Who Wants to Be a Landlord?

Earlier this year, Jahmal Pullen and his wife, Angela, spent much of their spare time in their car cruising the neighborhoods of Durham, North Carolina. They were scanning the streets and avenues for good real estate deals. Sometime in 2008, they decided they wanted to be landlords. But, Jahmal, 38, and Angela, 41, didn’t want to leave anything to chance.

The Pullens were determined to thoroughly examine their investment before they signed any contracts. They combed the Internet, searched listings in local newspapers, and investigated local rent rates. They even studied property inspection procedures. They zeroed in on homes near shopping centers, universities, and corporate office parks. An important step in that process involved coming up with a detailed analysis of the carrying cost of the properties and the cash flow each might generate. Eventually, their work paid off. Last March, they purchased a three-bedroom, two-and-a-half-bath, 1,386-square-foot foreclosed townhome for less than $50,000. They rent the unit to tenants who pay $850 per month. After the Pullens cover their mortgage and maintenance and upkeep expenses, their investment nets about $370 per month in profit.

For potential investors who have good credit, some savings, and a dose of patience, the time is ripe for being a landlord. Like many potential real estate investors these days, the Pullens initially worried that the national trend toward reluctant to buy their own home is actually working in favor of new landlords.

However, as with any major purchase, the first step is to understand the landscape before jumping in. As the Pullens demonstrate, research into local market trends is still key. “We will never see prices for investments this low again in our lifetime,” says Bryan Chavis, real estate investor and author of Buy It, Rent It, Profit! (Simon & Schuster; $17). “Capitalizing on this market while benefiting from strong demand for affordable housing can create wealth.”

The Pullens went about their property search in textbook fashion. Before they began looking at properties, they determined how much they wanted to invest and got a loan preapproval from a mortgage lender. Their real estate agent, Tiffany Elder of Realty Executives, had experience working with rental property investors. However, once they identified properties for which they wanted to make bids, they were quickly confronted with one of their biggest challenges: They were competing with many other bargain-hunters. And despite the slow economy and tight lending environment, there were buyers outbidding them or scooping up properties before they got a chance to bid on them at all.

“Sometimes we lost out to others and some were just poor properties,” says Jahmal, a civil engineer with the North Carolina Department of Transportation. Angela works as a professional development consultant at a regional bank. The Pullens considered nearly a dozen properties before they found the one they eventually bought. No matter how competitive the market got, the couple stuck to their plan–and their budget.

The Pullens personally inspected many of the properties and got estimates on necessary repairs. If they decided the property was a good deal, they would make an offer. In the end, they purchased a home for $47,000, paying $11,750 as a down payment. They had estimated that repairs would cost them from $7,000 to $10,000, which included new carpeting, tiling, bathroom fixtures, painting, general maintenance, and some appliances. The actual repairs totaled nearly $7,400.

Meet the Robinsons
The Pullens are hardly unique. Last May, the housing bust allowed Chris and Melanie Robinson to score one of their best real estate deals ever. Chris, an Air Force pilot, has been stationed in several states over the course of his seven-year career. In many of the places the couple has lived, they’ve purchased housing and leased to tenants. Currently in Macon, Georgia, Chris, 29, and Melanie, 28, were scouring properties and crunching numbers last spring when they spotted a duplex that was initially listed for $150,000. As luck would have it, just before they were about to make an offer, the owner cut the price in half, to $75,000. The Robinsons contracted to buy the home two days later.

In all, Chris and Melanie currently own four rental properties in two states–two fourplexes, one duplex, and one single-family home. Together the properties generate a monthly profit of $1,400. “We don’t buy anything if it’s going to have a negative cash flow,” says Melanie, a process engineer for a manufacturing plant, who along with her husband took a real estate course that included a section on analyzing property. She says most potential landlords remember to add costs such as taxes, insurance, and homeowners’ fees when calculating monthly cash flow. But many forget about other expenses such as maintenance, advertising, and tenant vacancies. Experts say that landlords lose about 1% of annual property income due to periodic tenant vacancies.

