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The residence at
In a city rife with empty and deteriorating homes, no wonder the family of the elderly owner, who moved out last year to live with relatives, couldn't get their original asking price of
The entrepreneur who bought it as-is in April for
This deal highlights the essential truth of property investing today: To boost the odds that you'll make a profit, you need to go down-market, where the rents are exorbitant relative to the cost of ownership. This is due to a drastic shortage of decent low- and middle-income rentals. For many years, it paid to buy rental houses even if the monthly expenses exceeded the income because you could count on leverage, high appreciation and tax breaks to produce a profit in a few years. But that business model does not make sense in 2011. Property values are not appreciating, so you can't expect to buy a place and flip it for a fast return. You might be able to profit from a modest small apartment building or duplex, but overbuilt high-rise condos and foreclosed suburban homes aren't economically feasible as rentals. The idea now is to insist that every house or apartment deliver "positive cash flow" (a net monthly operating profit) with no exceptions. If a house cannot "cash flow," as the pros say, you need either to walk away from the deal or to offer so little that if by chance your bid is accepted, the numbers work.
Accomplishing that isn't as easy as buying cheap stocks. First, you have to come up with enough cash to launch your business with a couple of properties because banks have all but ceased lending to inexperienced landlords. Then, take a hard look at your handyman skills: If you can barely hang a light fixture, you're vulnerable to all kinds of unpleasant surprises. It also helps to know the local real estate market, local politics, and which neighborhoods are stable and which are in irreversible decline.
Based strictly on the numbers, however, veteran developer and old-house rehabber
Positive cash flow
Giardini, who first invested in rentals ten years ago and has since sold all but
three of his 80 units, used to reckon that
According to BeVier's analysis, the maximum total cost (price plus repairs and improvements) a landlord should put into a unit that rents for
As Khan hunts for properties to buy, he knows that his profit will depend on getting a low offer accepted. His resources include real estate agents and the ever-lengthening list of bank-owned properties, and he scopes out the neighborhoods where he already owns houses. He noticed 3809 Shannon months ago because he owns another house three blocks up the street. He toured the home when it was listed for
Khan will end up patching walls, cleaning baths, and installing no-frills replacement carpet at
Khan is financing the purchase and repairs with a bank loan. Although credit is tight for newbies, he managed to get a line of credit at 7.75% because he owns eight other properties. He estimates that after all the financing costs and expenses, and based on a rent of
The tenants Khan hopes to attract qualify for Section 8 subsidies. Section 8 is the federal rent subsidy program for the working poor. Those who qualify typically hold secure but low-paying jobs, such as nurses' aides, school custodians, store clerks and the like. Section 8 tenants are screened by the
A valuable way to learn what it means to be a landlord on a daily basis and what kinds of problems arise is through BiggerPockets.com, a real estate investor network, and the residential real estate and finance group at LinkedIn.com. For example, a common theme among landlords is that it's better to buy a vacant home and spruce it up because you can choose your tenants (subject to laws on nondiscrimination), run credit and criminal-history checks, and avoid potential eviction proceedings with existing tenants.
No landlord wants to be taken to housing court and possibly end up paying fines and legal fees. That means taking care of preventable problems -- repairing a heating system, for example -- before they flare up.
Tenacity and toughness
When Giardini met Khan at a real estate seminar, he decided the young engineer had what it takes to be a full-time real estate investor and took him on as a client. In Giardini's estimation, Khan is part of a small minority. "The gurus who say anyone can do this are liars," Giardini says.
As an adviser, Giardini teaches Khan the business, helps identify properties that won't cost an arm and a leg to bring up to rental snuff, and helps him crunch the numbers. Giardini, who is an engineer, a
Giardini says prospective landlords shouldn't count on keeping a regular full-time job for long if they own more than about four rental properties. In 2000, at age 45, Giardini decided to quit a career in the defense-contracting industry and become either a full-time stock trader or a real estate investor. He chose real estate, but he kept his job while studying the business for a year before he and his wife and another couple bought their first rental property -- a group of ten units in eight buildings in 2001. He then resigned from his full-time job, only to face a contested eviction a few weeks later and a feeling of being overwhelmed by his new career.
As he learned more, he took advantage of the bull market in real estate and bankers' liberal credit practices of the early 2000s to accumulate 27 properties during his first year, most of them in
Khan now has nine properties and wants to buy three to five more each year. He has no plans to resume his career in engineering. With three small children and a wife who is a dentist, he says "freedom is the greatest benefit" of being a professional landlord. That freedom, however, isn't unlimited. Those stories you hear about being rousted out of bed at
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