Investing in Rental Properties

Mike Beirne
Author, "The Property Management Tool Kit"
Tuesday, October 3, 2006 2:00 PM

The dynamic of the Washington area's real estate market continues to change with every passing day. Is now a good time to sell? To buy? To curl up in your rental pad? For insight on this and more, check out The Post's Finding Your Way feature.

Not every home buyer plans to live in their new place -- at least, not forever. Mike Beirne, author of "The Property Management Tool Kit" (AMACOM Books, 2006), shared insight on investing in and owning rental properties in this live discussion.

Visit The Post's online Real Estate section for more.

The transcript follows.

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Mike Beirne: Good afternoon everybody. I am Mike Beirne the author of "The Property Management Tool Kit" I will be here for the next hour to answer questions relative to real estate investments and how good management makes for a better investment.

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St. Louis, Missouri: Are there legitimate property management companies out there? I keep hearing that they all take kickbacks from repair people and will spend every dime your contract allows them to spend without your OK.

Mike Beirne: There are plenty of good reputable companies. If you find your local apartment association affiliate or IREM (Institute of Real Estate Management) you are more likely to ensure getting a good one. Also the contract you negotiate is very important in protecting your investment.

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Olney, Md.: I have not had the chance to read your book. Do you cover the basic start-up information for obtaining and leasing rental property in your book? I have purchased houses in the past for myself and have played with the idea of obtaining rentals, but feel that I lack even the basic knowledge I need to avoid a disaster. Where is a good source to obtain this information?

Mike Beirne: Yes this book was written with someone such as yourself in mind. the devil is in the details in managing your own property and I hope I have included enough resources for someone like yourself to utilize this as a manual of sorts. There are sample forms in this book including a sample of a lease through the National Apartment Association which is a great reference group of affiliates nationwide that can be a information source and networking group for people who look towards investment real estate.

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McLean, Va.: My husband and I own a condo and would like to buy a house in another year. Problem is our condo is in great need of updating (cabinet doors falling off, a sink doesn't work) and we know it would sell better fixed up. We have an estimate from a reputable contractor to make the changes we want, but it will be $40,000 to $50,000. Is it too risky to make such a huge investment in a condo when prices are declining?

Mike Beirne: IT depends on the relative rent you can derive from the improvements. Look at the market now what are people getting for a comparable unit with the same amenities and what additional rent will the improvements return to you? How long would it take you to "pay back" the cost of the amenities. Example if you could pay back the upgrades with additional rent over three years its a very good investment.

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Arlington, Va.: Are good rentals properties going the way of the dodo bird (that is, extinction)?

The ratio of the price to buy to the monthly cost to rent (the price to rent ratio) is seriously out of whack here in the D.C. area. Whereas the long term historic average price to rent ratio ranged from 100 to 150 times monthly rent for decades prior to the current bubble, the ratio now ranges from 200 to 400 times rent on average. And that doesn't make for favorable investment purchasing conditions!

So here is the big question. Will home prices eventually fall to bring the price to rent ratio back to its historic average or are we in a new paradigm where it will no longer ever make sense to buy new investment properties?

Mike Beirne: They are two markets that historically will go back and forth and respond to the same supply and demand forces that any other product does. I would say the one thing that is concerning at this time is the rise in expenses that the owner has little or no control over such as utilities and that could keep rental prices high for a while.

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Wheaton, Md.: To buy a house, then re-sell it in five years, about how much more would you have to sell it for in order to turn a real profit? With the money spent on interest, maintenance and all other expenses, it would seem the house would have to double in value in order to make it worth the time and expense.

Mike Beirne: That really depends on how the market where you want to buy moves. My experience has been that investing in rental property becomes more lucrative over the long haul and probably won't see a market appreciate as it has the last few years for awhile. A lot of factors go into what's profitable for you.

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West Orange, N.J.: Are property prices generally so high that rent income will not cover expenses and debt service unless the equity quotient is high and, consequently, the equity return is low? What is the likely Return on equity for an investor who buys a residential property with 20 percent down payment?

