantee, it can be HUGE under certain circumstances. My sunny day scenario is we’ll see a 70s/80s style inflation. During that time, houses went up 3-4x nominal price. Along with increasing prices, rent also went up a lot too. If you locked in a 30 years fixed, you’re golden. I don’t expect that to happen, but who knows. Even a milder inflation period like the 90s-2000s, you see rent increasing and price increasing. If you have the cash to withstand the bad time, you’re stand to profit handsomely during the good time. Nothing is guarantee, but the potential is there.

[bearishgurl]

[quote=spdrun]

Some parents will do absolutely anything to remain in a particular school attendance area after getting foreclosed upon or forced into short-selling their family’s home.

How many of those people would be interested in renting 1/1 condos or apartments? And if they’re living in that level of squalor with children, wouldn’t they be risking an irate neighbor reporting then to Child Welfare Services?[/quote]

They aren’t living in “squalor.” They just simply place piles of laundry and used dishes around the house and fail to clean the kitchen or the cat’s litterbox, and stain the driveway, etc, for a “showing appt.”

spdrun, have you ever seen the ridiculously stupid listing pictures focusing on big messes, yard waste and trash/recycle bins plus cabinets, showers and closets torn out (may not even be of the same property) in online “short sale” listings, instead of focusing on the property’s best attributes? These listings are but one example of what I was discussing (above). These (deliberately ugly) photos are put in there in effort to lessen buyer interest in the property to enable the “owner’s” or agent’s relatives or friends to slip their offer through with no competition. Sometimes it works and sometimes it doesn’t. Most of these listings are tenant-occupied where the “owner” was collecting rent for YEARS without paying their mortgage(s).

This type of deadbeat parent/tenant is interested ONLY in renting upscale/luxury homes of 1900 to 3800 sf located in an attendance area of good schools. The 1/1 rental market is a different animal.

[spdrun]

Yes. I’ve seen such pictures and they tend to pique my interest in a property. I realize that a lot of people have no imagination, so reverse staging might reduce competition for a property with good bones.

[an]

[quote=livinincali]I can think of a scenario where this type of situation would apply here in San Diego. Suppose for a moment you gobbled up 3-4 cash flowing rental properties in a place like Mira Mesa and rented them out to young Qualcomm engineers or some people that were in related fields. Suppose then that mobile slows down and Qualcomm decides to layoff 5K people. 2 or 3 of your tenants get laid off and decide to leave your properties. Now you went from you nice 5% cap and the $500/month to a negative $2000/month situation. How long can you handle that situation and how long will it take you to find new tenants?[/quote]Rent in Mira Mesa only went up about $100-200 for a 1/1 and 2/2 over the last 15 years. QCOM was much smaller than than it is today. So, I don’t see rent in MM dropping $700/month anytime soon. If rent drop $700/month, then you’re talking about a 2/2 rent @ $800 and a 1/1 rent @500/month. I don’t see that ever happening. Rent for a 2/2 in MM hasn’t been that cheap for 20 years. At that time, QCOM was still in a startup mode and a lot of the QCOM buildings today were just empty land and UTC area was pretty empty compare to how it is today. If we do see that kind of rent drop, then there are much much worse thing to worry about. After all, rent was flat between 2005-2010, during the whole financial crisis.

[bearishgurl]

[quote=spdrun]…

Parent rental applicants with school-age children who have never left the area but have no legitimate rental references (or give friends/relatives names as “fake” references), may have dubious income sources which are unverifiable and have one or more former SS/FC’s on their record which happened YEARS AGO … BIG RED FLAG, folks. SFR owners beware, they’re out there

Why would anyone rent to someone like that? We’re talking about multiple red flags waving atcha.[/quote]

An “owner” who isn’t making their payments or is upside down and sees no way to move for a better job or simply thinks renters will make most of all their mortgage payment for them. This is why they (stupidly) elect to “manage” the property themselves from afar. This is most often an “owner” who has never been a LL before.

