This article is a little long and written back in 2007, but well worth the read for any new landlord to be. Enjoy and read carefully.
Become a Landlord (Without Losing Your Shirt)
By Shira Springer October 21, 2007
The small kitchen fire started when a tenant absent-mindedly placed a pizza box near a barely lit stovetop burner. With flames posing a threat to other units in the four-family Waltham home, the panicked tenant called his landlord, Mark Leger. The tenant wondered what he should do. Leger asked, "Did you call the fire department?" The tenant said, "No," believing that that was the landlord's responsibility. As calmly as he could, Leger told the tenant to hang up and call the fire department immediately. "What am I supposed to do? Come down there with a hose?" Leger recalls thinking. "If he hadn't got in touch with me, I don't know what he would have done."
Welcome to Life as a Landlord. As a realtor for the past 24 years, a landlord for the past 22 years, and president of the Massachusetts Rental Housing Association for the past five years, Leger has collected more than enough stories about tenant mischief and maintenance emergencies. He finds humor wherever he can, believing laughter goes a long way toward surviving the landlord business. Leger jokes about the former tenant who apologized for non-payment of rent by explaining he had instead "decided to buy cocaine for his birthday."
With falling prices and foreclosures commonplace in today's real estate market along with rising rents, individuals who can secure financing may be tempted to purchase an investment property or two or three. Buy an investment property, the wishful thinking goes, and you can see where the money went and the potential for making more. Watch enough HGTV, and you become convinced that new light fixtures, appliance upgrades, and a fresh coat of paint will translate into continual prosperity. The reality remains far more complicated, especially with landlords counting on sizeable year-to-year appreciation that is no longer a guarantee.
"We've been in a rising real estate market for the past 15 years, and you hear ridiculous sayings that imply property values cannot decline," says financial adviser Susan Kaplan, president of Kaplan Financial Services in Newton. "It's shocking, because it was only in the late '80s that we were in a ghastly real estate market, and people were wiped out. Yet, everyone has a very short memory. . . . Even though we think it may be a great property and anybody would want to live there, that's not enough."
When my sister and I decided earlier this year to keep the two one-bedroom Harvard Square condominiums where we once lived and rent them, we figured it was an ideal situation. The 660-square-foot units were well maintained in a professionally managed 1930s brick Harlow building. They boasted parking, close proximity to the Harvard and MIT graduate schools, and a quick commute to downtown Boston. But from the moment we advertised the two properties, we learned landlords can encounter one unpredictable situation after another.
Judging from my own brief experience and that of several other local landlords, owning rental properties is neither as simple nor as easy as initially anticipated. The stories of big profits are rare. The stories of big headaches are abundant. The most successful landlords "go in with their eyes open," says financial adviser and CPA Stephen Tankel with Wellesley-based Tankel Rosenberg & Co., PC. So, if the prospect of a $2,000 capital improvement assessment or a tenant who refuses to leave or the months where a multifamily home remains unoccupied doesn't dissuade you from buying, then at least consider some free advice.
Rule No. 1- Avoid Delusions About the MarketWhen clients contact Joseph Cooper with big plans for buying investment properties, the mortgage lender finds himself "forever discouraging them." Cooper saw firsthand the best and the worst the housing market can offer when he worked selling and developing condominiums in Brighton for 10 years during the 1980s and early '90s. Today, his mortgage clients rarely consider the idiosyncrasies of the market or the time-consuming responsibilities of home ownership. Cooper, vice president of Lexington-based Monument Mortgage, cites "underestimating the cost in time and the cost in money of actually owning property" as the biggest mistake investors make.
While the familiar real estate advice - buy the least expensive property on the most expensive street you can afford - still holds true, would-be landlords must also do market research. Kaplan suggests everything from studying local vacancy rates to getting appraisals to gathering information concerning future construction in the area that could disrupt traffic and temper renter interest.
Rule No. 2- Use a Calculator Before You SignConsulting experts to realistically figure out the costs of carrying a mortgage plus taxes, estimate insurance and maintenance fees, and determine a sensible monthly rent can save you from making a big mistake. Additionally, factor the cost of your time and energy into the equation.
"Over the years, I can't tell you how many people have called and told me, 'We're so excited. We're going to buy this condo,' " says Cooper. "Then, I say, 'OK, how much money do you want to put down? How much are the fair-market rents? How much are the taxes?' We do some quick math, and they're going to lose $800 a month. I ask, 'How does that sound?' They say, 'I don't want to do that.' Well, you better not buy the property, or you better come up with some more money. It's like anything else - if it was easy, everybody would do it."
