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Buying rentals: profitable but perilous -- Page 2

Consider these recommendations before buying any rental property:

Purchase in a desirable location
The cliché that the three most important factors in real estate are location, location and location is especially true when it comes to rental properties. Simply put, landlords who don't purchase in the right location for their market will struggle to earn enough tenant income to cover their monthly mortgage bill.

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But finding the right location isn't always easy and varies depending on many factors.

In the heart of a busy city, for example, landlords should purchase condominiums, most likely, or single-family homes located near theaters, shopping, parks, restaurants and, perhaps most importantly, public transportation.

"It all boils down to the neighborhood," says Jennifer Vogel, a real estate agent with Century 21 Sussex & Reilly in Chicago's Lincoln Square neighborhood. "The biggest thing a renter is looking for when they're renting in Chicago is public transportation and the amenities in a neighborhood. A lot of people don't have cars when they're renting in the city. It doesn't matter, then, if your property has all the bells and whistles. It can have granite counter tops and a state-of-the art kitchen. But if it's 12 blocks from public transportation you're in trouble."

The requirements are vastly different for rentals in vacation, beach or resort areas. Not surprisingly, landlords who offer a condo or single-family home on or near the water in such areas will be able to charge higher rents than will their counterparts whose homes are located just a short walk away.

"Everything in our market is driven by the lake," says Gail Lowrie, associate broker with Rubloff Residential Properties in New Buffalo, Mich., a resort town along the shore of Lake Michigan. "Appreciation of these homes is at least 10 percent, and in many instances more, per year."

There is more, though, to purchasing a rental in vacation areas. Lowrie says that in her market, three-bedroom units are in high demand because the Midwesterners who typically spend their summer vacations in New Buffalo are families with small children. Rentals must also be well-kept and clean, or renters will simply move on to the next available property.

Weigh various lifestyles
Landlords must also consider what type of property to purchase. Condominiums are generally easier to maintain, and they are also easier to find in downtown city markets. But condominiums may be harder to find along the shores of lake and beach communities. Single-family homes generally attract families with children who need the extra space and bedrooms they provide. Condominiums are draws for young couples or single renters.

Consider property management
Another decision: whether to work with a property management company or handle properties on their own. Property management firms, of course, don't come cheap, so hiring one will eat into a landlord's profits. But such firms do take many of the headaches out of the rental business: screening potential clients, collecting rent payments and handling those annoying leaky-plumbing calls.

"If I have investors who live out of town I'll typically recommend they hire a management company," Vogel says. "It's not viable for an out-of-town investor to be managing properties on their own."

Study local rules and regulations
One more piece of advice: Before purchasing a rental property in a specific neighborhood, check with zoning boards and city agencies. Some municipalities or even homeowner associations have laws that restrict rentals. Some communities, for instance, allow only long-term rentals of 30 to 60 days or limit the number of times a year a unit can be rented out. Landlords hoping to rent properties in vacation areas will struggle to find renters looking to spend one or two months in their rentals.

Dan Rafter is a freelance writer based in Indiana.

-- Posted: May 16, 2005

'05 Real Estate Guide
30 yr fixed mtg 3.63%
15 yr fixed mtg 2.77%
5/1 jumbo ARM 3.16%
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