An “owner” in an area which became decimated in value during the millenium boom (TV and inland empire cities and most of South County San Diego) and hasn’t completely recovered in value due to post year-2000 overbuilding so still cannot get their heads above water.

An “owner” who has had their home vacant more than 60 days between tenants, due to too many nearby SFR’s being offered as rentals or too little rental demand in the area.

This type of deadbeat tenant has the following (apparent) characteristics:

– is well dressed and groomed;

– drives a late model luxury vehicle;

– one of the parent-couple may have a legitimate verifiable employment which may or may not qualify for the rental;

– is willing to deposit a substantial amt of cash for damage and pet deposits (they’ll recoup it very quickly upon squatting);

– furnishes a list of “landlords” to call as references if asked.

What is NOT apparent to the unsuspecting “owner”/novice wanna-be LL:

– prospective tenant has continuous access to a family or friend-owned flatbed truck or moving van;

– prospective tenant has continuous access to friends/relatives to help them move – in the middle of the night, if necessary;

– prospective tenant knows how to properly search county RE records for defaults and NOS’s;

– prospective tenant may be licensee;

– prospective tenant’s list of references is “fake” (friends and relatives);

– prospective tenant had previous SS or FC preventing them from buying their own home and wanna-be LL doesn’t know how to check for this;

– prospective tenant had one or more successive BK filings/discharges that may have already dropped off their credit report but nevertheless reveals their character which doesn’t typically change;

– prospective tenant has an explanation for any adverse items on their credit report and plenty of cash to make it all better today.

Yeah, I could see where a lot of newbie LL’s would accept one of these “professional deadbeat tenant’s” applications, ESPECIALLY if they had no other applications under consideration and needed to get the place rented yesterday.

[HLS]

AN,
I don’t think that ‘normal’ inflation like the 70’s is possible again anytime soon.

I believe that 2 other extreme scenarios are more likely,
(1)Hyperinflation such as Weimar Republic 1921-1924, Argentina inflation and Zimbabwe inflation 2008.
(2) The collapse of the US Dollar that would make the 2008 ‘crisis’ look like a walk in the park.

The more likely scenario is several decades of sluggish economic activity and jumbled, confusing, manipulated reports released by the govt to give the average person an illusion and false sense of security that ‘things’ are in fact improving.

The biggest threat to this country (and possibly the world) that virtually nobody is talking about would be the collapse of the 401K system that people have been fooled into believing is a ‘safe’ vehicle for a secure retirement.

It’s a myth that has been perpetuated by an industry that makes a fortune managing these accounts of ‘pre tax’ dollars, whether the investor ever makes a decent return or not.

Here’s a link to an interesting article:
http://finance.yahoo.com/news/retirees-suffer-401-k-rollover-040100455.html

These are real dangers that most people (including experts) would tell you could never happen….just like the experts said that the housing market could never collapse.

It was only due to govt intervention AND irrational emotional people that kept the housing market from REALLY collapsing.

In an extreme situation, the govt is only capable of so much.

[The-Shoveler]

I think 1970’s-ish type inflation is very possible.

maybe 5-7 percent for 10 years.

And a strong-ish dollar to boot.

[The-Shoveler]

The only thing I would rule out however is long term asset deflation

The Gov can’t afford it.

[spdrun]

This doesn’t mean that individual assets won’t be subject to deflation, just that the mean will increase.

[livinincali]

[quote=AN]Rent in Mira Mesa only went up about $100-200 for a 1/1 and 2/2 over the last 15 years. QCOM was much smaller than than it is today. So, I don’t see rent in MM dropping $700/month anytime soon. If rent drop $700/month, then you’re talking about a 2/2 rent @ $800 and a 1/1 rent @500/month. I don’t see that ever happening. Rent for a 2/2 in MM hasn’t been that cheap for 20 years. At that time, QCOM was still in a startup mode and a lot of the QCOM buildings today were just empty land and UTC area was pretty empty compare to how it is today. If we do see that kind of rent drop, then there are much much worse thing to worry about. After all, rent was flat between 2005-2010, during the whole financial crisis.[/quote]

I didn’t really say anything about rents. It’s the months of vacancy you might have to endure. Can you immediately undercut the rents of everybody else in the market and get a new tenant? Most likely you probably could. Basically the question is how long can you carry leveraged rental property without collecting the rent and how quickly are you willing to lower the rental price.

