IS IT YOUR TURN TO BECOME A LANDLORD?
For Beginners, Investing in Real Estate Can Lead to Rich Rewards, but There Are Risks, Too

DANIELA DEANE
WASHINGTON POST STAFF WRITER
Saturday, December 1, 2001; Page H1

Owning a rental property means some work, particularly if the owner does not retain a property manager. Property managers who rent and manage buildings for an investor routinely charge a month's rent to find and screen prospective tenants. After rental, they usually charge from 6 per cent to 10 per cent of the rent to manage the property.

Many investors, closely watching their bottom lines, prefer to act as their own property managers.

"I'm too cheap to get a management company," Gratz said. "I'm also in a position to manage it myself."

Even McNelis, who lives in North Carolina, chose to manage his properties long distance rather than employ a local manager. "That has been one of the pitfalls of investing for me," he said "Managing them at a distance hasn't always been easy. But there's a concierge Property Management desk at the building I've bought in. And they have a list of service providers, like plumbers, painters, cleaners and the like. So that's helped a lot. Keep in mind that even if there is a property manager, the landlord pays for repairs.

To decide whether to employ a property manager, carefully weigh whether you are the type of person who does not mind whether you are the type of person who does not mind being bothered, even in the middle of the night, with a tenant calling about an overflowing toilet. And also think about whether you like dealing with other people.

I wouldn't advise anyone who isn't comfortable with people in general and interacting with people about their needs, to become a landlord," David Fairweather said. "If you treat the tenant the same way you like to be treated, everything usually works out fine."

Fairweather said some landlords make tenants pay the first $50 of a repair, but he does not advise it.

"Charging them makes tenants not call about needed repairs," he said. "I'm much happier if tenants call and I can fix whatever the problem is. The important thing is maintaining the investment."

Checks and Balances
Before buying any investment property, do the numbers, as investors like to say. That means adding up all the costs involved in owning the property, including the mortgage, taxes, maintenance, condo fees and insurance. Then compare that figure with a realistic assessment of the rent you can charge.

Make sure the numbers work the way you want them to, although there is disagreement among investors on what exactly makes a good investment purchase. A major debate is whether a good investment property must have a positive cash flow, that is, bring in more each month than it costs to own. And if so, how much is enough.

Big-time real estate investors use complex spreadsheets and formulas to manage the finances of their businesses. Smaller investors may not want to go that far, but they do need to carefully review the finances.

"Siciliano, for example, seeks a 10 per cent annual return on the money he invests.

"I look at every house as a profit center," he said. "I believe in making your money when you buy it. This buying and sitting on it for five or 10 years is not what I'm after."

To make that return on a 20 per cent down payment, he uses a rule of thumb that monthly rent needs to be 1 per cent of a property's purchase price, assuming standard expenses.

Others say that even a property with slightly negative cash flow can be an attractive investment, providing you hold it for the long term. Over time, rents rise, but the mortgage costs generally do not.

I've often invested without a positive cash flow," Fairweather said. "A negative cash flow today can be a positive cash flow tomorrow. You have to put it in context. This shouldn't be a financial investment that you're going to sell tomorrow.

Fairweather said the trick is looking at what other financial elements are at play - appreciation over the years, depreciation that can be deducted on federal income taxes, and the financial leverage that owning a property gives an investor.

Leverage comes from having the bank lend 80 per cent of the purchase price, which can be compared with buying stocks on margin. Additional leverage is achieved through an increase in equity over time, which can be borrowed against.

And consider return on investment, made possible by leverage: if a $100,000 investment property appreciates by 5 percent and an investor has put down $20,000 in cash, the return on the cash investment is $5,000, or a hefty 25 percent over that same period of time.

Investor Michael Sanders, a Washington lawyer and law professor, said he does not think about cash flow but rather concentrates on return investment.

"I look for a return of between 6 [percent] and 12 percent on the money I've invested," said Sanders. "That's how I work it out."

Keep in mind, though, that if the cash flow is a positive $100 a month after costs, and a $10,000 roof is needed for an old house, it takes many months to accrue the money for that repair.

And remember that real estate is not a liquid investment. If you need quick cash in an emergency, a property is not an easy asset to tap.

How to Get Started
Investors, real estate agents and realty lawyers advise doing your homework before investing in any property.

Agents say, not surprisingly, that working with an experienced agent preferably one who also is an investor - is the first place to start.

Real estate lawyers said, also not surprisingly, that sitting down with a real estate lawyer for an hour can go a long way toward educating a prospective investor. Contacting a tax adviser is helpful, too.

There are many books about real estate investment, too. Among the standards recommended by investors, including Robert J. Bruss, investor and author of the Real Estate Mailbag column:

-- "Landlording: A Handy Manual for Scrupulous Landlords and Landladies Who do it Themselves," by Leigh Robinson (Express, $27.95)
-- "Buy and Hold: 7 steps to a Real Estate Fortune," by David Schumacher (Schumacher Enterprises, $14.95)
-- Property Management for Dummies," by Robert Griswold (Hungry Minds Inc., $21.99)
-- Investing in Real Estate," Andrew McLean (John Wiley & Sons $19.95)

Articles appear as they were originally printed in The Washington Post and may not include subsequent corrections.