Rentals make attractive investments

By Alex Veiga

The Associated Press

Low mortgage rates have made buying a home more affordable and turned rentals into an attractive option for investors.

Throughout the downturn in the housing market, average investors, sometimes pooling their money, have bought foreclosures at a sharp discount and turned them into rentals. Many homeowners also have purchased a second home and rented out their first property.

Although the housing market is showing signs of recovery, demand for rental housing is expected to remain strong. The national unemployment rate remains high at 7.9 percent, banks are still working through a backlog of foreclosures and tight lending requirements prevent many renters from becoming homeowners.

Here are some tips on becoming a landlord or investor in rental property:

Cover your costs. Residential real estate generally provides three possible ways to get a return on your investment: by selling, by collecting rent and through tax savings, such as the mortgage interest deduction.

So, if you elect to buy a property for the long-term investment potential, the goal should be to ensure that the rental income covers the cost of your mortgage and monthly maintenance costs. If you buy a foreclosed home, you'll have to factor in the cost of repairs to ready the home for rent.

Location, location, location. Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.

Condominiums and similar properties in communities with a homeowners' association can be a great option because the association arranges for upkeep on the property.

But check the fine print on your mortgage and homeowners' association rules to make sure turning your property into a rental isn't forbidden.

Consider a management firm. Determine whether you want to select the tenant and handle property issues or hire a company to do it. If you take on the responsibility, you are obliged to fix any problems (leaky faucets, broken furnace, etc.) or find professionals to do it.

"Are you prepared to do all of this on your weekends or evenings or get calls while you're at work because a pipe burst and it's flooding?" asks Jim Warren, chief marketing officer for FirstService Residential Realty. "What's that threshold worth to you?"

Property management firms can charge a percentage of the rent, sometimes 10 percent or more.

Do the math. Although prevailing rental prices will go a long way toward determining what you can charge, getting the best return on your investment starts with making sure you collect enough to cover expenses and costs.

Chris Princis, a senior executive at Brook-Hollow Financial and owner of rental properties, suggests charging 15 percent above monthly mortgage and maintenance costs. So if those costs add up to $1,000, he'll look to charge $1,150.

Experts recommend starting with rental listings in newspapers or on Web sites such as Craigslist.com, Trulia and Zillow, to see what comparable apartments or rooms are going for. Another option is rent analysis website Rentometer.com.

Screen tenants thoroughly. Once your rental starts drawing inquiries, it pays off to screen prospective tenants by asking for previous landlord references and running a credit and a criminal records check. Experts recommend asking for a deposit equal to one month's rent, plus extra if the tenant has pets. That will help cover any damage to the property and protect you if a tenant moves without paying rent.

Looking for comments?