Part of the job of any real estate investor is to pay attention to the state of the real estate market. More than reading news and keeping up with our professional connections, we need to look into the mind of the consumer. The consumer on all sides of a real estate transaction. Demographics are important, particularly in a world where real estate investors are looking to draw in tenants and may need to draw in an end buyer.
Not only do we need to observe what makes our tenants tick, but how the face of the modern-day home buyer has changed.
One thing to note right off the bat is that many homeowners are staying put for longer. The state of the economy and the real estate market crash in recent years left many homeowners underwater — and those that weren’t were left fearful.
Given that the uneasiness is still lingering in the recovering (and increasingly competitive) real estate market, who exactly is buying? And what does it mean for real estate investors?
3 Characteristics of Today’s Homebuyers
In years past, one would expect home buyers to be relatively young 30-somethings. Today, however, home buyers average out at 44. Buying a home is out of the question for an alarming number of the up-and-coming generation of millennials who are struggling under the burden of student debt and both unemployment and underemployment — not to mention difficulties in getting approved for a mortgage. Today’s home buyers, for the most part, are of an older generation that has had both the time and the careers necessary to have enough capital to make a move.
While not all millennials in Generation Y are shut out by the real estate market (they still make up a sizable portion of home buyers) those in Generation X have gained on them in terms of numbers. Either way, the number of first-time home buyers (usually found in Generation Y) is at a significant low.
Speaking of capital, today’s home buyers are often richer. The highest percentage of home buyers (at 14%) make between $100,000 and $124,999, with the highest distributions near that same range. Because of the bottoming out of the real estate market, one would expect home buyers with less money to be capable of buying homes. Not so. The rock-bottom prices were great for real estate investors at the time, but as the market recovers (and prices go back up), many homeowners remain apprehensive. On top of it, the competitive nature of the real estate market means that all-cash offers from investors have been shutting out many without the income to compete.
They don’t shop around as much.
While the average home buyer in years past would look at least a dozen homes before making an offer, today’s home buyers look at an average of 10 home before buying. Why the decline? Again, it’s the competitive market. Homebuyers don’t often have the luxury to shop around, lest the property they want sell before they make a decision.
For real estate investors, the insight into the mind and make of today’s home buyers can help us identify and understand who makes up the real estate market. What we do has an impact on the market and the real people who operate within it.
For a more in-depth look at the modern home buyer, check out the 2014 Home Buyer and Seller Generational Trends report from the National Association of Realtors.
3 Characteristics of Today’s Renter
They are working hard.
More and more we are finding applications with two income earners on the application and often one or more have a second job. Times are tough for sure and many renters are looking for extra income. One thing that cannot be relaxed when approving a renter for a property is the rent to income standard. Like many home lenders, we look for proper ratios. We would like a renter to earn 4 times rent in take home income in a month. We will consider 3 times rent depending on circumstances. So, often times an extra income and more hours on the job is the best way for renters to qualify.
They are not great at budgeting.
Whether it is poor budgeting or over spending or a mix of both, one thing is for sure. Renters remain renters for one main reason - an inability to properly budget. As a reference, at Premier Property Management in Memphis collects roughly 50-60 percent of the billed rent each month in the first 5 days of the month. Over the next 10 days they will collect another 20-30 percent of the billed rent and over the last fifteen days of each month they will collect another 19-28% leaving roughly 1-2% of billed rent each month carried over into the next month.
Renters often make arrangements to pay rent twice each month understanding that it will cost them an additional fee to pay full rent later than the 5th of the month. This of course speaks to a much bigger problem about money management, but what our team at Premier Property is very adept at doing is communication management. Communication is the key when working with tenants who struggle to budget correctly.
They will pay 100% of their rent due, they just may make two or three payments and that may be a recurring monthly theme. Is that a reason to panic or be worried? No. That is a reason for an investor to let the management company they hired to manage their property make the best decision on the ground for ensuring that a property stays occupied and rent gets collected. If your property manager says it is time to cut a renter loose...then follow their advice, but worry and panic should never enter the picture given the state of today's renter. Let your management company do their job if they are collecting rent each month...even when it is late.
They want a great house too!
Whether we fully realize it or not, renters are looking for many of the same things that home owners are looking for. They want safety first and foremost. Clean, newly renovated, quality finishes and great location all come into play as well, but pretty much in that order. Safe is a big must for renters today. Clean and new both come in right behind safety and proximity to work, school and transportation are all equally important after safety and cleanliness.
One other big factor we are finding today is that renters really want to work with quality management companies. Many will complain about management after they get turned down for renting properties. But renters are turned down for very valid reasons. If you really want to know if a management company is quality, take a look around and see if there are complaints from people being turned down. That means they have standards! And standards are important when real estate investing. At the same time, take a look at the renewal rate of a management company. Renters stay put in houses and renew leases when they are happy with the service they are getting.
As many of you know, we track everything at Memphis Invest! We have instilled that same drive to monitor and track into our team at Premier Property Management as well. Six months ago we began really drilling down on our renewal numbers. Just skimming across the surface we were pleasantly surprised to find that on average 78% of our leases that fulfill their full term, sign a new extended lease. So some do move out early and some are forced to leave early for not paying. But a full 78% of those that complete their lease actually sign an extension. This is a big reason why less than 20% of our portfolio experiences a vacancy each calendar year.
As we continue to try and educate real estate investors to the ins and outs of investing, we have felt it was important to discuss renters. From what they are looking for to what motivates them to the challenges they face, this is an important topic for all long-term real estate investors.