Nine tips to consider before investing in rental property.
When the stock market is zooming up and down like a theme-park ride, the solidity and tangibility of real estate as an investment is increasingly appealing to many Central Texans, local agents say.
If you are considering becoming the new owner of an investment property, some things about today’s economy are in your favor. More people are renting, because it’s harder to qualify for a mortgage and because some people are genuinely scared to buy a home they might lose to foreclosure. So there is a large pool of potential tenants. And there are many houses and duplexes to choose from because so many properties are on the market.
But this is not an investment for the faint of heart. Being a landlord requires a good deal of time and money, possibly over many years. You need to be willing to make repairs or hire someone to do them. You have to be responsible for collecting rent, dealing with unruly tenants and finding new tenants when vacancies occur.
For Lloyd Lindsay, 25 years of owning investment properties has had more positives than negatives. But the 70-year-old IBM retiree from Walburg says he’s ready to sell at least one of his properties. The duplex he owns at 1110 Glenda Drive in Round Rock is listed for $210,000. Each side has three bedrooms, two bathrooms and about 1,200 square feet. Lindsay has one side rented for $800 and the other for $850 a month, which would give a new owner $1,650 in rental income.
“I bought this house for retirement income,” Lindsay said. “For 25 years it’s been a good investment.”
If you’re thinking of taking the plunge, here are nine tips from local real estate investment experts:
1. Sell your house, buy a duplex, rent out one half of the duplex and live in the other half. This is a great way to start out as an investor, said Robert Grunnah, the broker and owner of Castle Hill Investments LLC. Grunnah himself began this way, and now owns a company that has handled $54 million of duplexes and rental property transactions.
Grunnah bought a duplex near Oltorf Street and South Lamar Boulevard for $185,000 in 2001. He lived there for three years and rented out the other unit. Grunnah says he learned how to manage property, collect rent and take care of needed repairs in those first few years. Also, just by moving from your house to a duplex, you immediately have someone else paying a portion of the mortgage.
Grunnah is currently acting as the agent for owners of a duplex on the market at 11908 Sunhillow Bend in North Austin. The home has two bedrooms and two bathrooms on each side and is listed for $183,900. One side rents for $765 per month while the other brings in $775 a month.
2. Buy a single-family home and rent it out.
“Just experiment with one nice single-family home that is close to where you live. If you live in North Austin, buy something in North Austin,” said Steve Rosanky, founder and president of Texas Income Property Inc. and a real estate agent certified in commercial investment (he is also Lindsay’s real estate agent). “You will have to be at the property frequently to collect rent or to make repairs, and it is easier and simpler if it is close by.”
3. As a general rule in the Austin area, expect to pay $100,000 for a starter rental house and about $170,000 for a duplex, Grunnah said. Duplexes in more expensive neighborhoods can cost $300,000 or more.
4. Do your homework. The most important part of the homework is figuring out what you can collect for rent and whether this will cover your expenses as a property owner.
“You can only get for rent what the neighborhood will bear,” said Tom Polk, an agent with Stanberry & Associates. A good agent can help you figure out what a reasonable rent would be in your neighborhood. You can also drive around and call the numbers on signs advertising “duplex for rent” or “home for lease” to help you get a feel for what rents are like.
5. Calculate your expenses as a property owner. These will be your mortgage payment, property taxes, insurance, any possible homeowners association fees, maintenance, repairs, any utilities you decide to cover as the landlord, and advertising costs when you have a vacancy. You might need to add property management fees to this amount if you are not planning to manage the property yourself. Figure out whether your rental income will cover all of this, as well as leave you some extra money each month that you can put in a savings account to cover future repairs. Again, a good investment property agent can help you calculate these figures.
6. Consider a duplex over a single-family home because there will probably always be some rent coming in, Grunnah said. If you own a single-family home and your tenants move out, it might take several months to find another tenant, and in the meantime you will have to cover all of your property expenses out of your own pocket.
7. Be aware that because credit is harder to find in today’s tight market, most lenders are requiring a 20 percent down payment for investment properties.
8. Be a realist.
“Be very conservative with your expectations of how your property will appreciate,” Rosanky said. “And unless you are handy with repairs, buy a property that’s in above-average condition. Repairs can hurt your cash flow.”
9. Finally, “It’s always good to have an exit strategy,” Rosanky said. “If it’s not working out, you can hire a professional to manage it or you can sell it.”