Monday, January 14, 2008

Rental Property - a Primer

If you’ve decided that you’re tired of the ups-and-downs of the stock market, and are bored with a simple savings account, you might be a candidate to become a landlord. Not everyone has what it takes to be a landlord, but those who do, may find that owning rental property can be a way to build wealth.

Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research. There’s a lot I can write about on this topic, so today I’ll just cover the basics. Here's what you need to know to get started:

In Our Area:
In the Saline area, you’ll have a more limited market for rental property than you would in a larger community like Ann Arbor. In general, in Saline, you’ll be looking at single-family homes, 2- or 3-unit homes, small apartment buildings, or commercial property (office or retail).
In the larger community of Ann Arbor, with the influence of the University of Michigan, you’ll find more “student rental” properties near the campus, in addition to the types of property you’ll find in Saline.

Before You Buy:

Before you buy a rental property, you should have a good idea how long you plan to own it. The longer you plan to own the property, the more you'll probably need to invest in maintenance, repairs and improvements. If you're only planning to own a property for five years or less, you'll probably want to avoid making any major improvements unless you're sure you can recoup the cost with a higher sale price.

An Example:

For me, I made the decision to buy single-family homes for the long term. Here’s a photo of one of my rentals in Saline.

My thought regarding a single-family home like the one pictured above is that “they’re not building any more like these”. Think about it. When you “come of age” and move out of the home you grew up in, where do you go first? Likely to an apartment. If you don’t want to be in an apartment, and want a home instead, your first rental home isn’t going to be a Taj Majal.

The Basics:

So, find a 3-bedroom brick ranch, like those built in the 1950s. It seems that most communities have neighborhoods like this. In Saline, you’ll find these homes around the Pleasant Ridge school, and near the Liberty School. In Ann Arbor, you’ll find these homes near Abbot Elementary, and around Scarlett Middle School.

Be sure the home has at least 1 ½ bathrooms. A garage is nice, but not required. A basement is essential, especially if it is finished (for more living space). Remember, this type of rental property is only going to have about 1000 square feet, so a small, but growing, family will really appreciate a finished basement, and be more likely to rent.

Risks and Rewards:

The primary risk associated with a single-family rental is that a vacancy means NO income from the property. With a duplex or three-unit, you would at least have income from the other unit(s) to assist with your mortgage payment. Not so with a single-family rental. So, you need to be sure that you can handle the monthly payment for a while when the property is vacant.

The upside of a single-family rental is that the increase in value is not entirely tied to the income the property produces. In general, an income property is only as valuable as the income it produces. If you have a 3-unit home, the increase in value will only come at the same rate as the increase in rents. With a single-family home, you can always sell it as a single-family home, should the market for those type of homes really BOOM in value. In the meantime, you can collect your rents, and take advantage of the significant tax benefits.

In a future post, I’ll build on this primer, so you can gain some confidence that you can do this too!

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