Mark Twain is such a hero beyond the ages with his witty insights into human behavior. His quote,”History doesn’t repeat herself, but she sure does rhyme” is true as today as when he penned it a couple of centuries ago.
Take this article discussing how some segments of renters are actually employing debt to pay for rent obligations.
A virtually new industry of lenders has sprung up to service this market sector of residential property management.
Companies with names like Uplift, Domuso, and Till.
It used to be the world of payday lenders–you know, those people who prey on the downtrodden and unfortunate in civil society.
Boy, has that concept been flipped on it’s head in the rental world. Now, living beyond your means is as easy as an app on your iphone.
I imagine Dave Ramsey will have a coronary talking about the long term debt financing for short term occupancy.
Which made me think of a quote from Howard Marks at Oaktree Investments and how real estate investors and landlords can proactively use this information, emotional outbursts aside.
“When the credit market heats up–when the race to the bottom causes avid lenders to finance less-deserving borrowers and accept weaker debt structures-bonds are issued that back that margin of safety and won’t be serviced if things get a little worse. This is the unwise extension of credit. This process “Stacks the logs in the fireplace” for the next bonfire.”
Think about your current portfolio of rental properties and how you might be able to adopt the willingness of prospective tenants to pay their rent with credit.
Our company, Polaris Property Management, does accept credit card payments for rent. We, accordingly, do charge tenants for the fees associated with the payments, of course, and it does provide a gap solution for ensuring cash flows to our investors. But going to a full fledged lender scenario is an entirely different story which begs the questions:
- Do you truly have a qualified tenant if they must resort to a payday type lender such as this?
- When, (not if), the economy has a correction and employment softens, how much risk have your payday tenants brought to the portfolio stability above and beyond your risk tolerance level? Are you ok with a material increase in defaults?
- If your portfolio has a significant percentage of these tenants, is the market value of your portfolio truly what you envision it is worth on your books?
- Can you adopt these payday lender applications and incorporate them into your business model of real estate investing while limiting downside risk?
The answers to these four questions are certainly going to vary for every investor and landlord, of course. But their exploration is worth the mental energy regardless, since this likely tsunami will hit low-lying areas.
I’ll close with another of Howard’s enjoyable comments, which ties a nice bow around the entire oak tree:
“Every putt makes someone happy in golf.”