This past Saturday I had the pleasure of attending a civil union ceremony for some very dear friends
who have been together for almost 18 years. The two ladies had had a commitment ceremony many years ago, but now, finally,
they were able to make it "legal" in the State of Illinois. I was happy to be part of such a special day.
I also had a mention in the Wall Street Journal for an article they ran over the weekend about nightmares
in landlording. The article is printed below and can be seen if you click here.
The pitch is compelling: Buy a vacant house or apartment building and rent it
out to some of the throngs of Americans who have lost their homes to foreclosure. With interest rates near record lows and
property values still slumping, getting into the landlord business is cheaper than it has been in years.
Investors turned off by paltry bond yields and the mercurial stock market
are intrigued. Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif., says she has seen a surge of
clients looking to purchase distressed homes and apartment buildings. Her clients have an average net worth of about $4
million, she says.
U.S. home prices inched 0.2% higher
in August, according to a closely watched index released Tuesday. That prompted one economist to see a "modest glimmer
of hope" for the downtrodden housing market. Mitra Kalita has details on The News Hub.
"Many of my clients are looking to use part of their portfolios to
scoop up properties," she says. "They see it as an alternative retirement plan."
But
aspiring property owners need to watch out for a slew of traps. Among them: prolonged vacancies, surprise costs, deadbeat
tenants, difficulty refinancing and overestimating the rental potential.
It is easy
to overlook those risks when the market conditions appear so ripe. Home prices have fallen to 2002 levels nationwide, according
to the latest data from the S&P/Case-Shiller index, and financing remains cheap. For the week ending Nov. 10, the average
rate on a 30-year fixed-rate loan was 3.99%, not far from the Oct. 6 record low of 3.94%, according to Freddie Mac data
going back to 1971.
Rents are improving, too. The average monthly rent for all categories, including apartments
and single-family homes, was $846 nationwide in the third quarter, up 2.5% from the same period a year earlier, according
to Local Market Monitor, a Cary, N.C., firm that analyzes real-estate trends. That is lower than the long-term average gain
of 3.5% a year, but better than the 3% decline in calendar year 2009. ![[12rentmareJ]](http://si.wsj.net/public/resources/images/BF-AB761_12rent_DV_20111111202835.jpg)
photo
illustration byJeffery Mangiat Even the Obama administration
is considering getting involved in the rental markets. Government officials have been soliciting ideas for how to convert
some of the foreclosed homes owned by Fannie Mae and Freddie Mac into rentals, in order to cut the mortgage giants' losses
on those homes.
All of this is attracting interest among investors. Brian Davis, who
runs ezLandlordForms.com, a website for property investors, says traffic is up 20% this year.
"Most people think I'm crazy to buy now," says Jason Walker, a
marketing director in Washington. But the numbers were too good to pass up, he says. Mr. Walker is closing this week on a
town house in Baltimore, for which he paid $275,000. He says he put down 20% of the purchase price, locked in a 4.5% rate
on a 30-year fixed mortgage and expects to net $1,000 a month in profit.
Here is what
you need to know before taking the plunge.
Cheaper homes aren't
always a good investment. Even if a property is selling for half the price it fetched during the boom, that doesn't
mean it will generate enough income to make the deal pay off, says Wayne Copelin, a financial planner in Sugar Land, Texas.
The key is to figure out how much rental income the property
will generate. A good rule of thumb: Make a deal only if you can collect at least 1.25% of the purchase price each year
in rental income, says Jason Reed, a real-estate agent in St. Paul, Minn., who works exclusively with investors.
Determining the rental potential can be tricky. Some properties already have been rented out, and
the owner can furnish records. Others have no rental history.
One way to examine the
rental market is to use websites like FinestExpert.com, which tracks occupancy rates and rents across the country.
In certain sweet spots, rents are rising even as home prices fall. Take Nashville,
Tenn., where rents have jumped 6% over the past 18 months, while home prices have dropped 3%, according to Local Market
Monitor. Other markets where that is happening: El Paso, Texas; Houston; Omaha, Neb.; Raleigh, N.C.; Pittsburgh; and Washington.
Markets in areas that have been battered by foreclosures, such as Las Vegas and Phoenix,
remain unstable. They might have low prices, but they also are suffering from high unemployment. That could leave aspiring
landlords with empty homes, which then could fall even further in value, according to Local Market Monitor President Ingo
Winzer.
Local Market Monitor cites Austin, Texas; Akron, Ohio; and Dallas as among the
most attractive markets overall, and calls Detroit, Las Vegas and West Palm Beach, Fla., "dangerous."
When looking at properties, act like a renter, says Jeff Cronrod, president of the Boulder, Colo.-based
American Apartment Owners Association. Tour the neighborhood to see if landlords seem desperate to lure tenants. Are there
lots of vacancies? Are buildings offering deals like living rent free for a couple of months in order to drive up demand?
If so, be wary, Mr. Cronrod says.
Carrying costs add up.
Another pitfall for real-estate investors: not accounting for unexpected expenses.
