Rent Real Estate as an Investment Option

Kiplinger's

As a physician-investor, you may be frustratedover poor stock performance and worriedwhat rising interest rates might do to bondinvestments. If so, rental real estate maywake you up from your financial nightmare. Accordingto an article in , more investors are opting toinvest in real estate because they believe it to be a surerpayoff in the end. The question is, are you ready tobecome a landlord?

Lucrative Possibilities

Kiplinger's

Being a landlord can be a time-consuming, pain-inthe-neck job, as anyone who has been one will tell you.If you're not ready to be actively involved with yourinvestment, the article suggests that you'rebetter off buying shares of a real estate investment trust.The key is to make smart decisions with regard to yourreal estate purchase, including the price you pay and thepeople you rent to. If you do, the results can be lucrative.

For example, if you buy a home for $200,000 and itsvalue rises to $400,000 at some point, you've doubledyour money. However, if your initial down payment wasjust $10,000, you've actually gained $190,000—or1900%. And that doesn't take into account the benefitsyou receive from the tax code, which allows you to writeoff operating costs, interest, and depreciation.

Experienced investors say the best way to get startedis to join a real estate investors group. TheNational Real Estate Investors Association (www.nationalreia.com) has chapters in most big cities, andattending meetings will help you learn the finer pointsof subjects such as zoning laws, tenant relations, andhow to negotiate a purchase.

These same experts suggest you start your career inrental real estate by purchasing either a 2-unit propertyor a 3-bedroom, 2-bath single-family home, as thesetypes of properties appeal to a wide range of tenants.However, don't pass on a house that may merely lack alittle tender loving care. Often, simple improvements likeadding a washer and dryer will quickly pay for themselveswhile improving the property's rentability.

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How do you determine the right price to pay for aproperty? The article suggests working backwardfrom the estimated rent to calculate how much youcan afford to offer. For example, assume that 40% to45% of rental payments you receive will go towardmanagement fees, property taxes, insurance, and repairs.Then you can determine how large a monthly mortgageyou can afford and still break even.

Landlord Responsibilities

If all of that sounds rosy, it can be, but there are somepitfalls to be aware of. For example, the phone calls inthe middle of the night because there's no heat. That's aminor problem. Hiring a property manager to handlecomplaints, repairs, and inspections will cost you about5% to 10% of the rent. There are, however, more bigticketitems to be concerned with.

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The article suggests learning everythingyou can about a property before you purchase it. Youdon't want to buy a duplex, rent out both apartments,and then find out that the building had been convertedillegally from 1 to 2 units. That could get mighty expensive.And while you're checking, conduct a title search soyou don't find yourself liable for any state or federal taxliens that may be held on the property. It's common forrenters to pay for heat and electricity, but not for water.However, if a tenant has several guests visiting, the additionalbathing and laundering could send the water billthrough the roof. Establish a policy that if water usageexceeds a set level, the tenant is responsible for the actualcost of the extra water.

Check local laws to learn about policies and proceduresthat govern tenant eviction. Also, be sure toset clear payment guidelines, including dates and latefees, and hire an attorney who is familiar with therights of landlords.