The first-year revenue minus estimated first-year expenses (including some value placed on your time) divided by the full cost of the property when purchased (essentially price plus transaction costs minus mortgage) produces a good estimate of the initial rate of return. To calculate your rate of return in later years, divide by your supposed equity in the property (what you could sell it for after deducting transaction costs and the remaining mortgage), taking into account price appreciation or depreciation. You may also want to consult an accountant on how much of a tax and cash-flow benefit you will receive by depreciating the property.
After making all those rudimentary calculations and realistic estimates of price appreciation, you should compare the rental-property rate of return to rates of return for various financial vehicles that involve little of your time and, in all likelihood, a lot less anxiety and aggravation. Although there is no guarantee the future will mirror the present or past, US 10-year government bonds currently pay 4.5 percent. At best, a one-year CD pays somewhat more than 5 percent. The three stock mutual funds with the most assets under management have averaged a rate of return slightly less than 9 percent for 2007 to date. For investment properties, experts like Tankel recommend a rate of return that falls between 8 to 15 percent. "I find that the majority of the people who have real estate, unless it's been purchased a long time ago with a lot of old appreciation, usually do not have a competitive rate of return," says Kaplan. "Part of that is that they're not really cognizant of it. They're not really aware of what that property is costing."
Rule No. 3Choose Your Tenants Carefully
Negotiating the landlord-tenant relationship can be one of the biggest challenges for rental-property owners, especially since investors view Massachusetts law as tenant friendly. Again, landlords must do the necessary research, whether that means familiarizing yourself with discrimination laws, calling references, or checking credit histories. Common sense should also be applied. Prospective tenants who respond promptly and conscientiously to calls or e-mails and who show up on time to see units will likely be responsible when it comes to paying rent and taking care of the property.
"Do be choosy," says Rick Novak, a real estate lawyer with the Boston office of Day, Pitney, "but be careful to document that your choosiness is not code for some type of discrimination." The federal Fair Housing Act and local laws prohibit discrimination based on race, color, religion, age, gender, sexual orientation, familial status, marital status, military/veteran status, national origin, ancestry, receipt of public assistance, or physical or mental disability. Landlords can choose among prospective tenants for economic reasons that arise after credit, employment, and reference checks. Set financial standards for prospective tenants that make you comfortable that they can cover the monthly rent.
"Be consistent," says Leger. "Always treat everyone who walks in to see your place the same way. If you offer one a cup of coffee, give them all a cup of coffee. If you use the same procedure with everyone, then chances are you're probably going to be safe. If you show records and say I didn't rent to them because their income is this and I require this and prove that all your tenants meet that requirement, then you're discriminating because of economics, which is allowed."
Rule No. 4-Avoid Getting Sued
While landlords may confront anti-discrimination issues before tenants move in, another matrix of federal and state statutes affect the landlord-tenant relationship once occupancy begins. The Massachusetts Rental Housing Association offers half-day conferences around the state dealing with landlord rights and responsibilities, including everything from asset protection to eviction procedures. Networking opportunities and educational resources can be found on the MRHA website at
massrha.com.
With older homes and units constituting a significant portion of the Massachusetts rental inventory at any one time, lead-paint liability presents a familiar legal concern for landlords, especially since they cannot discriminate against families with children. Landlords must give tenants the Massachusetts Lead Law Notification form, explaining the dangers of lead paint and guidelines for removal. If a child younger than 6 resides at a property containing unlawful lead levels, the landlord is required to remove the lead. "The reason lead-paint liability should scare prospective landlords the most is that the downside goes far beyond not getting the rent and not getting the desired economic return on your investment," says Novak. "The potential multimillion-dollar economic liability can be catastrophic, not to mention the horrific potential health impact on a child."
When it comes to evictions, landlords should understand that they typically involve a legal process that Leger estimates lasts "a minimum of six weeks from the time of the eviction notice, if everything is perfect and the stars align." More often than not, Leger notes, problems and delays with evictions occur "because landlords didn't know proper procedure at the beginning, and it snowballed out of control."
Other aspects of the landlord-tenant relationship that can lead to litigation include failure to provide the minimum standard of habitability and the mishandling of security deposits. If a tenant pays a security deposit, several conditions must be satisfied, including placement of the money in an interest-bearing account and inspection of the property. Mishandling of a security deposit, even inadvertently, is one of several reasons a tenant or aggressive tenant's lawyer may invoke Massachusetts General Law Chapter 93a, a consumer protection provision that can result in the payment of triple damages and legal fees if the plaintiff succeeds.
"The stereotype is that landlords don't do anything, that they're just living off the backs of their tenants, but that's not the case at all," says Leger. "It's the most regulated business you can get into. So, you have to mind all your p's and q's."
