“Landlord”. Merriam-Webster definition: (noun) “The owner of property that is rented or leased to another.”
The lure of becoming the next Donald Trump has many San Diego residents asking me lately about buying rental/income property. After all, Will Rogers said it best, “Buy land, they ain’t making it anymore!” Late night infomercials help fuel the fire that fortunes in real estate are there for the taking, all you have to do is send in $49.95 everything else comes naturally, right? Well, not exactly…
With housing prices at historic lows in San Diego, would-be entrepreneurs inquire to our office often about how to get in the game. “How can I invest a minimum down payment and rent out a house or condo for positive cash flow?” Effectively, “How can I, the average person, get someone else to pay for a real estate purchase that I make?”
Or, “How can I move out of the house or condo I currently own, rent it out, and buy a second house/condo to live in myself?” Great questions! Consider this…
Yes, it is true; more millions have been made in real estate than any other business in the history of our country. We all have stories of friends, relatives and famous people in history or in the media today who have leveraged OPM (other people’s money) to help them build a significant real estate investment portfolio.
After all, of the popular investments one can make (stocks, bonds, gold, a small business, the list goes on), real estate is the one you can normally leverage most using a mortgage, and the only investment you or your tenants can actually live in while waiting for the investment to gain value!
There are two basic components that get in the way of the typical person following through on this dream, and I don’t mean picking up the phone at 2:00 am and ordering those DVD programs from the television pitchmen! Instead, start by asking yourself these basic questions:
1) “Do I own the place where I currently live, or am I paying rent?” Unlike most investments, one of the beauties of a real estate portfolio is you can usually start off by firing your current landlord and buying your own place first! This is a great way to get to know what all is involved in being a real property owner AND getting yourself off the rental treadmill, month after month, after year after year. Often, the tax advantages make the decision to buy a no-brainer (see your tax professional). Then, being in control of your own space is the icing on the cake!
But you have to be ready to get your “hands dirty”, by getting your financial house in order (as you should probably do before investing in anything) and changing your lifestyle from that of a renter (see previous column) to a property owner.
3) “Do I have a savings account?” Sounds basic, but with no savings, it is a stretch to pursue most investments, all of which come with some degree of risk (see your financial professional). It is not how much you have in savings that is key, as much as developing the habit of saving.
3) Are you cut out to be a landlord? Real estate investors who buy property with the intention of renting it out have weighed the pros and cons carefully. They normally have some cash reserves for the months that a property may become vacant, often at a moment’s notice! They have budgeted for repairs of damaged walls and carpet, or replacement of appliances for example. And what about the famous late night phone calls to fix a leaky toilet? You will never get a call like that from your stock broker! Maybe the idea of getting a part time job to provide additional income is not that bad…
But if you have answered these basic questions “yes”, you may be landlord material. If question #1 is an obstacle, now is a great time to taking the first step and buy your first home, and stop paying your landlord’s mortgage! Don’t worry; you don’t have to change to a Donald Trump hair style. Whew!
Q: We are thinking of selling our house on our own, in order to save the real estate commissions which we cannot afford to pay anyway. Any tips? - B. Kaminska, El Cajon
A: Great question, but be careful. According to the National Association of Realtors, the average sales price of a FSBO (for sale by owner) property is over 20% LESS than a similar property sold by a real estate professional, who normally charge around 6% to do the job for you. My tip is, carefully consider your options before you make any major decisions about what is probably the biggest investment you will ever make.
Keith Woolgar