Busy professionals considering real estate as an investment option often have a misperception about owning rental property.
“It’s a struggle at first getting into the business because it’s not like what you see on TV,” said Bill Leech of Aberdeen, who owns about 30 rental properties. “You can’t make a fortune and it’s a first-class headache to fool with. That said, when you know what you’re doing and what to expect, it can be good to you.”
Real estate experts suggest researching rental property investments thoroughly by attending seminars, reading books and subscribing to magazines devoted to the topic. They recommend studying the area in which you intend to buy property, watching for fluctuations in interest rates and preparing a detailed investment plan. But the best advice is from property owners with hands-on experience. Whether considering buying one rental property or amassing a portfolio, here’s their list of do’s and don’ts to help make the correct decision:
• Don’t buy a house because it’s cute. Buy it because it will bring a 10% to 12% return on investment. “Emotion should never enter the picture,” said Charlotte Sadler, a broker with John Jones & Associates in Pascagoula. “It should only be a matter of making the dollars and cents work.”
• Don’t pay market value for residential real estate. “Buy from a distressed seller, someone who has to sell for less than market value,” said Phil Hardwick of Jackson, a former real estate professor who has owned several rental properties. Sadler added: “There are a number of really good buys in the marketplace throughout the state: foreclosures, VA-repossessed houses, HUD houses.”
• Do consider location first. “Buy residential property near an institution, such as a college, hospital, military base, etc., so there is almost always a steady supply of new tenants as well as a constant turnover of tenants,” said Hardwick.
• Do buy the worst house in the best neighborhood. “It will tend to appreciate at a faster rate than surrounding properties,” said Hardwick.
• Do finance the mortgage for the shortest time possible. “Whenever I’d find a house to buy, I’d call Trustmark,” said Leech. “I’d know what rent I could bring, and what I’d need to take care of maintenance, taxes and insurance. I’d ask the bank to tell me how much payments would be over a 10-year period. Then I’d back it down to eight and seven and six years, if I could. My goal was to cover expenses, and at the same time, pay it out as soon as possible.”
• Do seek the advice of an accountant. “Tax laws change; some are even retroactive,” said Hardwick. “Have a regular discussion with your CPA about the tax consequences of owning rental property.”
• Do have a home inspection done on a property before the purchase. “Make sure you’re buying a good, sound facility,” said Sadler.
• Do set aside a reserve account of at least 5% for repairs and replacement items.
• Do consider paying a third party to manage rental property. “If the owner can handle it, it’s probably better if he manages the property himself because the running management fee is about 10% of rental income,” said Leech, who manages approximately 100 rental properties, including his own. “That extra money will come in handy for maintenance, taxes and insurance.”
• Do check credit references on potential renters. “Take applications and then select the best tenant,” said Hardwick. “Don’t pick the first tenant who walks in the door with a security deposit and the first month’s rent. Exception: if the tenant has the security deposit and wants to pay up to six months in advance, don’t lose this tenant.”
• Don’t delay taking action if a renter is late paying rent. “Make arrangements to collect the money or evict the tenant and move in another renter,” said Leech. “If you don’t move quickly, you’ll go deeper in the hole.”
• Do have a network of trustworthy and skilled maintenance and repair people. “They’ll help you more than you could ever imagine,” said Leech.
Contact MBJ contributing writer Lynne W. Jeter at firstname.lastname@example.org.