How to invest in real estate: Part II
Posted September 13, 2012on:
My wife and I own a couple of rental properties, so I feel like I am qualified to give my 2 cents worth on another way of investing in real estate – owning rental properties directly.
Now let me be clear: owning rental properties is a business; it is no longer an arm’s-length investment. It is great for some people, people who are hands-on and disciplined, but it could be a disaster for others.
When we posted a notice to rent out our townhouse, the first person to answer was a single mother with three kids. My wife checked her credit – it was bad. When my wife said no to her, she could not hear the pleas of my bleeding heart: Rent it to her! She has three kids to take care of! We’ll waive her rent if she can’t pay!
You see, I am a good money manager, but I would not make a good rental property manager since my empathy would get the better of me.
In the end, we rented the townhouse to a plumber’s family with two incomes. The added bonus of renting to a plumber is that he can take care of everything. This surely beats renting to a lawyer. Imagine he couldn’t flush his toilet and you have to go fix it at midnight or he will sue you!
All our rental properties are productive because of my wife. The lesson I have learned is: if you want to own rental properties, marry a stern spouse who will keep bad renters out.
Joking aside, here are three pieces of advice I can give you about rental properties:
- Buy rental properties in up and coming areas with easy access to transportation and major roads.
- Choose your renters carefully since your rental returns depend on them. We required all prospective renters to submit a formal application and pay a $40 application fee. We then used landload.com to check their credit scores and interviewed them individually. We left little to chance.
- Buy umbrella insurance. You never know what you could be sued for when you are in the rental business. Your tenant’s parent could slip in the bathroom and it legally could be your fault. Some attorneys would recommend putting each property into a limited liability company. I can save you the hassle: just buy an umbrella insurance policy.
If you can do these three things, chances are that you will become a happy and profitable landlord.
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