Start small and local when investing in real estate

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 info or advice you have would be helpful. — B. L.

A: You folks are following my standard advice: As real estate investors, start small, and start close to home. You should have an accountant lined up 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, snow removal, whatever.

■ 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 multiple-unit developments, where it might be set at 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 is a positive figure. The accountant can help estimate actual return, taking into account items like depreciation (an artificial bookkeeping concept), principal pay-down, estimated appreciation and income-tax consequences.

The most important aspect for successful landlording is probably tenant selection. You will 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.

Buyers’ remorse

Q: Last weekend, we signed a contract to buy a house. My wife was very eager, and it was OK with me. But now, we’re both sorry we acted so quickly. Our lawyer says we could lose our earnest money deposit or even be sued for more than that if we back out. What should we do at this point? — Anonymous

A: Onset of the malady known as the scientific name of Buyers’ Remorse might occur 24 hours up to two weeks after your purchase offer is accepted.

Symptoms usually develop rapidly around 2 a.m., as you lie awake wondering why you ever got into this, whether you can really afford the house, how you will get along without your present neighbors and whether the whole thing was a big mistake.

Rather than lose any more sleep, call your real estate broker, or the sellers directly if there isn’t a broker, and ask if you can visit the house again. “Measuring for curtains” is a good excuse: No need to alarm anyone at this point.

Nearly every time, buyers are pleasantly surprised during the return visit. All that hard work house hunting really did pay off. This is clearly the best house in town for you.

If, as happens rarely, you are more depressed than ever after your return visit, it’s time to consult your attorney. Be sure to take along a copy of the contract you signed to see whether it offers any means of escape or how much you are likely to forfeit by dropping out. Sometimes, loss of the bargain isn’t established until the property has been successfully sold to someone else.

Agent suggestions

Q: As an active Realtor, I want to thank you for your excellent advice that homeowners should not be present during home showings, and especially during open houses. If you have other recommendations, perhaps you could print them also. — R. O.

A: OK, here’s a last-minute checklist for homesellers before the public comes in to view the property: Kids out. Pets out. Dishwasher off. TV off. In daytime, window shades up and drapes pulled back. Uncluttered stairs. Wood fire burning. Lights on throughout. Clean towels in bathroom. Toilet seats down. Empty, scoured sinks. Counters cleared almost empty. Garage door closed. Beds made. Soft music playing. Fact sheets available. Ditto utility bills. Guest book for signins. Homeowners unobtrusive, or even better, invisible.