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Are you cut out to be a landlord?

Your tech stock flopped. Your pension fund fizzled. How will you build toward retirement now?

If you're like many battle-scarred investors, you may be seriously considering income property for the first time as an alternative to the vagaries of the stock market.

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After the tech tumble, there is something comforting about investing in income property: It's physical, it's tangible, it tends to hold or appreciate in value, it serves a need and you won't lay awake nights wondering if it's going to be worthless in the morning. Plus, if you own your own home, you're already familiar with the home-buying process and many of the financial considerations that come into play for first-time landlords.

According to the U.S. Census Bureau's 2000 Census, roughly one out of every three occupied households in America is a rental, nearly 35.2 million in all.

Properly priced and maintained, rental property can be a great way to let others build your equity while you enjoy the tax advantages of depreciation and let property appreciation work for you.

But don't expect this to be as easy as buying stock, warns Tom Lucier, author of The Florida Landlord's Manual.

"Stocks are passive investments; this is an active investment," he warns. "If you want to make it work, you need to be hands-on because if you don't know what you're doing, how are you going to know if the person doing it for you knows any more than you do? It's the blind leading the blind."

Still interested? Let's see if you're landlord material.

Is your house a moneymaker?
If the key to success in real estate is location, location, location, it has been said that the key to investing in income property is timing, timing, timing.

How you will fare as a landlord depends in part on your local housing market and your own financial status when you either acquire income property or move and rent your current house.

Yes, national trends can certainly affect local markets. For instance, due to historic low interest rates, many renters may have been able to purchase a home during the past year, shrinking the size of the rental pool. Low rates also resulted in overbuilding in some parts of the country, placing rentals in competition with builders offering buy-downs and other incentives to lure buyers.

But it's the rental market in your own town and perhaps even in your own neighborhood that is going to determine if you can make a go of it. Remember: All real estate is local.

First, let's do a little kitchen-table calculating to determine if your property is a moneymaker or a money taker.

Let's say your monthly payment principal plus interest, taxes and insurance, or PITI, is $900. Let's add $100 a month for yard and pool service. To break even, at least in terms of cash flow, you will need to rent the house for $1,000 a month, given that renters pay their own utilities.

Whatever money you wish to make above the monthly nut must be added to your break-even rental figure. If you intend to hire a property management service to handle your rental, be prepared to add 10 percent to 15 percent to the rent to pay them. And some landlords build a small contingency fund into the rent to cover repairs and tide them over should the property sit vacant from time to time.

Lucier says be sure to contact your home insurer and adjust your PITI accordingly before proceeding further.

"Your insurance changes dramatically. When you're in there as a resident, it's owner-occupied; once you move out, it's a rental property," he says. "Most insurance companies offer rental insurance. Think about getting an umbrella policy. It's added insurance, a liability policy. You can get a couple million dollars provided you've got good credit and you haven't filed a lot of claims. You've got to have proper insurance or you could lose everything."

The tax portion of your PITI also is likely to increase when you move out because you will lose your homestead exemption.

 
 
-- Posted: March 11, 2003
   

 

 
 

 

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