BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
BUSINESSWEEK INVESTOR Putting Stock in Rental Properties With rents and real estate prices rising, the appeal is clear After years of watching clients get rich investing in small, single-, and multifamily rental properties, real estate attorney Timothy Furey decided to diversify his portfolio beyond the standard mix of stocks and bonds. ''With three kids to put through college, I thought I'd better expand my financial horizons,'' he says. So Furey bought a carriage house and fourplex to let near his home in Bristol, Conn. Three years later, he's well pleased with his investments. Furey won't disclose his returns, but he says ''they were better than my 401(k) last quarter.'' While there are no nationwide data to quantify it, regional landlord and property-owner associations report that more individuals than ever are investing in rental housing. The appeal is clear enough: Nationwide, such properties have been appreciating 6% to 10% a year for five years running, says Mark Datzour, research director at Texas A&M University's Real Estate Center in College Station, Tex. During the same period, rents have risen an average of 3.5% a year. In some high-growth areas, particularly in Northern California, Nevada, Washington State, Texas, North Carolina, New York, and Boston, rents and property values are climbing even faster--in some cases 15% to 20% annually. But owning rental properties isn't like owning stocks ''that you can stash away and forget about,'' Datzour says. Dealing with a burst pipe or a tenant who skips town, not to mention all the bookkeeping, can be a major headache. You have to treat a residential real estate investment as a business venture and actively manage all facets of its operation. LESS IS MORE. On the bright side, competition among mortgage lenders has sharply reduced how much of your own money you have to put up to buy small residences. ''With leverage, you can make a lot of money with hardly any equity in the property,'' says Larry Lick, president of Rental Housing On-line (www.rhol.com), a Web site for landlords. As recently as 1998, lenders required at least 30% downpayment. But Doug Perry, a first vice-president at Countrywide Credit Industries, says lenders now will finance as much as 90% if your credit is good. That makes your gains and rental profits considerably fatter. When the property's value rises 10%, for instance, you've doubled the 10% you put down. And you can get back that initial cash investment by refinancing the mortgage when the property appreciates. If you live in one of the units, you can sometimes get a loan for 100% of the price. Costs and rental terms vary considerably, even from neighborhood to neighborhood. But here's how a deal for a $300,000 property might work. If you get 90% financing, or $270,000 at, say, 8.25% interest, your monthly mortgage payments will be $2,028. Figure in another $117 a month for mortgage insurance, perhaps $250 for property taxes, and $75 for homeowner's insurance. Your monthly pretax nut? $2,470. A common error is not factoring in enough money for maintenance--for example, the cost of removing raccoons from the attic. Experts advise setting aside up to 15% of rental income for upkeep. You have to be patient, counsels Bob Bruss, a real estate attorney who owns rental properties in the San Francisco Bay area and also writes a syndicated real estate column. ''Rental houses are a long-term investment,'' he says. ''You should be prepared to stay in at least five years.'' Hold on even longer to get the full tax benefits. You can deduct depreciation or age-related wear and tear on residential structures for 27.5 years. And when you sell, you won't have to pay a cent in capital gains tax if you sign a contract within 40 days to buy another property of equal or greater value--and close within 120 days. CLOSE TO HOME. Finding a good rental property requires the same due diligence you'd exercise if you were buying your own home. ''You have to really study the surrounding community,'' Lick says. This includes investigating traffic patterns, local crime statistics, zoning ordinances, and the quality of nearby schools. Bruss suggests avoiding ''one-industry towns'' where a shuttered factory or corporate office could devastate property values. Also, he says, ''look for fixer-uppers'' so you can raise the property's value by making a few choice renovations. Painting, landscaping, and new light fixtures will increase resale value more per dollar spent than stabilizing the foundation or overhauling the plumbing. Renovating a bathroom or adding a pool are notorious money-losers. The National Association of Realtors and Remodeling Magazine publish an $11.15 annual repair cost vs. value report (call 312 329-8258, or e-mail mmurton@realtors.org). Experts also suggest buying rental property near your home. Jeffrey Taylor, who lectures on landlording and hosts the site, www.mrlandlord.com, advises buying within 30 minutes of where you live so you can make regular visits and quickly attend to tenant requests. Or you can hire a property manager. But his salary should not exceed 10% of rental revenue, and it's better if he's certified. ''It doesn't mean they are any good, but at least you know they take the job seriously enough to have taken some courses on property management,'' says Bruss. Check the managers' references, inspect properties they manage, and talk with the tenants. Instead of hiring a manager, many landlords say it's far more cost-effective to find dependable carpenters, plumbers, and electricians whom you can call when you have a problem. ''I really didn't expect to have to spend so much time attending to the buildings,'' says Furey in Bristol, who spends a morning every weekend on maintenance. He gets valuable help, though, from his local property-owners association, which holds regular educational seminars. And there are software programs such as Community-LiNX by RC Microsystems and Landlording by Express Publishing that track rent payments and generate standard forms. But even if you hire a property manager, landlording isn't easy. It takes a lot of work to establish a firm financial foundation. By KATE MURPHY _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Putting Stock in Rental Properties TABLE: Getting Started INTERACT E-Mail to Business Week Online

Copyright 2000-2009, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice