I get asked a lot if I think now is a good time to get started in real estate investing, and I usually say “yes” (or “maybe” or “hell no” depending on how bad that day’s housing/economic news is), but with the caveat of only if you’re looking to buy a duplex or a rental property or a home that you plan to live in and fix up yourself. Unless you live in very specific regions of the US or have a ton of experience as a flipper, I think it’s pretty much a terrible idea to even consider buying a house to flip in 2009, as way too many factors are working against you.

Buying a rental property, though, is a whole other ball of wax. If you plan to hold it for 5+ years, timing the market is much less of an issue, and you can miss the bottom by a year or two and still make a nice profit, especially if you’re really in it for the long haul and not looking to sell for 10 years, etc.

Owning rental property is a tried and true way of making money in real estate, but most people are scared off by the prospects of being a landlord. And understandably so, as it can be less than fun at times and it’s not a path to quick riches. With no futher ado, my random thoughts on the experience so far of being a landlord:

• Deal with problems immediately. If your tenant calls to tell you that something is broken, fix it. Immediately. If it can’t be fixed immediately (such as a furnace that just kicked the bucket), show your tenant that it’s being dealt with as quickly as possible and make sure they know the timeline for repairs (“I’ve scheduled for a replacement of the furnace but it can’t be done before 3:00 PM tomorrow afternoon.” No landlord likes dealing with the unexpected, especially when things break and unexpected costs arise, but hiding your head in the sand accomplishes nothing, and shows your tenant that you don’t really care about them or the condition of your property, which is a dangerous precedent to establish.

• Be real. We don’t use a property management company so I meet all prospective tenants myself, and I go out of my way to talk to them like a potential neighbor, and not the looming, never-present Landlord, with a capital L. I wear jeans and a t-shirt, make sure they see my truck with its usual assortment of ladders, paint cans, and tools in the back, and work into conversation that I’m only a real estate investor on the side. Be professional, be organized, but leave your ego at home. Tenants who can see themselves in you are much more inclined to take care of the property and pay rent on time as opposed to tenants who you try to overwhelm and intimidate from day 1 with your unholy power as Landlord, deeming whether or not they are fit to live in your house, etc.

• Don’t be judgmental. Tenants who dropped out of high school, work sixty hours a week at two jobs, don’t have a bank account and pay the rent with a money order are often much, much better tenants than someone with two PhDs who makes $120,000 a year.  Your ideal tenant is someone who takes care of the house and pays rent on time and never bothers the neighbors.  That’s all that really matters.

• Trust your gut. It’s better to have a house sit empty for a month than to rent it to someone you have misgivings about, for whatever reason. If you’re offering an attractive rental at a fair price, more prospects will come along. If someone seems interested but hems and haws about the price, about paying the utilities, don’t budge. It’s better to let them walk away and later reduce the price if you need to, as you want tenants who want to live there at the advertised price, not someone who feels like they’re overpaying and that they’re somehow “owed” something because of it.

• Don’t be scared off by a lack of credit history in tenants. I didn’t realize this until experiencing it myself, but not everyone fully embraces the good ol’ banking system in the US. For various reasons, some people don’t have bank accounts, credit cards, or any credit history. That’s not necessarily a bad thing, as it simply means they have no credit history, and not that they’re hiding something or have a bankruptcy, etc. That’s not to say that they’ll make a great tenant, just that if you run a credit check and it comes back completely blank, it’s not a red flag in and of itself.

• In sight, in mind. Being a landlord is sort of strange as when things are going well, you never even know you have a rental property. Rent arrives on time, nothing breaks, you don’t lift a finger. It’s tempting to extend that to not regularly checking up on your rental properties, as if everything is going perfectly, no good can come of driving by the property, as you might see problems if you do. I shouldn’t have to point out how dumb that is but I mention it because I do it from time to time, despite knowing it’s dumb.

• Keep a separate bank account for your rentals. This helps with bookkeeping as well as with motivation. Assuming you’ve got cash-flowing properties, it’s nice to be able to see it build up over time, and helps justify the occasional headaches that arise from being a landlord.

