Enter Rental Investing With Eyes Wide Open

By Elyse Umlauf-Garneau

If you've been scanning real estate headlines, you've likely seen the stories saying that landlords are back in the driver's seat.

Demand for rentals, along with monthly rents are ratcheting up. Moreover, with the decline in condo and home prices, investors in some markets are picking up properties for a song. 

Though investing in rental property has the potential for long-term financial benefits, becoming a landlord isn't without its hazards and headaches.

Real estate experts routinely urge caution when investing and recommend that you fully understand the pitfalls and benefits of owning rental property. They also suggest that you look closely at your finances and goals and make purchasing decisions based on your individual circumstances.

Eyes wide open

Determining whether such an investment is right for you--financially and psychologically--and then picking the right property are among the first key decisions.

Though the list isn't comprehensive, here are eight considerations before starting a sideline as a landlord.

1. Tap experts.  Be certain that a rental is a good fit with your short- and long-term financial strategy, that a deal is structured to your advantage, and that you're properly insured.  Rely on a team of advisors that includes real estate and mortgage professionals, an accountant, a lawyer, an estate planner, and an insurance expert.

Tip: Your cadre of experts should be able to help you explore and understand all your options, including 1031 exchanges and buying investment property using a self-directed IRA. And they should address exit strategies and crunch the numbers so that you know the effect capital gains will have when you sell. And be sure someone schools you in IRS rules that affect investment property. 

2. Know thyself. Owning investment property can create a special kind of angst that you've not experienced before.  Do you deal with uncertainty well or will a one- or two-month vacancy stress you out? Do you have the skills to get along a variety of people? Can you build good will with tenants without becoming their pals? Are you assertive enough to address tenants' misdeeds and say no to unreasonable demands?  Are you able to make minor repairs? Do you want field late-night calls about burst pipes or broken air conditioners?

Tip:A property management company can remove the burdens of day-to-day contact with tenants, and manage leases, tenant screening, maintenance, rent collection, evictions, and so forth. For a price.

3. Location analysis. Understand the history and the future of a potential neighborhood. That entails more than pricing trends, which a real estate practitioners can address.

Vickey Wachtel ABR,CIPS,CHMS,CRS,e-PRO,GREEN,GRI, SRES, broker/owner of Imagine Realty International, Katy, Tex., looks beyond the obvious and checks with the city to measure, for example, the fiscal health of a city (tax hikes coming?), assess what projects are being planned (will there be new road running past your front lawn in a couple years?), and to understand how the empty lots in the immediate neighborhood  are zoned. Also look at the ratio of owners to renters in a given area. Prospective tenants look at crime statistics and school rankings, so you should too. 

Tip: Neighborhoods that are walkable, accessible to public transit, and rich with amenities--restaurants, shopping, parks, and entertainment--often trump far-flung bedroom communities, particularly if your target tenant trends to a younger demographic.  

4. Read your neighbors. Spend time in the neighborhood during all times of the day. You want to see what goes on on a Saturday night, for example. Is the neighborhood full of partying college students? If so, it may not be the place to invest if you envision your future tenant being a family. Is the neighborhood tidy? Are parks clean? Are lawns mowed?  

5. Condition and upgrades--Determine whether you want a property that is ready to rent immediately or whether you're willing to make upgrades and repairs. You'll need to factor such decisions into your budget. 

Tip:Unless it's a luxury property, don't sink money into high-end finishes and appliances. Middle-of-the road upgrades, say real estate experts, likely are a better choice.

6. Rising costs. Particularly if you buy in a condo building or a gated golf community, know that you'll face costs for assessments, club memberships, and so forth, and factor them into your decision-making.  Such costs always rise, points out Janice B. Leis ABR, an associate broker with Prudential Fox & Roach, who specializes in marketing property in Pennsylvania, New Jersey, and Florida.

7. Future home? If you're planning to turn your rental into your retirement home, be certain that you like the city, the neighborhood, and the property and that you'll be happy living there. Be sure that the property can be adapted for aging in place. Sure, you're 55 now and in good physical condition. But when you're 75, do you want to be hauling groceries up three flights of stairs? 

Tip: Test-drive your choices by renting the property type and in the town in which you'll be investing and possibly retiring in, suggests Leis. She asks, "If you've always lived in a single-family home, will you like condo living?" Find out before you invest.

8. Know your audience. Pick a neighborhood and housing type and size that are in demand among prospective tenants. In some markets that might be a three-bedroom, single-family house. In others it could mean a high-rise studio. Wachtel says that renters can include anyone from divorced singles and middle-aged couples who are downsizing to recent college graduates and college students.

Tip: In a university town, you'll likely find a steady flow of student renters to tap. But, warns Leis, know that you'll probably face chronic repairs. College students aren't, after all, always gentle on property.  

Resources:

• National Apartment Association (www.naahq.org): Find education, advice, and discussion boards on topics associated with investment property ownership and management.

Tax considerations: The Internal Revenue Service offers some documents about the tax implications of owning and selling rental property. It's important to seek advice from qualified certified public accountants, but the IRS documents give you some insight into some of what such professionals will discuss with you. Seewww.irs.gov/businesses/small/industries/article/0,,id=98895,00.html and www.irs.gov/publications/p527/index.html.

• The Institute of Real Estate Management (www.irem.org): The association offers a book, Principles of Real Estate Management (www.irem.org/acb/stores/1/_font_color_FF0000_NEW_fo_P13C1.cfm), that provides introductory information for those new to real estate investing and managing.

Local education: If you want a greater understanding about real estate investing, consider taking classes on the topic at nearby colleges and universities.