How I got started in real estate - are you ready to be a landlord?

There are many ways to get started in real estate. For this first of several articles on real estate investing, I want to talk about my background, where you might invest, and who you might rent to so you can begin earning money each month. I hope you can learn something from the path we chose.

My journey into real estate started like many others do, as an accidental landlord. We bought our first house in 2004 while my husband was in school. We had only lived in the house for a year before he graduated and joined the Air Force. We had to move and I didn’t want to sell the house. We decided to hire a property manager and have them secure a good tenant for us. It was rented within a month and has continued to be rented ever since. Our first stop with the Air Force was Fort Walton Beach, a nice beach town in Florida. I had the grand vision of buying a house every time the Air Force moved us and then renting it out after we left – building a real estate empire around the country! But during the years we lived in the house we had to evacuate three times for hurricanes, including Hurricane Katrina, and the thought of maintaining a rental property with high risk for floods or hurricane damage wasn’t appealing. We sold the house in Fort Walton Beach, used the proceeds from the sale to completely pay off that mortgage and the rental property mortgage and moved to the next military assignment: Dayton, Ohio. Now it was 2008-2009 and the recession was starting, housing prices were forming a bubble and the market in Ohio was not one we wanted to jump into. We decided to rent and my dream of buying property all over the country ended.

During the recession years our investment balances kept going down, this motivated me to learn more about how the stock markets worked. I read books on investing, I watched TV shows that talked about the markets, and even subscribed to an investment newsletter on the Motley Fool. I wanted to understand what was influencing my family’s net worth. What I learned was that there are thousands of things that influence the stock market – individual company performance, the economy, politics, world events and so many other factors. I could not possibly understand all of them. The one consistently positive investment we had during the recession years was the rent check coming in every month.

I had faith that the stock market would eventually improve so I kept depositing money into our workplace 401ks and Vanguard IRAs knowing that dollar cost averaging was going to pay off big once the market rebounded, but some of the excitement of the market was gone for me. I wanted something I could physically see and say is ours. In 2010 I decided to start saving up for a second rental property. We went into our first home purchase not knowing anything about real estate so I had a lot of learning to do this time around. I wanted to treat this as a business and to do that I had to learn more about real estate. Like stock market investing, I am a buy and hold real estate investor -- I do not have the skills or time to flip houses. I just wanted to find some good homes to invest in that would provide a steady monthly income. I started reading books about real estate and found it hard to filter through the hype or sales pitches of most real estate books.

If you decide to go down this path, the first decisions you will make are where do you want to buy and to whom do you want to rent?

Real estate is all about location, location, location! Real estate investing is certainly no different. You should select a city with strong rental demand; this is often found around colleges, military bases or urban centers. Vacancy rates are available online to see if rates are rising or falling. A city with stable or declining vacancy rates is preferred, as this builds confidence about the demand for future rental properties.

After choosing a city, I further narrow down my search to a few neighborhoods. Your real estate agent can provide you the average home costs, average household incomes, unemployment rates and job growth. Once I had chosen several neighborhoods to examine and had some money in the bank for a down payment, I scheduled a trip to the town to examine the location first hand. I normally drive around the neighborhoods to get a feel for income level, transportation options, vacancy rates and general home conditions. The closer you are to amenities, the more desirable your location will be to renters. Are there businesses, shopping, or good schools nearby? Look for negatives as well; where is the nearest waste water treatment plant, prison, garbage dump, or flood zone? Will you be looking for single family homes or condos or apartments? Just driving around the neighborhood for 20 minutes will give you far more insight than hours looking at pictures on Zillow or realtor.com. If you plan on managing the properties yourself, then they should be close to your home or work so you can respond quickly if there is a problem or so you can show the house to a potential renter.

Along with finding the right location for your rental properties, you need to decide who will be your renter. We focused on college students but perhaps your neighborhood would be better for young families or single professionals. My advice is to appeal to the middle income bracket, which in my college town is $100,000 homes and $1000/month average rent. This is the widest group of renters who will consistently pay their rent. All of our houses are single family homes with fenced in yards, within two miles of a university campus and right on a major bus line. A supermarket and several restaurants lie within walking or biking distance. We allow pets with a clause in the lease that there is a $500 non-refundable pet deposit to cover damages. This combination of location, amenities, and allowing pets has been key to our success. Our homes appeal to families starting out, university students, and young professionals. The broader appeal you have, the more successful you will be. It is tempting to reach into lower income areas hoping to scoop up a “real deal” house for only $40,000 and getting $700/month in rent. You might get lucky and find a great family who will pay rent and take care of your property, but I think you will be frustrated in the long term. You will have less credit worthy rental tenants, less home value appreciation, and increased repair costs. Lower income homes require more time and energy from you to make the home run profitably.

Investing in a university town has proven to be a great choice for us for several reasons:

• University towns have a lot of turnover which makes for great rentals since few people want to purchase a home but they all need a place to live for a few years.
• Big state schools have graduate students and international students who tend to have families and treat your home better than undergrad students.
• Parents can co-sign the leases to provide backup in case the students fail to pay.
• Homes are cheaper a mile or two away from campus, but rent is well priced.
• Single family homes have strong rental demand.

If you are ready to buy a new property I recommend that your first house be a turnkey, which means the house is immediately ready to be rented without any renovations or major repairs needed. A simple house that can rent easily will get you started and provide you with the confidence to get that 2nd house and 3rd house down the road. Once you have several homes in your portfolio you can start reaching for more complex and possibly more rewarding investments. You might be tempted to buy a beat up foreclosure house for cheap and then fix it up on weekends before renting it out. Unless you’re a professional contractor, I can guarantee you will underestimate the repair cost and the repair time and that is lost rental income for you. If you really want to go that route, move into the beater while you are renovating and rent out your current home! Flipping houses and major renovations are beyond the scope of this article, but if you have the skills to renovate a home there is profit to be made.

If you already own a home your first step in real estate could be to rent a room or a floor of your house. This would generate income with very little additional expense or risk to you. It may seem like you are sacrificing part of your life or that you are stepping backward by having roommates if you have not had them in years. But perhaps it is the sacrifice you need to make to get your finances in order and start bringing in extra money. An empty guest bedroom in your house or a basement full of junk is not earning you any extra money each month!

In the next article I will talk more about how to determine if a house will be profitable for you, how to calculate your return on investment, and what renovations are worth doing.