• Calls those references. All of them. I hate talking on the phone, too, but there’s a reason you should always ask for references and a reason you should call them.

• There’s a time and a place for lease option agreements. If your primary strategy is a lease option, ignore this, as you’ll obviously be focusing on that. If you’re not actively trying to lease option a rental, don’t get overly excited if a tenant mentions wanting to buy the property, and don’t overly complicate things with extensive lease option contracts, haggling over a purchase price, etc. Most lease options don’t result in the tenant buying the property, and that’s unlikely to change in 2009. A quasi-hybrid on the lease option that I used with our current tenant in House #2 was to sign a normal lease, but to also give him a signed letter stating that we’d credit him with $50/month for each month’s rent if he bought the propety in two years. No agreement on a purchase price, no option fee, no official contract to purchase the house, just something to reassure him that he’d get a little something for being a good tenant, if he did end up buying the house. He got a bit of incentive to take care of the property and a bit of a discount if he does prove serious about buying the house, and it took all of a few minutes to draft the letter and sign it.

Taking a mini-vacation tonight with the wife, but Sunday and Monday are going to be marathon work days, trying to knock out all of the interior painting (minus the windows) at the Main St. house, as well as tiling in bathroom and the new ceiling in the kitchen. Knock on wood, but I think I can power through all of the work I plan to do there in the next few weeks, and be done with it by June 15th.

Went with our local realtor to look at some properties yesterday, mainly just to eyeball some of the more promising stuff available right now. Didn’t see much in the way of potential flips, but we did look at a couple of rental properties that looked good, a duplex with 2-1s on both sides (listed at $59,000) and a 1400 sq. ft. 3-1 SFR (listed at $49,000). The 3-1 needs a little more work to be rent-ready, but nothing too substantial, mainly just painting and new flooring throughout. It’s also got an amazing old live oak tree in the side yard, easily 200-300 years old. The pier and beam foundation is kind of wonky, though, which isn’t much of a problem as far as renting it but potentially an issue when selling.

The duplex has zero curb appeal, but it was built in 1990, has a slab foundation, indestructible ceramic tile on the floor, and really nothing wrong with it. Just needs some paint and appliances in both sides.

Either property would rent out for $750-$800 when fixed up, which isn’t bad. Both have been on the market for awhile, too, so there’s probably some negotiation room in the list prices.

Getting ahead of myself in the planning and plotting (buy hey, planning and plotting is fun), but I’d like to get to the point where I can flip 3-4 houses a year, netting $40,000-$50,000 in profits, and basically roll all those profits back into picking up a couple of rental properties each year, covering down payments, repairs, etc. Not very sexy, as the rentals will likely never throw off a lot of free cash on a monthly basis, but I think the long-term prospect for appreciation in our general area is very promising, as people continue to pile into central Texas.

It’s a weird layout, as it used to be a beer joint that was converted into a duplex, so there’s some odd stuff here and there. I’m not even sure it was actually rented as residential property all that long, as there’s no flooring other than bare concrete slab in most of it and it has the most gawdful paint in one side of it, pink, dark purple, forest green, and red carpet.

There’s also some pretty creative plumbing in one half, and that’s just what’s visible, as far as plumbing for the toilet actually running along the siding at one point, exposed and attached to the wall. I ain’t no expert but I’m going to go out on a limb and say that it’s probably not supposed to be done that way. Electrical looked okay and fairly new but again, based on the other creative engineering, there’s no guarantee that it’s all up to snuff.

It’d need new appliances on both sides, but the bathrooms were in decent shape. It’s got a newish metal roof, but most of the windows need to be replaced, along with about half the doors. No clue on the furnaces and water heaters but they’re definitely older and likely in their declining years.

Sounds pretty crappy on paper, and, well, it looks pretty crappy in person. But the redeeming factor is the size (1800 sq. ft. total, with a 3-1 on one half of the duplex and a 2-1 on the other) and potential price, as it’s listed at $49K. It’d rent pretty easily for $700-$800 with both sides occupied, and even just renting one side would cover the mortgage cost.