Becoming a landlord isn’t as easy as it sounds. One thing real estate investors can count on these days is a higher amount of scrutiny from loan officers. When it came time for getting financing, both the Pullens and the Robinsons say they experienced tougher examination from their banks and had to fill out more paperwork than in previous real estate transactions. In addition, the Pullens were asked to come up with an additional $9,600 just before closing to cover repairs. The Robinsons had to produce several years of tax returns. “Nowadays, mortgage underwriters are not taking any chances,” says Chris.

Clearly, the Pullens and the Robinsons were smart investors. But many people are not as savvy.  Longtime real estate investor and professional coach Nancy Spivey says, “A lot of people don’t bother to write out a budget or make cash flow calculations.” Doing the math is especially important, says Spivey. She advises prospective landlords to be conscious of market rent price trends.

Sandra Pearsall, author and real estate investor (www.nomorerealestatesecrets.com), says that often new investors

come to her and with no idea what their criteria is. “They haven’t determined if they want a two-bedroom, a three-bedroom, or if they plan to keep the property for a long time or not,” says Pearsall. As with any investment, setting specific goals is always the best first step.

THE TOP 10 PITFALLS ALL LANDLORDS FACE

Being a successful landlord isn’t as simple as finding good tenants and watching the rent checks come rolling in. It’s hard work. In his book Buy It, Rent It, Profit! (Simon & Schuster; $17), real estate expert Bryan Chavis cautions against the 10 most common mistakes landlords make. Chavis talked to Black Enterprise about each of these missteps:

1 Not continuing to educate yourself
“Laws change and they differ from state to state. It’s easy to put a tenant in an apartment, but you have to be educated and understand the rent variances and tenant regulations you’re expected to follow.”

2 Not following proper landlord systems
“Some of the most successful businesses are franchises. Why? It’s because branding, protocol, and operating systems are in place. You must follow proper accounting protocol.”

3 Not following Fair Housing laws as they apply to landlords
“Fair housing laws are one of the biggest things that are overlooked. It’s the most litigated area of housing aside from security deposit claims. There are seven protected classes–race, sex, color, national origin, familial status, religion, and persons with a disability. If you can’t remember these classes, you’re running a major risk. Bottom line: Don’t discriminate.”

4 Not understanding how to screen tenants
“How do you avoid a troubled tenant? Thorough upfront screening. That means checking the person’s background, revolving credit load, and credit scores. But you can’t base it solely on those things. These days, you’re going to see a lot of bankruptcy and foreclosure victims. So you have to evaluate that and massage your criteria accordingly. You can find some examples of good screening criteria on my site, www.landlording101.com.”

5 Not using a well-written lease
“This is a major line of defense. It protects you against challenges from the tenant on evictions or security deposit issues. If you wind up in court–and every landlord does eventually–a well-written lease will give you a firm legal position.”

6 Not conducting a market survey
“Every one to three months, I do research into the local market. For example, you should know how many landlords are waiving application fees for prospective tenants, or giving specials and other concessions. Doing a market survey is important to understanding the competition.”

7 Not properly maintaining your property
“A lot of landlords try to cut corners. At the end of the day, this is your investment. Do frequent inspections of the units in your building. You can catch little things, like leaky pipes, before they become major issues. You have to keep the property values up. When you do sell it, you want to get as much out of it as you can.’”

8 Not building the proper team and network infrastructure.
“If you’re the smartest person on your team, your team is in trouble. Have a good maintenance technician, a good plumber, and an electrician as part of your buddy system. Join landlord networks and associations such as the National Apartment Association.”

9 Not enforcing your rules and regulations
“Landlords are sometimes too soft on the tenants. When that happens, things can quickly get out of control and may also weaken the lease. Be respectful and professional, but have tenants remember that it’s a business relationship. You must enforce the rules. Have guidelines for cleanliness and order.”

10 Not treating landlording as a business
“What you have with a rental property is a business. Most people don’t approach being a landlord like owning a company. Rules, procedures, order… if you don’t create that structure, you’re not only hurting yourself, you’re hurting the neighborhood.”