Newbie landlord needs help with vanishing rental rates in Allen, Plano, and McKinney... (Dallas: sales, real estate)

[wlovin]

Hi all - Back in 1995 I owned a house in Allen that I rented out. On the tax rolls it was valued at $104,000. I easily got 1.2% per month of the appraised value of the house.

By 2001 the house was valued at $135,000 but my rent was down to 1.0% per month. Still an easy house to rent.

I sold the house in 2002.

I had been living in Florida all those years, and recently moved back to the Dallas area. I've started looking at buying single family properties to hold and rent. I always liked Allen, so I started looking there first.

These days however, I note my old house in Allen is assessed at $155,000 and my market analysis suggests there's *no way* it could be rented for more than .85% of its assessed value.

The same *is not* true of several other suburbs (i.e. my old Allen house in Rowlett, Cedar Hill, Mesquite, Desoto, Arlington, or even East Dallas would bring 1%).

What's going on? Why does there appear to be a long term erosion of rental rates in Allen (also Plano and McKinney)?

[MaryS80]

I had a friend who lived in the Willow Bend area of Plano back in 2001 he was paying $700/mo for his one bedroom apartment. By 2003 or 2004 that same apartment was about $630 per month. Now it's down to $585. There may just be a glut in the rental market. That area tends to be more geared towards young famlies buying homes.

[socketz]

$585 in Willow Bend ?

I pay $695 nowadays in the same area.

Regarding the rental prices, I lived in San Diego during this last 5-7 year upswing and something similar happened. When a market is good as it's been in Dallas, I think you get several types of buyers that aren't around in a down market:

1. People that will stretch themselves alot further to get into the market because they don't want to miss out. In a down market, these people will rent because buying is too risky.
2. People like yourself, investors looking for rental income properties, that they too will see some appreciation on over time. In a down market, investors will split and move to a market will more potential for appreciation. Investment financing is also harder to get in a down market.
3. People that move out of their home, but instead of selling, decide to keep it as an investment. In a down market, these folks either decide to not move or they sell their old place to get out from under it.

All these lead to a glut of rentals, which then pushes prices down.

I think when it changes is when the market turns down and the press gets ahold of it....like now in Socal. Rents have skyrocketed about 15-20 percent in San Diego since the downturn because now there are alot more people renting (based on the factors above). Before, when there was 10% jumps in appreication every 6 months, it really made not sense to rent, even if you really had to stretch yourself out to afford a place.

What's funny is that when I moved to Dallas, I looked for a house to rent and there were not many and the ones I found that were nice were either about as expensive as a mortgage OR they were gone by the time I called. So at that time I would have thought the rental market was strong.

[wlovin]

The oversupply argument makes sense. It's usually the only argument you *can* count on.

There's also the sub-prime lending fiasco we've been subjected to for the last five years which would tend to depress rents (you'll buy before you'll rent if you can get easy financing) *and* artificially inflate sales prices (more money chasing a housing supply that is increasing more slowly than the money).

All around Dallas (and the US), landlords have been unable to pass rent increases along since the sub-prime phenomemon began in 2002. In fact, rents around here have actually decreased over the last five years while property valuations increased (or stayed flat) year over year.

What makes Allen, Richardson, Plano, etc. different though is that from 2001 - 2004 the tech bust hit *really* hard and that had to take rental rates down compared to Desoto and Cedar Hill for example.

Paradoxically, the advent of sub-prime financing would seem to have *supported* telco prairie real estate *prices* through the bust. Maybe that's why telco prairie home values (at least on the tax rolls) were pretty flat from 2002 to 2007 and didn't dip much at the height of the bust.

So is that it? Sub-prime lending caused rents to decrease across the board from 2001 to 2006 while the tech bust nailed telco prairie rental rates at the same time?

Next question: is the sub-prime phenomenon *really* over? Is it safe to own Dallas area rental property again?

[socketz]

Sub primes hit unaffordable coastal areas really hard, but has Dallas been affected ?

[GoPadge]

Based on the foreclose rate of some Metroplex areas, I'd say yes. How hard is the real question.

[lh_newbie]

Here's a property management company that has a quarterly newsletter that I find very informative:

Moderator cut: website

The issue of decreasing rental rates has been touched on these newsletters for over a year - with only the most recent newsletter having a positive overtone. Enjoy the reading.

[wlovin]

Yep - I'd already found him.

Good info about decreasing rental rates and he generally underscores my argument - that sub-prime lending was putting people who otherwise would rent into their own homes thus driving rentral rates generally down. But that's been a nationwide phenomenon (pretty much)...

The other thing about Allen, Plano, and McKinney is that properties there tend to be higher priced than in Desoto so you're going to get slightly lower rental rates anyway... i.e. the old rule of thumb that a $100,000 property gets 1%, a $125,000 property gets .97%, a $150,000 property gets .95%, and so on...

In Allen today (certainly the same for Plano) there are comparitively few $100K-$125K properties anymore. Heck, even my $104K (in 1995) starter home in Allen is now on the tax roles at $159K.

[cdelena]

I think the Dallas market is slowly moving into the area closer to major markets elsewhere in the country. In the past it has had unusually high rents against equivalent purchase price when compared to other markets (some of it property tax driven).

In many markets I have looked at in my travels it is not unusual to find rents in the .45% area, or half of what you are looking for. The steady building of residential properties in DFW has changed the inventory so expect the rental dynamics to shift.

[socketz]

Originally Posted by lh_newbie

Here's a property management company that has a quarterly newsletter that I find very informative:

Moderator cut: website

The issue of decreasing rental rates has been touched on these newsletters for over a year - with only the most recent newsletter having a positive overtone. Enjoy the reading.

Could you PM this to me newbie. I'd like to read it.