More Americans Become Landlords as Rents Rise

With home prices retreating from fever-pitch highs, a new breed of real-estate investor is eclipsing the speculator: the landlord. To survive the experience, the first step is to find a good tenant.
By: Jeff D. Opdyke: The Wall Street Journal Online
With home prices retreating from fever-pitch highs, a new breed of real-estate investor is eclipsing the speculator: the landlord.

More Americans are hanging out "for rent" signs. Some were forced into the business after buying investment houses or condos at top dollar during boom times that they now can't sell. But many are discovering their inner landlord on purpose, often buying properties well below prices from a year or two ago.

It can be lucrative. For the first time in several years, rents are rising in many places, in part because the subprime-lending crisis is making it harder for people with marginal credit records to secure mortgages, increasing rental demand.

Shantay Wakefield and Gerald Taggart, a couple in Fairview Heights, Ill., have bought two rental properties in the past two years. The two 30-year-olds figured they would be income-generating investments, though they didn't foresee the pitfalls.

"You find out quickly that this is not easy," says Ms. Wakefield, a high-school teacher. They expected repairs to one of their rentals to take four weeks; they took seven months, and costs piled up.

Nevertheless, she says, "The sense of accomplishment, that's what we've enjoyed."

At the National Association of Residential Property Managers in Virginia Beach, Va., membership in the past year has increased by more than 20%. In Nashville, Tenn., Wilson Group Real Estate's property-management-services arm has nearly doubled to 250 clients in the past year, thanks to the landlord boom.

Getting into real estate remains relatively easy. Despite the difficulties in the loan market for higher-risk, subprime borrowers, there are lots of financing options available for investment real estate, assuming your credit is good.

But that doesn't mean it is a good idea for you. Think of it like operating a small business, even if it is just a single condo. Tricky tax laws, obscure local ordinances and other imponderables can turn what looked like a no-brainer rental into a money pit.

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Keep in mind that "you're buying an income stream, not a pretty house," says Paul Howard of the Florida Landlord Network, which provides services to landlords in the Sunshine State. A house will attract only so much rent. If you overpay, you can raise the rent only so much before your property starts sitting vacant.

Mr. Howard says he recently took a call from an engineer in Maryland who had just bought a waterfront Florida home and was looking for help finding a renter. "I ran the numbers," and "even if this guy got top dollar for rent, he was still underwater by $800 a month," Mr. Howard says. "He overpaid, and now he's got problems."

The first step is to assemble a small team of pros, especially a real-estate agent knowledgeable about local rental rates and other issues that will impact your bottom line. Consider retaining a local property manager who can help you navigate ordinances, set a fair rent, find tenants, arrange lawn services and handle worst-case scenarios, like evictions.

The downside: Managers tend to charge a month's rent upfront and about 10% of the rent thereafter.

Tenant Complaints

Ms. Wakefield and Mr. Taggart manage such duties themselves. One of their two properties has been smooth sailing. The other's tenant is "calling every day with a new complaint," Ms. Wakefield says. "Right now she wants us to put in a water line because she bought a new refrigerator with a water dispenser."

Property managers are listed in phone books or online. You will want one that has been in the business full time for years. To track rental finances, many landlords use Quicken Rental Property Manager or similar software.

Running a credit check "is a must," says George Heim, a retired policeman in Wall Township, N.J., who, along with his wife, inherited a home that is now a profitable rental unit. Landlords can sign up for services from providers such as Fidelity Information Corp. (gofic.com) to get these reports for small fees.

Key Questions

Insist on references from previous landlords. Key questions to ask: Did the tenant pay on time? How much damage was done to the property?

A typical mistake is to underbudget for repairs. Keeping the home in good condition helps attract quality tenants. "It's just so silly to scrimp on maintenance," says the Florida Landlord Network's Mr. Howard. "When you're a landlord, you're in the retail business, not real estate. You don't want to lose your good customers."

Insurance is another concern. An injury to your tenants or their guests on your property could mean a lawsuit. A good insurance agent and lawyer can help determine how best to structure your business to limit your personal liability.

Where's My Accountant?

Rental real estate also comes with a dizzying array of tax breaks, deductions and write-offs, perhaps more so than just about any other investment. You have deductions for interest, insurance, repairs, even for the mileage accumulated driving to the bank to deposit the rent checks. It is worth the expense to hire an accountant with rental-income expertise.

Overall, aim for an annual return of at least 10% to 12%. Remember, you can earn 5% in risk-free U.S. Treasury bonds, so you should make more to compensate for the headaches of being a landlord, such as the Christmas Eve phone call informing you of a broken toilet.

That happened to John Hayes, president of HomeVestors of America Inc., a national chain based in Dallas that buys and sells homes in need of repair. "This kind of stuff is a hassle," says Mr. Hayes, who is also a landlord. Fortunately, he had a plumber on 24-hour call - another good idea.