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.
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'
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
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
"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."