Rental property investment can reap dividends, but…

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Published: April 24,2006

Cheryl High, broker-owner of Cheryl High Realty in Gulfport, used to complain when she had a rental home tenant who left the place trashed out. But when she was commenting about that at a real estate seminar, the speaker said: “Thank them. They are buying you a house.”

Despite 20 years of being in the rental home business, High says she doesn’t know how to pick renters.

“I have had really good ones and the worst in the world,” High said. “I think that is the nature of the beast. I used to buy properties and completely renovate them before renting them out. Then I would be so disappointed when renters wouldn’t take care of it. Now I fix it up at first, but save the big redo until I sell.”

Despite the headaches, High says investing in rental homes has paid off handsomely for her. She was able to purchase — with cash — a nice home with 20 acres. She now has several of the rental homes paid for. And when her office washed away with Katrina, she was able to weather the loss.

“Because of rentals, I had paid off most everything before the storm,” High said. “I didn’t end up after the storm hurt as bad as many people. The rental business is just the most awesome way to end up with some of your money at the end. It is a 20-year process. It doesn’t happen overnight. But it is a great way to end up with some money for retirement. I have some stocks, but a whole bunch of that was taken away. But my real estate hasn’t been taken away.”

High recommends people choose the property carefully. Her attitude has been that anything she purchases has to be able to be brought up to a standard so that she wouldn’t mind living there herself.

“If you buy something just because it is cheap, and will make you a little money, that isn’t the way to go,” she said. “It has to be a really great place to live after you fix it up. Put yourself in the position of renters and ask, ‘Would I want to live here if I had the choice?’ You want to make it so they would want to live here. You have to look at the property and make sure it is a property that can be brought up.”

She also recommends a good neighborhood. Even if there are some blighted properties, it needs to be a neighborhood that can be brought back up to good standards.

“Some houses were pretty down when I got them, but I bought in an area that could be brought back up easily,” High said. “When you improve houses like that, it is a good thing for the community, as well as yourself.”

Despite being in the business, High says she has paid market value for almost everything she purchased. She doesn’t feel it would be good for her professional reputation to make low-ball offers to sellers.

“I have to make sure it is a win-win situation,” she said. “And although every time I buy a house I go home that night and think I could have bargained better, every one of the homes I have invested in over the past 20 years has paid off.”

Although she uses leases, of course, she has learned to not go to the bother of trying to enforce a lease if a tenant moves out prior to the end of the agreement. When a renter is ready to go, they will pick up and move.

“It is not like that lease will hold anyone,” High said. “You don’t want to spend all your time in court. So I let them go and say, “Next.” I may have a few bad words for them, but I get over it quick. I have picked up the worst messes in the world over and over again. It is not for everybody because of the aggravation. Sometimes you are dealing with people you are not proud of for being part of the human race. You are surprised at the people who would live like that. But over these past 20 years, investing in rental homes has served me very well. I would recommend it to anyone who is somewhat of a risk taker.”

Eric J. Bradley, a Realtor with Century 21 Eric Enterprises in Picayune, suggests buying homes inside the city limits on as small a lot as possible. If the house goes vacant, you aren’t stuck with a large amount of yard maintenance.

“Any profit could well be lost if you have to re-clear four acres,” Bradley said. “Tenants do not rent yards. They do not keep up flowerbeds or hedges or anything else. Do not expect anything you left on the outside to be like it was when you come back. Pick as generic a home as possible to appeal to as many as possible. And make it low maintenance. A three-bedroom, two-bath brick home on a slab in town is your best bet.”

There are numerous types of problems. The first is a financial pitfall such as a major change in the whole market. Right now isn’t perhaps the best time, for example, to invest in a rental home in Picayune because housing inventory is down since Katrina — so prices are up. However, rents are up, as well, so it may still be possible to make the numbers work. You can also have the opposite of the current situation in South Mississippi. If a major employer shuts down, that could have a negative impact on the rental market.

“Things happen that change the nature of the rental market,” Bradley said.

Taxes and insurance on rental homes is an increasing concern. Bradley said it has been difficult to get home insurance in Mississippi for a while. The Katrina experience only makes it worse.

“Unavailability of insurance can mean the difference between buying and not,” Bradley said. “And if there is not enough margin, and your insurance and taxes doubled in past five years, that may eat up your margin. Some people invest for cash flow, and others for long-term appreciation. If you rent for long-term appreciation, increases in taxes and insurance may be no problem. But if you invest for cash flow, and suddenly you no longer have cash flow, that is a problem.”

Regarding management, Bradley suggests either purchasing properties close to where you live so you can keep an eye on them or hiring someone who is a professional to do it for you. It is helpful to have someone on your side who knows what it is like to stand in front of a judge for an eviction when things go awry.

Rental homes can be a good investment even for small investors, Bradley says. There has been massive appreciation in real estate values across South Mississippi in the past few decades. But people who aren’t willing to do their homework and roll with the punches, or who are averse to risk taking, might want to invest somewhere else.

“If you are going to be a relatively passive small investor, real estate is probably not for you,” Bradley said.

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.

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