your own — location, location, location. That doesn’t mean your investment property has to be situated in a dream zip code. Save that for your primary residence.
Rather, the ideal neighborhood should have a built-in tenant base like, say, an area that needs housing for military personnel and their families.
Curtis White Jr., 43, maintains that location was a primary consideration when he bought his first house in 1993. He remembers asking himself one thing: "Will I be able to sell this house in 10 years?"
White learned from the mistake made by one of his clients at his tax preparation practice, e-Tax Pros, in Teaneck, New Jersey. "My client did well with rental property in Newark," he says, "but when he wanted to sell the building so he could retire and move to Arizona, he couldn’t find a buyer because the area was depressed at the time."
With that lesson in mind, White bought a four-family building in Weehawken, New Jersey, a tiny commuter hamlet less than a mile square. Just 10 minutes outside New York City, the town offers breathtaking panoramic views of midtown Manhattan. White lived on one floor, rented out the other three apartments and met his future wife on the same block. Today, White and his wife, Chrystal Ingram-White, 34, own 16 rental units within a four-block radius in the community. Bearing out his assertion, White bought one property for $90,000 and made $56,000 in capital improvements. This year, he sold it for $239,000 — a $93,000 profit.
When identifying a property, do your homework. Thorough analysis can determine whether a dwelling can generate enough income to pay for itself. "You should have a good handle as to today’s and future expenses and how safe and secure the income stream is. Those principles don’t change whether it’s a two-unit or 100-unit apartment," says Dennis Cronk, president-elect of the National Association of Realtors (http://nar.realtor.com), a trade association based in Chicago.(See sidebar, "Is Real Estate a Viable Investment for You?")
With interest rates and unemployment low, conditions are favorable for acquiring rental property. But real estate is, by and large, a local investment. Research the market by asking area realtors about the history of rental rates and vacancies. Red flags to watch for: rents that haven’t increased in five years or met the inflation rate.
GAINING ACCESS TO FINANCING
Once you’ve landed the right property, how are you going to pay for it? Your options are dictated by the following:
- The type of property you want to purchase.
- Whether you will live in the property.
- The number of units.
- The size of the loan.
- The number of properties you currently own.
If you’re living on the grounds — even though you’re a landlord — your owner-occupied home is not considered an investment if it has four units or fewer. That means you can make a down payment of as little as 5% with a loan through a special program