||The Real Estate Adviser
Equity buildup's not enough
on rental property
My husband and I are considering buying rental property as an investment.
If the rental income simply equals our monthly costs (mortgage,
taxes, insurance), is it still a good investment, given the chance
to build equity? Or is it realistic to expect that we could find
property that yields a monthly profit also?
You and your spouse are really thinking about starting a side business,
not just making a simple, no-maintenance investment. That is, you're
not just putting money into something, then sitting back and reaping
returns, while trained professionals handle the administrative details.
You're getting into real estate, and that's a hands-on job, not
Ponder this, Kate: Few people will set out to
buy into a business, then spend their spare hours laboring away
at it, content with the knowledge that they'll cash a check only
when they sell it years down the road -- assuming, of course, the
demand for the product continues to improve. Profit floats the boat.
Sure, it's true that residential real estate
investment, on average, has beat Wall Street the last few years,
and plain old equity can be as good as money in the bank.
But you should make a reasonable profit, commensurate
with your time and effort -- some of which will, by the way, be
devoted to property maintenance, more intricate tax filings and
other upkeep. In some worst-case scenarios (i.e., renters vandalize
the house or force you to evict them), your "profit" buffer
may actually keep you from losing big on the deal.
And you may as well do it right. Here are a
few starter tips:
- Do your market research. Scour for-rent
ads to gauge the market. Call on a few of them in your target
buying area to see if the homes have leased after a few days.
Ideally, seek out a well-maintained, low-to-mid-priced home in
the most desirable school district around.
- Get a thorough home inspection before you
buy. And for goodness' sakes, Kate, please run a credit report
on your prospective tenants and check their references thoroughly
before you let them take occupancy. (Just remember the chilling
movie, "Pacific Heights," starring Michael Keaton as
the predatory tenant). This
Bankrate feature tells you how to protect your property from
"Tenants From Hell."
- Charge the correct price. To make things
worthwhile, veteran landlords say you need to charge about 1 percent,
or even a tiny bit more, of the home's value in monthly rent.
(For example, you ask $800 a month for an $80,000 home.) But note,
it gets a little harder to ask for that much in most markets when
homes are valued at $100,000 or more.
And don't forget to add property-maintenance
expenses, if you're providing this service, to your fixed expenses
of mortgage, taxes and insurance.
-- Posted: Dec. 12, 2003