21st-Century Landlords
The strong housing market makes renting out property look attractive. But it pays to figure the dollars and cents of being a landlord before you jump in.
By Jeffrey R. Kosnett, Senior Editor
From Kiplinger's Personal Finance magazine, December 2004
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Just as with property values, however, there are big variations among cities. The vacancy rate is 4.4% in New York City and just 3.2% in Los Angeles. On the other hand, it's 15.8% in Houston and 16.8% in Atlanta.
Rebecca White and her husband, Harry, learned the hard way that rental real estate isn't a sure thing. When the Whites relocated to Austin, Tex., in 2003, they held on to the two-family house they owned in Athens, Tex., three hours away. When they converted their residence to a rental, the Whites' insurance agent also converted their insurance to a landlord's policy at three times the cost of their old coverage.
Within three months after the Whites left, they had rented the smaller unit but were unable to find a tenant for their own. Even lowering the rent didn't help. Eventually the Whites gave up and sold. "We lost significant money," says Rebecca. But the experience hasn't soured the Whites on rental property. Rebecca says they would buy another one if it were closer to Austin.
Stay close to home
If you're in the market for an investment property or two, it helps to stay close to home. Look for a house that's in sound condition and is located in an area where renters will be willing to pay you enough to cover your expenses and then some -- what rental owners call positive cash flow. Any gain in the value of the property is icing on the cake.
Detached houses and two-unit buildings are usually more attractive to buyers than apartments because vacancy rates are lower. Also attractive are properties with three or more bedrooms. Because larger rentals are the hardest to find, tenants snap them up quickly. In a pinch, they're also the easiest to sell quickly to another investor.
You want a steady stream of potential tenants, so focus your search on properties that might be popular with people who prefer to rent rather than buy. For example, a nearly new, single-family home in a high-end community can rescue a transferred executive who's on temporary assignment, or a family waiting for a builder to finish their new home. An affordable three-bedroom ranch close to schools, public transportation and shopping works well for a single parent. A house within easy walking distance of a hospital could attract a medical professional who works erratic hours and is often on call. A large townhouse in a trendy urban area could be rented to a group of roommates.
In addition, it helps to have a financial cushion in case you don't find a tenant right away. Successful investors usually have a vision and a marketing plan. Phil Byers of West Chester, Pa., came up with his rental-home investment strategy while visiting his daughter in Nashville. Because short-term rentals in high-end neighborhoods are scarce, Byers figured there was money to be made by buying a home in a fast-selling, upscale development and renting it for a hefty price to tenants who needed temporary accommodations.
In 2003, Byers paid $252,000 for the smallest single-family home in Westhaven, a planned community in the historic town of Franklin, Tenn., where builders expect some houses to sell for $1 million or more. The first tenants moved in to Byers's 1,700-square-foot house in July 2004 and signed a nine-month lease for $1,900 per month. The family's new house is under construction, so they'll be leaving this coming spring. Byers expects to line up his next tenant through either a real estate agent or a referral from the builder. He'll charge the same rent, or possibly even a higher amount. "It's working out extremely well," says Byers.