Mike Beirne: In your area the property values make an investment somewhat prohibitive obviously at 20 percent down you leave yourself some room. Occupancy is up right now but rental values are not climbing concurrently and expenses right now in your area are not favorable.

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Annandale, Va.: How much do we need to renovate in order to get market value rent?

We own a small 1-bedroom in a Ballston hi-rise. Our long-term tenant is moving out and the apt. is desperately in need of updating, before we have a new tenant move in.

Besides painting and carpet cleaning, the question is how much: The bathroom floor and tub tile are old fashioned in color and size (over 30 years-old) but may be cleaned up and the Formica kitchen counter is plain with sloppy grouting.

We don't know how long we will hold onto it (if the market rebounds, it could soon, or we can hold onto it for 10 years) Should we just hold off on the expensive items until we're ready to sell or renovate it now, hoping to get more rent with a modern look?

Mike Beirne: Here is a question to ask yourself: Based on research of the market your investment is in, how much additional rent can you expect to receive from doing the upgrades. If the market has a high end and your near it, make the apartment safe, clean and a good living experience, if there is room then the improvements would be worth it and if you plan to sell the value stays with the unit.

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Washington, D.C.: Is there a book specific D.C. that can hip me to the landlord/rental laws?

Mike Beirne: Specific to the D.C. area I am sure there are some publications. Check with your local apartment association or the local public housing authority they'll be able to let you know.

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Adelphi, Md.: Greetings Mike -- I'll probably be leaving this area next year and I had plans to either rent or even sell my one bedroom condo. I'm currently renovating the unit. I just recently pulled up the old carpet and would like to install wood floors. I thought about installing engineered floors because it is cheaper and very durable against moisture and pets. Many people have told me that I should just lay down hardwood floors. But I'm really hesitant due to the fact that I may not be selling the unit right away. I had also planned to upgrade the bathroom and kitchen. What would you suggest? I would hate to do too much expensive renovation work if it's not going to be worthwhile.

Mike Beirne: There are two ways to look at your question. One is cost verses return and the other is who you are renting to. I assume you are willing to take pets. Make sure you install clauses that protect you as the owner as to what pets can do. After you have decided on that What can the area and your unit get in additional rent to justify the upgrades?

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Herndon, Va.: Does it help to hire a property management firm to handle certain issues such as excessive occupancy (zoning issues) and nosey neighbors who don't like your property rented? If yes, what exactly do these firms do to help the landlord?

Mike Beirne: It helps based on what you expect of them for what you are paying them..A good property manager is worth their weight in gold a bad one is just as bad as not having one at all. Decide what you think you are capable of and what you aren't and then negotiate terms of a contract that fit your needs..In the case of over occupancy this is something that a good lease should help you with and then its just a question of your management monitoring and following up. Those are two very key words in property management.

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Washington, D.C.: Planning to buy an apartment building that's walk-able to the Metro in a D.C. neighborhood (four one-bedroom units). Is this the right time to buy?

Mike Beirne: What I can say to this and a lot of your neighborhood specific investment questions is do a good due diligence. Check out the market, make sure you are paying what seems to be about the going "per unit or per square foot price" then research the place you want to invest in. What is it getting in rent now? what major expenses will you incur. A  proper due diligence tells you a lot. In general, single family is slowing interest rates are up and the rental market seems to be improving but its very relative to all those factors I described.

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Northeast Washington, D.C.: I want to rent my house, which is sitting furnished but empty right now, but while I realize people have rented properties since there were properties to rent, I'm hesitant to do so because of fears of having a bad renter or ending up in court. Any advice for those of us who can't shake the landlord/renter horror stories?

Mike Beirne: It is all in how you design the rental and screen your applicant. A good lease protects you and if you do a good job financially screening properly there is a chance the renter will be ok. If you are a complete novice, then consider hiring an "agent" or property management firm for a year. Of course that will reduce what you bring in, but it is a good way to learn. Check with your local apartment association for reputable firms.

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Arlington, Va.: My husband and I are planning to invest in real estate over the next few years. Our plan is buying homes fixing them up to a basic standard and renting them, in effect use real estate as a long-term investment. We are split on whether single family homes, townhomes or condos are the best type of property for this purpose. What are your thoughts? Thank you.