Rule No. 5-Keep An Electrician on Speed-dialThe Dublins own a three-family home in West Cambridge and represent the rare landlords with no major complaints. For the past 31 years, Peter and Jana Dublin have lived on the first floor and rented the top two floors to tenants ranging from single mothers to foreign graduate students. Rental income allows Peter to run his own educational software development company while Jana works as a social worker. With the mortgage paid off and retirement nearing, the Dublins foresee rental income essentially providing a pension.
But even the best of landlords in the best of situations cannot manage all the responsibilities by themselves. Peter Dublin was reminded of that when he was nearly electrocuted during the second of three renovations on his property. A do-it-yourself kind of guy before it was popular, Peter thought nothing of finishing some electrical work in the basement one night. "I did all the electrical myself before I almost killed myself," says Peter. "I got a good jolt. . . . Some people can do a lot. Most people can't do much. Nobody can do it all. You're always, in a sense, a bit beholden to other people to tell you stuff about which you know nothing. That's always a problem."
In addition to a lawyer, financial adviser, mortgage broker, and realtor at the ready, landlords should know a reliable electrician, plumber, and handyman and preferably have phone numbers for all three on speed-dial for inevitable emergencies. Recommendations from friends, neighbors, and fellow landlords can help you find the right person. Without such resources, the cumulative effect of the so-called small stuff can drive a landlord out of the rental-housing business more quickly than major catastrophes.
To avoid the small and big repairs, the Dublins advise being as proactive as possible. As soon as the stove in one rental unit broke down, the Dublins replaced the stoves in both units. While not everyone has the financial wherewithal to replace appliances in rental units before they break down, all landlords should try to carry a reserve. Experienced landlords half-jokingly comment that major catastrophes come in pairs - that the boiler goes the same week that a section of the roof collapses. The ability to spend money when and where needed can be essential to long-term success.
Rule No. 6-Forget About FlippingBarring major, costly, and time-consuming problems and repairs, Munther Haddad plans to keep the four-bedroom rental property he owns in Somerville - at least until the oldest of his three children heads to college in six years. If needed, he could then sell the property to cover the costs of higher education.
"With each property you look at, you should have a likely time horizon, when you think you might be in a position to sell it," says Cooper. "Anybody who buys something and says to you, 'I'm going to make a ton of money in two years and sell this thing' isn't being realistic. That does happen, but it's extremely rare. You should be buying real estate with the idea that you're going to hold it for five to 10 years. That will take you through a cycle of up and down."
Haddad ventured into the investment-property business in 1999, during a booming rental market in the Boston area. Still, by his own admission, Haddad was fortunate during his first six years as a landlord, happily leasing the Somerville property to four young professionals. In 2005, however, Haddad was faced with a complete turnover in tenants during a struggling rental market, with occupancy rates and average rents falling. The property remained vacant for three agonizing months. "Not knowing if I was going to be able to rent it was the worst experience, because I was relying on the monthly rental income, and all of a sudden it disappeared," says Haddad. "If that money doesn't come in, it becomes a challenge if you don't manage it correctly."
With a long-term vision for his investment, Haddad felt reasonably comfortable with short-term revenue drains and devised a costly yet effective strategy for handling the poor rental market. First, he updated the property, installing new carpet, replacing kitchen tiles, upgrading appliances, and painting the entire home. Second, with similar properties crowding the market and renting for less, he thought creatively when advertising the house. Haddad suggested using the fourth bedroom as office space. Third, he reduced the rent by more than 25 percent, dropping it from $2,500 per month to $1,800. Fourth, he enlisted the help of a broker and covered the finder's fee. Eventually, two people became interested in the property, and they found a third to help cover the rent. While the three-month vacancy and sharp decline in rental income were difficult to stomach, Haddad took comfort in the big picture - the appreciation of the property. In the interim, he needed to ensure the short-term costs of ownership did not eclipse the long-term benefits.
The Dublins stand as a prime example of the inherent value of staying power. They purchased their three-family home for $56,000 in the early 1970s and rental income more than covered the $260 in monthly mortgage payments until the Dublins paid off the loan several years ago. Judging from recent sales in the area, the property is worth well over $1 million, with a single unit capable of fetching upward of $550,000. Jana Dublin, however, says the couple has no plans to sell.
"Very few people are good enough to consistently pick the right time to do anything," says Cooper. "I've learned that unless you make a terrible mistake, time tends to bail you out a lot. So, in the case of real estate where there's an expense to holding it, you have to minimize that expense so that you can maximize the period you can hold the property."
Shira Springer covers sports for the Globe. She’s also a landlord. E-mail her at
springer@globe.com.
© Copyright 2007 Globe Newspaper Company.
