Want to be a landlord? Be smart about it

A lot of people want to rehab property to rent. There are plenty of mistakes to be made.
By: Al Heavens: Realty Times
I'd hate to be a landlord.

I had the opportunity once. In 1987 we were unable to sell our first house for several months after we'd acquired our second, and we briefly considered getting into the business.

The first house had been built in 1848, and I had spent six years and $30,000 trying to undo all the dumb things previous owners had done in the name of renovation and modernization.

The new house, built in 1904 and three times bigger than the first, need 10 times more work.

We were hoping to use the profit on the sale of the first to rehab the second. But the market was souring, we were around the corner from the worst housing project in the city and our first listing agent didn't seem in any hurry to move the property.

We tightened our belts, prepared to juggle two mortgages (one 13.5 percent, the other 10 percent) and prayed that nothing serious would go wrong with either house before we sold number one.

The monthly mortgage payment for the first house was about $800, but the rents for comparable properties in the neighborhood strained to reach $400, so becoming a landlord wasn't a viable option.

Although both properties were in the same city, they were 14 miles apart, and we both worked. Our then 5-year-old was embarking on an expensive 13-year-long private education, so resources needed to maintain both houses were becoming even more strained.

Fortunately, the new agent was able to sell the house almost immediately after taking over the listing, and we waited out the three months until closing almost without incident.

We had to replace the oil burner on the furnace in the new house two weeks before Christmas at a cost of $500. It reduced holiday spending a bit, but had little effect otherwise.

A few years later, after I'd begun earning a living writing about real estate, an agent who also owns rental properties suggested that I'd made the decision not to become a landlord much too quickly.

"You should always consider renting a house you can't sell, especially if there is no lender requirement to sell the first house to buy the second," he said. He also preferred renting the property if selling means reducing the price and taking a big loss.

"Just look at it as your future," the agent said of the unsold property. "You may not be able to get much money out of it at this time, but, in the long run, the equity could pay for your kid's college education or your retirement."

If you need to lower your total mortgage payment, just refinance the mortgage on the unsold house.

Looking back on it, the agent was right. The housing project was cleaned up and rebuilt, becoming a model for the nation. That coincided with the housing boom and the renewed interest in city living.

When the property sold in 2001, it went for three times what I'd sold it for 14 years before -- almost exactly what I sold the second house for in the same year.

The five-year-old entered college that year, and the first house would have paid for all four years and with room to spare.

On the other hand, scholarships and savings bonds took care of it completely, so he was one of the few who graduated without debt. That said, having a couple of hundred thousand around would not be such a bad thing.

A couple of hundred thousand, minus the cost of repairs and maintenance of the rental property over 14 years.

Although my renovation book is designed for homeowners rehabbing or expand their own digs, the classes I teach at Temple University's Real Estate Institute that are based on the book are filled instead with people who want to buy and rehab rental properties cost-effectively.

Of course, the approach to rehabbing rental is completely different to that of renovating your own home, and the trouble is that too many of my students didn't discover the difference until after the fact.

Others have tried to do it cheaply and have spent a considerable amount of money and time trying to undo it.

It's funny, too, because there are so many books on the market that purport to tell you how to rehab to rent, and, as I've found much to my dismay as I've tried to retool the course for small investors, virtually all don't make the cut.

So I've had to spend lots of time and effort trying to define and demonstrate "rental-quality renovation," just so these folks won't lose their shirts.

The definition I've come up with is this one:

Say you are a first-time homebuyer and don't have much money and your house needs work. Do what you really need to do and don't go deeply into debt to do it? Go laminate rather than granite, vinyl instead of quarry, Kenmore, not Dacor; GE instead of Bosch.

But do it tastefully.

Funny thing. That was our first house. Looking back, it really would have made a great rental property.