July 1, 2004
Buy, Sell & Rent
Steven Perkins had been in court the day before. “I was involved in a dispute involving my rental property in Southfield,” he recalled, referring to the Detroit suburb where he lives and works. “An oak tree by the driveway had been damaged by someone I’d hired to do some cutting. I’ve owned that house more than 20 years, and I’ve been in court often enough to have learned quite a bit about how to make a suitable case.”
Have such trips to the courthouse sapped his desire to be a landlord? Not really. “Even with the hassles, it’s worth it,” says Perkins, 52, a psychologist with a private practice as well as a position with the local school district. “Over the years, I’ve added other properties, such as two lakefront houses, one in Canada and one in Holton, Michigan, that I use myself when they’re not rented out, and a co-op that I just bought in downtown Detroit. Some of those properties have appreciated a great deal, and I’m counting on them for my retirement funds.”
Perkins’ experiences illustrate both the highlights and pitfalls of owning residential real estate that you rent to tenants. While there are certain risks and obligations potential landlords need to be aware of, the financial rewards can be ample.
There’s no denying the benefits of owning rental properties, especially when real estate values almost consistently trend upward. Among the perks are:
Current income: Landlords collect rent from tenants; over the years, increasing rents can provide another source of cash flow. “I receive about $1,000 a month from the house I rent in Southfield, or $12,000 a year,” says Perkins. “After expenses, I probably clear about $6,000, which I consider ‘play money.'”
Appreciation: Perkins says that the Southfield house, originally bought for around $30,000, is now worth more than $200,000. “My lakefront properties have gone up even more, in a few years, and the Detroit co-op I just bought has already jumped in value.” Perkins bought his Holton property for $180,000, with a $40,000 down payment. The property has nearly tripled in value in six years, to $500,000, giving him an eightfold return: a $320,000 gain on a $40,000 outlay.
Daryle Jordan, 45, an attorney in Alexandria, Virginia, also relates a tale of success in rental real estate. “I owned a property in Georgia for a year and another in Virginia for about 10 years,” he says. “Even though I had some negative cash flow, I wound up selling the properties for a substantial profit. I’ve been using those proceeds to invest for my daughters’ college education.”
Leverage: Rental property can be bought largely with borrowed funds, increasing the effective return if the property gains value. “When you borrow money to buy investment property, it’s typically on a ‘qualified non-recourse’ basis,” according to Larry Torella, tax partner at Eisner L.L.P., a New York accounting firm. “The property secures the debt, not your other assets, which limits your downside if things don’t work out.”
Tax advantages: “The tax laws are very favorable to real