Mike Beirne: In the case of condos, remember you are tied to the community restrictions and therefore may be limited in what purposes you can utilize your unit. Generally, they are well kept because of the "common expenses," but that's also another cost factor you would have to take into account. As far as the other two it really depends on location and what the rest of the local rental market will bear. A good market survey of the area will tell you what people are getting for rent on a per square foot basis and then you can determine whether the investment is a suitable one.

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Alexandria, Va.: What are the tax implications if you move from primary home and rent it out due to work. Is selling better or renting out if one moves due to their job?

Mike Beirne: I don't know that moving for your job has much bearing. There are capital gains issues if you sell and don't buy something. And there are tax advantages to renting it out but check with a local certified accountant for specifics.

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Washington, D.C.: What is the biggest piece of advice you would give someone thinking about renting what was initially their primary home?

Mike Beirne: I think that making sure you have a good lease, and you have made sure that your prospective resident is financially qualified to afford your house are the two most important things, and that you keep very much in touch with what goes on once you do rent it. What is financially qualified? You have to make that decision but the average person is spending somewhere around 21 percent of their income on housing it certainly shouldn't be much higher than 25 percent.

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Baltimore, Md.: How do you find rent rates for a particular city or area?

Thanks.

Mike Beirne: There are several good publications that will give you the bigger places: apartment guide and renters guide. The Internet is becoming a great source because some of the sites will give you comparisons and the advertising dollar isn't expensive so the little guys advertise with the big guys. Technology will point you to the rates.

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Alexandria, Va.: Piggybacking off of Arlington's question ... with a lot of new condos being "converted" back to rentals how will this affect the rental pricing in the local market?

Up due to really high home prices or down to over supply of rentals?

I would like to start in the rental market but the "numbers" just aren't there.

Mike Beirne: I originally started my career in New Jersey and in the late-80s there were many failed condo conversions..this is risky business I now manage complexes that are left partially unsold and are running more like taken back apartments now except for a few owners. I think you have to look at values in the area. It's all predicated on what the local area can handle and how saturated it has become.

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Falls Church, Va.: My husband and I planned to downsize and sell our current house and move back into a smaller home we have been renting out for the past 10 years. Now, we are faced with a bad seller's market. Our current home has been on the market for five months, and the renters moved out of the rental property last June. We need to put some renters in there. We are thinking either short-term renters and keeping our house on the market or a year's lease and taking our home off the market for now. How hard is it to find month-to-month renters? Any advice?

Mike Beirne: No, it is not hard to find month-to-month renters anymore. Many markets have become very transient, but finding a good month-to-month renter is the challenge. Look in some of the apartment guides and real estate offices for "locators." They typically cater to business clients making moves from oversees or in high profile jobs single family short term rentals works very good for them.

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Wood Ridge, N.J.: Your book was of a great help to me in seeing the overall picture of Property Management. It is a must-read for anyone in the Property Management "Game." Thank you for finally getting this information in book form. Looking forward to your future endeavors.

Mike Beirne: Thank you, this book was designed for people who think they want to buy investment properties but aren't sure what "sweat equity" it entails, I hope I have achieved that end.

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Arlington, Va.: What is your advice regarding evaluating the initial cash flows of potential investments? Should an investor only buy a property when it is expected to be cash flow positive from the start?

Some people I know think its ok to buy property with negative cash flows because they think appreciation will bail them out. In fact, one prominent realtor in my area (in Lyon Park, Clarendon) suggested that people "handle as much negative cash flow as possible." Is that good advice?

Mike Beirne: I think that is a mentality that can fool or rather the eyes may like it but the stomach can't handle it. Real estate investment is much more conducive to long term investment when it comes to rentals; but negative cash flow? A lot has to do with the operating costs and the condition of the investment but most of all the mistake I see made is how much people think they can get in rent and that's where the cash flow thing hits a wall.

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Great Falls, Va.: I had a three-year lease with an ex-tenant. He broke the lease after six months and moved out. His breaking lease costs me more than $18,000 of property damage and lost rents. What options do I have to recover my loss? Is it worth to hire a lawyer and take legal action against him?