[SK in CV]

[quote=HLS]The biggest threat to this country (and possibly the world) that virtually nobody is talking about would be the collapse of the 401K system that people have been fooled into believing is a ‘safe’ vehicle for a secure retirement.

[/quote]

I’ve seen this referred to a few times and I don’t really follow. The “401K system” is a small, but not insignificant piece of the larger financial markets. And similarly, a small but more significant piece (about 20%) of the retirement plan market. If the financial markets collapse (as they did 6 or 7 years ago), retirement plans will fall similarly (though I think it’s roughly 40% of 401Ks are in fixed income instruments with substantially less risk).

I’ve never had a 401k, but I have been involved in a dozen or so presentations to 401k participants. Every single one of them included warnings of risk associated with the various investment options.

Is the expectation that the “401K system” has unique risks associated with it that are different from risks associated with other retirement plans or other financial investments?

[HLS]

The best way to increase your odds of having a problem tenant is to have the lowest rent.
The lower your rental rate is the more applicants you will have.

The more applicants you have, the more confused you will be about who is the best choice and believe it or not, the more likely you are to be slapped with a lawsuit for discrimination by someone you turned down.
In a land where anybody can sue anybody for the cost of filing, there are perils.

My suggestion is to maintain the properties that you own. Charge top rent and let the tenants know that you do this but will maintain the property if there are any issues, and don’t get emotionally involved with your tenants (and their problems)

You might want to have someone else show the property for you and take applications.
Review the applications before you meet the applicants face to face. Charge an application fee to cover the cost of running their credit (with their permission) and require proof of income.

Charge the maximum late fee that you can and NEVER ever. EVER waive a late fee.
If rent is due on the 1st but not late until the 5th, you can still deliver a 3 day notice on the 2nd.

Do not EVER let the inmate run the asylum.
I believe that month to month agreements are better for the landlord in many cases.

With a lease you cannot get rid of a miserable tenant as long as they are paying their rent
(unless a violation of lease, which they often correct)
My longest month to month tenant stayed over 13 years and only moved because I sold the property.

A happy tenant may stay longer than they thought without the pressure of a lease.
If they don’t want to be at my property for any reason then I don’t want them there either.

Don’t screw tenants out of their security deposit.
The rent they pay you INCLUDES wear and tear.
Be fair with what you charge them for.
They probably need it worse than you do, and I believe in karma.

If you are uncomfortable charging high rent, another option is to offer a half month or full month credit after 12 months of paid rent on time.
Baker’s dozen. 13th month credit. Equates to a 3.85% or 7.7% discount.

Don’t micro manage your property and keep tenants waiting when a repair needs to be made because you cannot get over there to fix it yourself.
Find a good handyman that is available to go check out the problem and provide a temporary solution quickly if a follow up by a professional is required.

If your tenant is inconvenienced by a flood or interior damage, hop on Priceline and find them a decent place to stay for a couple of nights without them having to ask you for this, and apologize for the inconvenience.

MOST IMPORTANTLY: Read the state handbook on tenant/landlord rights and talk to someone who can explain anything that you don’t understand.

There are plenty of other ideas. I suggest mine with over 30 years of experience with many tenants.

PS: Don’t worry about nail holes in walls. 😉

[livinincali]

[quote=SK in CV]
Is the expectation that the “401K system” has unique risks associated with it that are different from risks associated with other retirement plans or other financial investments?[/quote]

The risks are the same. 401K aren’t as good as a public sector pension because of the assumed taxpayer backstop, but who knows if that holds up. The reality is that as the boomer demographic has moved through the system there has been demand and supply imbalances. Right now there’s large demand for assets to fund retirement. Down the road there will be a large supply of assets wanting to be sold to fund retirement. The demand to buy all those assets just isn’t going to be there when that time comes and asset prices are likely to fall.

[Author]

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