It’s also zoned as commercial property, and part of me wondered about turning the front section (the 2-1) back into commercial space, and renting it as a package deal to someone looking to live in the back and run a small business out of the front.

If I could get it at around $40K, I think I might pull the trigger. That’s a pretty steep discount from the asking price but it’s a REO property and needs lots of work, so I doubt anyone is going to jump on it soon, and they might accept a lowball offer just to get it off the books.

$40K is about what our realtor paid for his REO duplex that he just bought down the street (which was actually owned by the same guy who got foreclosed on on about 7 properties in town simultaneously), and his total monthly bill for mortgage+insurance (with a 100% financed 30 year fixed mortgage) is about $325.

So I’d be looking at $400-$500 NOI/month, which, umm, ain’t bad at all. Assuming the furnaces and water heaters are shot, I’d have to put at least $10K into it to get it presentable and rentable, but that’s doable, even with expenses looming for the 1002 S. Main St. house.

Hmm…

I can’t say I have much love in my bosom for underwriters. I understand the necessity and that most headaches they cause are simply them doing their job, but this stage has been consistently painful, in assorted ways, every time we’ve bought a house.

The headaches are never a matter of money or assets or income, either, but dumb stuff like the underwriter balking at the fact that my primary job is listed as being employed by XYZ, Inc., but my W2 is in the name of ABC, Inc.

Fair enough to balk at the discrepancy, except for the fact that XYZ, Inc. is a subsidiary of ABC, Inc., and is very publicly so, since ABC, Inc. is a Fortune 500 company, with billions in annual revenues, etc. Establishing the connection literally takes seconds via Google searches or, Jebus forbid, one simple phone call to Investor Relations at ABC, Inc.

Except the underwriter is insisting that I provide hard copy documentation to prove the relationship between the two companies, instead of doing any of the above themselves.

Which, again, would be fine if you were asking me to produce a W2 or pay stub, but asking me to somehow conjure up documentation spelling out the legal relationship between the two entities is kind of dumb. I’m just an employee. I don’t have that. I’ve never had that. I’m not even sure I can get that.

But if this is the only headache involved, then I’ll consider myself lucky. So, you know, fingers crossed.

In other random news, the fridge at the Austin rental house went kaput on Monday, and I ended up just buying a new one at Home Depot. I’m probably going to keep the old fridge and try to get it repaired, to put into a future rental, but it was fairly old and we had planned to upgrade the appliances in the Austin house anyway this year before selling it, so it seemed to make sense to go ahead and get a new one.

I’m not really including the Austin house in my schemings here, as my wife and I bought it as our primary residence, then rented it out to her brother when we moved last August to our current house.

The real purpose of this blog was to detail experiences in my dipping a toe into the world of investment properties, which is a bit different than hanging onto our last house for a bit before selling it. So it’s technically a rental property but only by proxy, and likely will be sold and off the books this year.

A foreclosure listing popped up yesterday for a 1700 sq. ft. duplex, listed at $49,900. It’s in a slightly sketchy part of town and it needs some work, but it’d pretty easily rent for $800-$850/month for both sides.

I’d probably need to sink at least $10K in repairs into it, though, as  nearly all of the windows and doors need to be replaced, the exterior needs new siding in places, the carpets need to be replaced, along with assorted other repairs. The furnaces visually looked pretty old and beat to hell, too. And there’s the small issue of, umm, currently being in the midst of buying another investment property.

On top of all that, I’m still not exactly settled in my head as far as the whole landlord gig, especially with properties in less-than-stellar neighborhoods. Technically we’re in the landlord business now with the Austin rental house, but my brother-in-law is renting it, which isn’t quite the same. (Although with how damn picky he is about everything sometimes I think it’d be easier to have complete strangers as tenants.)

I could simply turn it over to a property management company, though, as there should still be some room for net monthly profit given the rock-bottom foreclosure price.  And I do want to eventually pick up some rental properties, as I like the chances of some decent appreciation in the area over the next five years, which I’m largely losing out on with straight-up flips. The timing just isn’t that great, though, as far as trying to juggle two purchases simultaneously.