G.M. Filisko is a Chicago area freelance and former editor for REALTOR® Magazine.
When home sales drop, rentals shoot up. But just because the smart money is in rental services right now doesn't mean it's easy.
March 1, 2008
Home sales and rentals are like the two sides of a seesaw. When home sales rise, home and apartment rentals fall. But when home sales drop, rentals shoot up. “The number of renters is on the rise today,” says Brad DeVries, president and CEO of Semonin, REALTORS®, in Louisville, Ky. “Every day there’s a greater need.”
That’s why DeVries and other brokers are glad they offer rental services.
“In 2006 and 2007, our sales didn’t do that well,” says John Paulsen, a partner at Crye-Leike Coastal Realty in Destin, Fla. “But thanks to the vacation rental side, we’ve been fortunate to keep our doors open.”
What’s more, a strong rental market can help curb an oversupply of homes in your market if sellers offer their home for rent, not sale, at least temporarily.
“Any depletion of the for-sale inventory will help on the seller side, because inventory and home prices work in an inverse relationship,” says NAR Chief Economist Lawrence Yun. “Less inventory strengthens home prices, so taking some inventory could be taken off the market and turned into rental units will help stabilize sellers’ competition, lessen foreclosures, and stabilize the overall housing market.”
Does that mean you should follow DeVries’ and Paulsen’s lead? Perhaps, but be ready for challenges. Rentals are a tough business because keeping all your customers happy is a balancing act.
One Model Doesn’t Fit All
Brokers who do rentals range from huge to modest-sized operations.
Mike Tarantino, broker-owner of West Shore Realty Inc. in Milford, Conn., handles hundreds of rentals each year by offering four types of services — year-long unfurnished rentals; September-to-June furnished rentals, typically for students at nearby universities; weekly and monthly summer furnished rentals; and short-term furnished rentals (typically three or six months), usually for business use. For each type, the company charges 10 percent of the monthly rent. Tarantino’s profit on rental services is under 20 percent.
Paulsen’s company offers no long-term rentals, only seasonal rentals to snowbirds visiting the white-sand beaches of Destin. His company charges 28 percent of the monthly gross rental income, and his profit is 15 percent to 22 percent annually.
On a more limited scale is the small department at Semonin, REALTORS®, which has a full-time rental coordinator and two assistants who do nothing but work to generate relocation business. “Our rental coordinator keeps a database of rentals as a service to our sales associates and customers,” says DeVries. “Even sales associates who don’t work for our company will call her with a property they want rented.”
Semonin’s coordinator spends 70 percent to 80 percent of her time providing rental services to corporate clients who need short-term housing for transferees. Another 10 percent to 15 percent is spent helping noncorporate transferees or local residents who have housing needs. The final sliver of her time is spent helping the company’s sales associates find renters for their sellers’ properties.
“Maybe the market is flooded in a certain price range,” says DeVries, “and the home owners need to generate some cash flow on their home. Maybe they’ve already moved. Or maybe they’re building a house and their current home sold first, sooner than expected, so they need a short-term rental.”
Fees vary depending on the length of the rental. For instance, if the coordinator rents a property for one year, the company’s take is 50 percent of the first month’s rent. And though the rental department generates a small profit, “it’s not a huge moneymaker,” says DeVries. “The true value is in providing full service for clients so that we can hold onto that business, build trust, and gain long-term business.”
Challenges? What Challenges?
Tarantino says one difficulty in operating a large rental business is the overhead. “You need a lot of staff to handle it,” he says. “For about 200 rental properties, you’ll need up to 10 people.”
Tarantino’s staff includes rental agents, some on salary and some on commission; a full-time staffer who handles tenant and landlord complaints; and two workers who are constantly on the road making sure properties are in move-in and -out condition and coordinating repairs. He outsources maintenance, cleaning, legal, and accounting functions.
If you’re interested in starting smaller with an operation like Semonin’s, DeVries estimates your initial annual investment would be no more than $45,000. “You’ll need to pay for desk space, a computer, a phone line, personnel, and benefits, but that amount should include everything.”
In addition to shouldering the overhead, another test in running a rental business is maintaining good relationships with everyone you’re trying to serve. That’s even more critical if your goal is to use the department to find a temporary solution for sellers whose properties aren’t selling and to build relationships with renters before they become buyers.
“You sit in the middle with tenants and landlords throwing rocks at you from both sides,” says Tarantino. “My biggest challenge is keeping both sides of the deal happy. For example, if tenants qualify highly as far as credit but then move in and don’t maintain the property properly, it’s very difficult when the landlord says you put a bad tenant in there.”
On the flip side, some landlords don’t want to spend the money necessary to maintain the property. That might mean you’ll spend your own money to make repairs to keep tenants — whom you’re hoping will become buyers — happy.
Phil Wood, CRB, GRI, who was once in the rental business, agrees. The broker-owner of John R. Wood, REALTORS®, in Naples, Fla., cites tenant and landlord tensions as one of the chief headaches he remembers. “Vacationers view rental units like they’re staying at the Ritz, and they expect everything to be perfect,” he says. “We’d get a call from renters saying something like, ‘The toaster is a two-slice pop-up, and I was expecting a four-slice pop-up.’”
Wood’s brokerage ran its rental operation for about 25 years and at its height employed a dozen people but closed it down in the late 1990s because of thin profit margins.
Lessons from the Pros
If you’re intrigued by the idea of using rentals to reduce inventory and build lifetime relationships with customers, brokers who know the business first-hand have advice for you.
“Product knowledge is important,” says June Prophet, regional rental manager for Prudential Florida WCI Realty, also in Naples.
Advises Wood: “Keep your overhead low, and let it grow only as revenues justify. Also, outsourcing things like accounting, cleaning services, and maintenance is really the key to making it work. Then all you have to worry about is the rental service itself.”
And don’t forget marketing. “Most rental companies don’t capture business based on advertising,” says Wood. “Most get the majority of business through REALTOR® referrals or a condominium or other project that you handle rentals for. So you’ll need a salesperson to go out and get that business.”
“Talk to somebody who’s filling a different role in your company to see if that person can begin to provide this service,” says DeVries. “Part of the beauty of doing that is word-of-mouth will let associates know the service exists. All of our sales associates know we provide these services, so we don’t have to market it to them. They won’t hesitate to call our coordinator to get exposure for a listing they want to cover.”