Other People's Property: The New Landlords

| Print Post This | Like (0) | Comments (0)

SO, YOU OWN a home and think the market is ripe for you to buy another property and rent it out. After all, there are more homes on the market than banks have failures, prices are dirt-cheap and interest rates historically low. To sum it up: You need less money for a down payment, and the rates mean a lower monthly expense. You've always heard that real estate is a wise investment. What's not to like?

It depends on who you ask. Helen Schubert Krause is the marketing director for Dominion Title Corporation in Great Falls, Va. She's also a first-time landlord, having just rented out her own house after moving into her new husband's digs. The 27-year-old says that, so far, it's been a good experience, albeit foreign.

"It was strange the first few times I drove by it. It's still my house, but I don't live there anymore," she says. "I thought about selling but decided to wait until the market turns around. Or maybe I'll just hang on to it longer," she adds.

Schubert Krause was forced to decide whether to sell or rent. But what if you're considering buying a second property as a rental income? Is buying a foreclosure as an investment now different than it was, say, five years ago?

"Absolutely," responds Bill Burnett, the regional vice president of the VA Association of Mortgage Brokers and the president of Homestead Mortgage in Lorton, Va. "There were far, far fewer foreclosures occurring then, and it was an active market, so they were quickly absorbed into the housing inventory. Prices didn't need to be dramatically decreased, because the market was on fire."

Today, it's barely flickering. Now with a historically high number of foreclosed-on homes on the market, and "because lending is tight and there are not as many people looking," Burnett says, the general principle of supply and demand still applies. "Banks are trying to liquidate as reasonably as possible, but they're having a hard time getting them off the market."

If all that whets your appetite to take the investing plunge, consider a few of the payouts you'll have to make. Beyond the initial cost of the crib, investors need to have money set aside for mortgage interest and taxes. Then there's the vacancy costs, which experts say you should figure is eight to 10 percent. You won't always have a renter in the house, and you need to know you can keep afloat during the off-times.

Tying into that is tenant turnover cost. When a renter moves out, you're not only stuck with the full amount of the mortgage but also the cost of advertising for a new tenant, and cleaning, repainting and repairing the property.

And then there's regular maintenance. Before becoming a landlord, decide whether you can handle the handy work yourself or whether you need to hire someone. Even if you're an accomplished fixer-of-all-broken-things, a place in Prince George's County can eat up a lot of gas if you have to drive from Capitol Hill. Hiring a professional is clearly more expensive, but be realistic about how much time you have to devote to maintenance.

Schubert Kraus points out that buying a foreclosed property may cause less concern when it comes to maintenance. "With renters, you worry about them damaging something, but if you bought a foreclosure, you're probably less worried about it. You're more worried about getting your money."

Finally, consider how long you plan to own the house. The longer you hang onto it, the more you'll need to invest in maintenance, repairs and improvements. If you're looking to dump it once the market turns around, your output for those things should be relatively minimal. If you're thinking you'll hang onto it for 15 years, you'll likely face expenses including new appliances, roof replacement and some of the other more expensive joys of homeownership. When you're talking about a condo, some of these costs are covered. On the flip side, many condo associations have pretty strict guidelines about the number of units that can be rented, so be sure you dig into those restrictions, too.

WISE CHOICES
Despite the number of bank-owned homes to choose from, finding the right investment property takes work.

Once you have found the home you think suits your needs, "do your research," Schubert Kraus advises. "Drive through the neighborhood to get a feel for its condition. Talk to some of the neighbors to see how it is transitioning." For instance, are people keeping maintenance up on their homes? A renter doesn't want to live in a run-down neighborhood any more than you want to own a place in one.

Find out what the rentals go for in that area. You may find that your mortgage is more than you'll get in rent and you'll face a deficit month after month. A good real estate agent "should be able to tell you if the area is close to breaking even," Schubert Kraus says.

All of that taken into account, she comes down squarely on the "yes" side of foreclosures' being a good investment, as long as a good agent is involved. "Don't jump into anything too quickly, but I do think there are great investment opportunities out there."

Burnett feels differently. He says, even with the pros of buying in the current market, "it will take a year or two before we have full stabilization. We haven't hit bottom, and the bottom will not be a typical U-shape — it will be a very flat, long bottom. It could be five to seven years easily before you would regain any equity."

Written by Lynn Thorne for Express
Photos by Regan Kireilis for Express