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Buying rentals: profitable but perilous

Almost one-fourth of all homes being sold in the U.S. are being grabbed up by investors. Why? Same reason 1930s-era thief Willie Sutton said he robbed banks -- that's where the money is.

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The appeal of owning rental real estate lies in the promise of a big payoff. Real estate has been appreciating for years and last year was no exception. The median sales price of an existing single-family home across the country in February 2005 stood at $191,000, an increase of 11 percent from one year earlier, according to the NAR. At the same time the average condominium sales price stood at $210,700, a boost of 20.5 percent from one year earlier. This means that even if landlords don't realize enough in rental income to cover their costs they have been able to count on their properties' steady appreciation.

The National Association of Realtors (NAR) recently reported that 23 percent of all homes sold in 2004 went to investors -- not counting the 14 percent that went for use as vacation homes. Another NAR survey shows only 3 percent of all homebuyers sell their homes in a year or less, so it appears even investors are holding the properties for the long term.

Real estate was also one of the few industries that didn't struggle when the country went through its recent slowdown. And even as the stock market continues to experience its ups and downs, housing prices have been rising steadily, though economists debate whether buyers can continue to expect such appreciation.

Kim Andereck's a good example. The real estate agent with ERA Advantage Real Estate in Cheyenne, Wyo., owns, manages and leases 61 rental homes and his occupancy level stands firmly at 100 percent.

Andereck is far from the only person who has turned to rental housing as a source of steady income. But he might be one of the better examples to follow for other investors hoping to earn big money in the business. A professional real estate agent, knows landlords must first know their market: Renting out an apartment, single-family home or condominium in downtown Chicago, for example, is different than doing so in a resort area in Miami; renters look for different amenities and attractions when they're renting in a big city than they do when they're looking to spend a week along the beach. Markets also determine the monthly rents a landlord can charge, and what type of tenant a landlord can expect to attract.

The point? Owning rental properties can be a great way to make extra money. But buying a rental property isn't like winning the lottery: Landlords can't expect to earn the big bucks without first doing serious research.

"I recommend that you look at this as you would any business venture," says Christine Hrib Karpinski, author of "How to Rent Vacation Properties by Owner." "Sit down and create a business plan. When people purchase a rental home in a vacation area they sometimes let their emotions dictate their decisions. They can fall in love with a place and want to buy it even if it's not the best place for them to buy."

 
 
-- Posted: May 16, 2005
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