Besides
closing costs, which generally average between 3% and 6% of the purchase price, general maintenance expenses like taxes,
insurance and repairs can be much higher than many investors expect, says Jason Post, president of Los Angeles based Post
Investment Group, a boutique real-estate investment firm that buys and operates apartment buildings.
You should allot roughly $2,000 a year for insurance, taxes and any association fees for neighborhood pools
and the like, Mr. Reed says. To ensure that a major repair doesn't break you, set aside at least six months' worth of expected
rent, he says.
"You can't even fathom some of these strange costs," says Jerry
Garretty, who runs a property-management firm in San Jose, Calif. Six months ago, Mr. Garretty says, he found a nasty surprise
after overseeing the eviction of tenants who were three months behind on rent in a Cupertino, Calif., home: They had poured
quick-drying cement into the sewer pipes—a $1,000 repair—and defaced the walls with graffiti scrawls, he says.
Jumps in property insurance premiums also can dent your investment profits, says Jason Holtz, a
real-estate lawyer with Kevin Jursinski & Associates in Fort Myers, Fla. This is particularly common in states like
Florida that are prone to tropical storms.
Kathleen Farmakidis, owner
of a three-unit apartment building in Winter Haven, Fla., says she has seen her property insurance jump 50% this year, to
$110 a month.
Venturing far from home can be dicey.
It is a good idea to buy rental properties only in your immediate geographical area, Mr. Cronrod says. Although it might
be tempting to venture far from where you live for better deals, those properties can be difficult to manage.
As an owner, you need to be ready to repair leaky faucets, collapsed roofs and all other middle-of-the-night
disasters—or pay someone to do it.
Hiring a local property manager can help. Such
managers perform maintenance, collect rent and even screen tenants. But they typically charge 8% to 10% of the annual rent
for their services.
And some are much better than others. Michael Epstein bought a
single-family home in Pompano Beach, Fla., in 2009 even though he lived more than an hour's drive away in Jupiter and the
house needed work.
Mr. Epstein, a small-business owner, hired a property manager to
rehab the house, which he scooped up at a foreclosure sale, and maintain it. But because Mr. Epstein didn't visit often,
it took him months to discover the manager hadn't been overseeing construction and that the work was botched. He had to
spend an additional $40,000 to bring the property up to building codes.
"That was
a risk I didn't even factor in," Mr. Epstein says.
It
pays to plan conservatively. Don't assume you will be able to attract renters immediately. If a neighborhood is
littered with foreclosures, those properties aren't going to be any more attractive to would-be renters than they are to
buyers, says Jim Evans, president of real-estate investment firm Bruce G. Pollack & Associates and president of the
nonprofit Institute of Real Estate Management.
The best tactic, say financial advisers,
is to build in a cushion. Assume you need at least three months to find a tenant, and keep that much cash in reserve.
John Interdonato wishes he had foreseen the dry spell he would suffer after buying an investment
property in Cape Coral, Fla., for $280,000 in 2005. The electrical engineer planned to rent it out for enough to cover the
$2,200 mortgage payments. But after the property sat empty for more than a year, starting in 2009, Mr. Interdonato fell
behind.
Last December, after having sunk 50% of his savings into the property, he was
forced to sell.
"It felt like I was staring down the barrel of a shotgun," he
says.
Refinancing can be difficult. With interest
rates so low, many homeowners have been able to refinance their mortgages recently. But lenders are reluctant to take on
refinances of investment properties, says Matt Englett, a real-estate lawyer in Orlando, Fla.
Banks
view such owners as more of a risk, he says, because they can walk away from the property more easily than owners of primary
residences can.
Mark Cheplowitz, the owner of an international event-planning firm in
Aurora, Ohio, says he is losing roughly $24,000 a year on two properties in Collier County, Fla. Last week, a lender declined
his applications to refinance the mortgages.
Mr. Cheplowitz says he despairs whenever
he flies down to check on the properties.
"Here I am, staying in a crappy motel,"
he says, "as tenants live in these beautiful carriage houses I am losing money on."
Screen tenants with care. Renting out your property to unreliable people can
be a costly mistake. Eviction proceedings can take months, and owners can't rent out the property until the eviction is
final.
Chris Ourand, a chief marketing officer for a technology company, says he battled
for nearly 10 months to evict a tenant who had stopped paying rent in February on a four-bedroom town house in Arnold, Md.
Mr. Ourand, who lives in nearby Severna Park, says he trekked to court three times to get the tenant
to pay up. In October, he says, he was able to oust the delinquent tenant, whom he says trashed the place.
Mr. Ourand says the ordeal cost him roughly a third of his annual investment income on the property. "This
is the worst experience with investment properties I have ever been through," he says. "It was a nightmare."
Even tenants with clean credit can turn out to be unsavory. Attorney Rachell Horbenko says she had
to boot tenants from her Chicago building after waking up in the middle of the night to the smell of marijuana. The tenants
were consuming so much, she says, that the smoke had seeped into her six-month-old daughter's room.
"The room was cloudy," she says. "I could barely see the crib." The eviction process took
more than three months, she says.
