Real Estate Rookies

Reap the benefits and avoid the pitfalls of being a first-time landlord.

BY KAREN LELAND

Although credit is tight and home sales are waning, the number of people getting into the real estate rental business is on the rise. According to the National Association of Realtors, 21% of home purchases in 2007 were for investment purposes, which translates into 1.35 million houses for rent by those who hope to earn a profit in the future. Three primary factors driving the increased interest are: Foreclosures and dropping prices are making property an attractive investment; those who can no longer afford their primary residences—but can’t sell them—are moving; and people with disposable income are taking advantage of the prices to buy second homes for vacation rentals. Add to this the baby boomers inheriting property from their parents, and it’s easy to see why there is an abundance of “for rent” signs dotting the landscape. Regardless of why you get in the game, Marcia Stewart, co-author of Every Landlord’s Legal Guide, says that the most important thing is to treat your rental real estate like a business.

SETTING GOALS

The first step, says Theresa Souers of Pinnacle Real Estate Group in Lake Tahoe, CA, is to determine your goals for the property. “If your main objective is to generate income, then buy a home in close proximity to the majority of amenities that location has to offer,” she says. For example, the closer a Lake Tahoe rental property is to the lake, casinos, ski runs and restaurants, the higher the rental income will be.

Alternatively, if your primary goal is to use the property as a second home—also using it for vacation rentals to supplement expenses—Souers recommends finding a property that can comfortably sleep at least four to eight people, with as many bathrooms as you can get. “Extras such as a hot tub and game room will also help you market the house as a vacation rental,” she says.

FOLLOW THE LAW

Once you’ve acquired property, the next critical step is to be scrupulous in following tenancy law. “Doing this is more complex than people realize, since tenancy law can vary from state to state,” Stewart says. Stewart’s co-author Janet Portman, an attorney, offers the following advice:

• If a tenant does not pay rent, there are basic steps you can take in any state. First, deliver a pay or quit notice that says the tenant must pay within a specified number of days (usually three to five) or move out. If they don’t comply, file an eviction lawsuit.

• Get comprehensive general liability insurance on the property. “Th is protects the owner in case they are sued by someone who claims that the owner was careless in maintaining the property and [the tenant] has been injured as a result,” Stewart says.

• Rent is generally based on the market rate for a comparable unit. Although the law does not generally specify limits on rental rates, there may be legal limits in areas with rent control. Rent control also limits how much you can increase charges year to year.

PROPERTY MANAGEMENT

Would you be better off managing the property yourself, hiring a handyman or contracting a property management company to take care of everything from finding tenants to collecting rent? It depends.

Joe Russo, a 36-year real estate broker, investor and manager, says that the determining factors are money and distance. “If you’re investing outside of your immediate area,” he says, “it can be very time-consuming and even impractical to take care of things yourself.”

On the other hand, if the property is nearby, you can save money and gain valuable hands-on experience by managing it yourself. “Most property management companies charge between 5% to 10%,” Russo says. “This not only cuts into profits, but you don’t really know what’s going on with your rental.”

The happy medium is to hire a local handyman to help with repairs. Just remember, you are still legally responsible for any issues that may arise.

Renting property can be financially rewarding, but it’s not for the faint of heart. Even if you screen with scrutiny, follow the law to the letter and hire the best property management firm, you may still face unhappy renters, expensive repairs and empty units. But if you’re prepared and thorough, being a landlord might just be right for you.