With home prices retreating from fever-pitch highs, a new breed of real-estate investor is eclipsing the speculator: the landlord.
More Americans are hanging out “for rent” signs. Some were forced into the business after buying investment houses or condos at top dollar during boom times that they now can’t sell. But many are discovering their inner landlord on purpose, often buying properties well below prices from a year or two ago.
For the first time in several years, rents are rising in many places, in part because the subprime-lending crisis is making it harder for people with marginal credit records to secure mortgages, increasing rental demand.
At the National Association of Residential Property Managers in Virginia Beach, Va., membership in the past year has increased by more than 20%. In Nashville, Tenn., Wilson Group Real Estate’s property-management-services arm has nearly doubled to 250 clients in the past year, thanks to the landlord boom.
Getting into real estate remains relatively easy. Despite the difficulties in the loan market for higher-risk, subprime borrowers, there are lots of financing options available for investment real estate, assuming your credit is good.
Keep in mind that “you’re buying an income stream, not a pretty house”. A house will attract only so much rent. If you overpay, you can raise the rent only so much before your property starts sitting vacant.
The first step is to assemble a small team of pros, especially a real-estate agent knowledgeable about local rental rates and other issues that will impact your bottom line. Consider retaining a local property manager (who may just be your real-estate agent or his/her company in many cases) who can help you navigate ordinances, set a fair rent, find tenants, arrange lawn services and handle worst-case scenarios, like evictions.
The downside: Managers tend to charge a month’s rent upfront and about 10% of the rent thereafter.
Property Managers
Property managers are listed in phone books or online. You will want one that has been in the business full time for years. To track rental finances, many landlords use Quicken Rental Property Manager or similar software.
Running a credit check is a must! Landlords can sign up for services from providers such as Fidelity Information Corp. (gofic.com) to get these reports for small fees.
Key Questions
Insist on references from previous landlords. Key questions to ask: Did the tenant pay on time? How much damage was done to the property?
A typical mistake is to under-budget for repairs. Keeping the home in good condition helps attract quality tenants. When you’re a landlord, you’re in the retail business, not real estate. You don’t want to lose your good customers.”
Insurance is another concern. An injury to your tenants or their guests on your property could mean a lawsuit. A good insurance agent and lawyer can help determine how best to structure your business to limit your personal liability.
Where’s My Accountant?
Rental real estate also comes with a dizzying array of tax breaks, deductions and write-offs, perhaps more so than just about any other investment. You have deductions for interest, insurance, repairs, even for the mileage accumulated driving to the bank to deposit the rent checks. It is worth the expense to hire an accountant with rental-income expertise.
Overall, aim for an annual return of at least 10% to 12%. Remember, you can earn 5% in risk-free U.S. Treasury bonds, so you should make more to compensate for the headaches of being a landlord, such as the Christmas Eve phone call informing you of a broken toilet.