Mike Beirne: Each jurisdiction is different, without being a lawyer I will tell you what my experience has been. Get as much security deposit as possible, make sure the lease is very clear about responsibilities and damages, utilize the small claims courts and in your case talk to a few collection companies. They will take a percentage but most of them don't charge you up front they collect you collect hiring an attorney does not ensure that the individual will have the money anyway.

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Washington, D.C.: Is it true that for a lawyer making around $38,000 a year that it would be a smart move for him to try to qualify for a condo -- one of those that are for people of moderate to low incomes? Are the units reserved for people on these incomes? I would think that this would be a good way to build equity and to be on one's way to purchasing a single family home -- since this is a buyer's market.

Mike Beirne: Affordable housing have income limits that are regionalized you'll have to check on what those income limits are in your area.

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Fairfax County, VA: Mike -- I have a question about Section 8 tenants. My mom owns some property in Michigan and has had both good and bad experiences with them. I am considering renting out my condo near Fort Belvoir within the next couple years and am wondering how bureaucratically difficult renting to Section 8 tenants really is. Would I need a property management agency to handle all the paperwork? I wouldn't want to invest more than about four hours/month of my own time in managing the property. What if I were out of state?

Mike Beirne: Section 8 housing on one hand gets a bad rap..its money that comes in every month religiously you don't have to chase it in most cases (although there are some bad housing authorities)and sec 8 residents are usually cooperative..they lose a subsidy if they are caught violating the laws. It is however much more paper heavy and you are subject to third party inspections. There are computer programs that are setup to help with this but I would say its time consuming until you get the hang of it and you do have to be a diligent "landlord."

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Largo, Md.: Mike,

I brought my first rental property four years ago when I turned 21. I currently own three rentals and I make a nice profit each month. I plan on buying a house for me in a year or two. I want to know should I sell the houses since the market is still good and buy my dream house? Or wait and in 20 years all three houses will be paid off and then I can have that large income going in?

Mike Beirne: That is a question for you to answer...The houses you own certainly won't depreciate if you hold them especially if you keep them up but I don't know..the dream house sounds good..the good thing is you have those options..have fun deciding! Keep your eye on the market though.

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Washington, D.C.: In general it seems that D.C. is not a good investment market given that prices are so high and thus covering mortgage payments with rental income would be difficult. What markets would you recommend for investment?

Mike Beirne: That's a hard question to answer but you can gain that statistical info from many sources. The national apartment association in one of the recent issue's of UNITS magazine looked at occupancy across the country and its data that should have you make that decision not guesses. The mistake many make is assuming or listening to experts Even the big boys don't use the data that's out there research the market and fit yourself into a market you can afford and can prove out a good return. It's not hard to do but a lot of people don't do the leg work

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Falls Church, Va.: I just purchased a three-bedroom condo and wanted to rent it out for at least one year when I'll be ready to move in. I posted an ad on Craig's List, but I am having a hard time finding a renter. What's the best way to advertise the condo?

Mike Beirne: I am surprised Craig's List has been a hot way to do it..there are many other Web sites and the Internet is one of the best ways right now because its cheap. there are many sites now that only charge if your place gets rented like Rent.com you'll have to check if they take singular ads but that's becoming the most effective and cheapest "rent per lease."

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Severna Park, Md.: Greetings. What kind of mortgage options are available for an investment/rental property? Is it possible to find loans that only require as little as 10 percent down?

Mike Beirne: The mortgages are like a Chinese menu there are many and yes they have mortgages for 10 percent down but again what you put in is what you get out make sure the income is there to support low down payments.

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Baltimore, Md.: I'm thinking of buying a decent-sized house in the Ellicott City or Columbia areas in the Spring or Summer. I'm inclined to move slowly to let prices decline. Your thoughts?

Mike Beirne: Housing markets vary from location to location it is true in general housing is slowing but not everywhere. I would use an agent a obtain comps now and then wait for a little while and do this again a few months may indicate trends

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Mike Beirne: OK folks, I tried to answer as many as I could but if you go to www.mikebeirne.net and leave me a question I'll see if I can answer any others get the book there are some good real life stories in there. Tthanks it's been fun.

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