As real estate investor, start small, and start close to home
Q: My husband has a chance to buy the house next door to us. They would give us a mortgage, and we would rent it out. He was wondering whether you have any guidelines for how we could know whether it would pay to do it. Any information or advice you have would be helpful. —B.L.
A: You are following my standard advice: As real estate investors, start small, and start close to home. You should have an accountant who can help analyze the project before you’re committed. From gross rental you expect to collect, subtract the following:
» Utilities (if paid by landlord).
» Heat (if furnished).
» Property taxes.
» Landlord insurance.
» Water charges (if paid by landlord).
» Ditto trash removal.
» Estimate for repairs.
» Lawn care.
» Allowance for vacancies and uncollected rent (of course, this works better for multiunit housing, where it might be estimated at 5 percent of gross rental income).
» A reserve for future large improvements. That last one also applies mainly to multiunit developments, where it might be set at, for example, 2 percent of property value.
With those expenses subtracted from gross rental income, you arrive at what investors know as annual net operating income.
From that, subtract debt service (mortgage payments) to arrive at cash flow — actual dollars you can expect to take out of the property each year.
It’s good news if that’s a positive figure. The accountant can help estimate actual return, taking into account items like depreciation (an artificial bookkeeping concept), principal paydown, estimated appreciation and income-tax consequences.
The most important aspect for successful landlording is probably tenant selection. You’ll need to research fair housing laws — federal, state and, occasionally, even local. Those set limits on what factors can influence your decisions — but that’s a topic for another time.
Small buildings suitable for beginning investors won’t usually support professional management, so let’s hope your husband enjoys changing faucet washers — that he’s temperamentally suited to landlording.
Or that you are.
Contact Edith Lank at www.askedith.com, at edithlank@aol. com or at 240 Hemingway Drive, Rochester NY 14620.