Carefree Landlady, Not a Slumlord

Owning and renting out properties isn't really a hobby per se, but when you take the work out of it, it's a lot more fun. I have found the formula for making good on the investment and finding good buys.

MAKING GOOD ON THE INVESTMENT

Once we step out of the Dallas metroplex, the numbers change, but I think the principles stay the same. All three of my houses are in Carrollton, a suburb of Dallas. I bought them when the interest rates were extremely low: 4.65, 5.25 and 6.25. I wanted houses in a range where the ongoing expenses were covered by the rent. For example my monthly income and expenses are as follows:

Monthly rent $ 1,100.00
Mortgage payment incl. property taxes and fees $ (950.00)
Property mgmt fee (10% of rent) $ (100.00)
Total monthly outgo $ (1,050.00)
NET INCOME (if you're lucky) $ 50.00

What we have to keep in mind is that rent rates are (1) competitive and (2) rarely increase. $1,100 - $1,200 is average for a three bedroom house and has been for YEARS in my neighborhoods. You have to buy a house with a mortgage payment plus the property manager fee coming out equal to or less than the mortgage payment. Well heck, that doesn't leave you any cash flow! Here's the catch. All of your maintenance expenses, paint, carpet, new AC unit, etc. have to come out of your pocket! You will have to put your own money (not rent money) into the house unless you own the house outright. If you lose a tenant and can't replace him immediately, that housepayment comes out of your pocket. Where you make it back is on the federal taxes at the end of the year. When I get my W-2's and fly to the store to buy Turbotax, I leap to the computer singing, "It's the Most Wonderful Time of the Year!" Here's the average scenario:

Rental Income minus property mgmt fee & mortgage ZERO!
Expenses for all three houses $ 6,000.00 (what the f....??)
Tax refund (for interest, insurance, depreciation, mgmt fee, maintenance, prop taxes) $ 7,000.00
ANNUAL NET INFLOW (if you're REALLY REALLY REALLY lucky) $ 1,000.00

I've had bad years where I spent more than $6,000 on keeping things up and making the house payments without a renter. My renters almost NEVER stay more than a year. I pay the housepayment when I have no tenant, and the property manager also gets the first month's rent when he finds a new tenant. (This is standard.) I would assume that you will pretty much break-even on the cash-flow. The way to look at it is that this is an investment that somebody else buys for you (for the most part). Where you make your money is when you sell the house. In Carrollton and Dallas in general, we have a lot of for sale signs and foreclosures. However, it's not as bad as the rest of the country. My houses each cost $100,000 to $130,000. They are all basically of equal value now, so let's assume I could sell them all for $140,000 each. I still owe $190,000. Let's do the math.

Current worth $420,000

Original closing costs ($15,000)

Outstanding Loans ($190,000)

Principals pmts by me ($ 120,000) (I accelerate my payments

TOTAL RETURN ON INVESTMENT $95,000

NOT BAD FOR SEVEN YEARS! I might well be overstating the current sales value of the houses, but this isn't off for a non-recession year. If it is a recession year, here's the rule: Don't sell the silly thing! There's no rush!

HOW TO FIND GOOD BUYS:

My property manager Karl Kennerly of Kennerly Properties is also my realtor and taught me everything I know. His wife Jean does the day to day property management and works with my tenants. I've never had a late payment or a destructive tenant. When buying a house, Karl and I drive around looking at houses that fit into the following box:

1. Buy houses under 15 years old. After that things start to need replacement, (e.g. AC).

2. Make sure the price is low enough that the payments (with taxes, insurance, and property mgmt) do NOT exceed the rent. Renters are not rich people. Their net income is usually around $40,000. Don't buy a fancy house for a rental or you will pay out of pocket every month to cover the housepayment.

3. Buy something you wouldn't mind living in. You may have to one day. All my houses would be very comfortable for my own home. And because of that (a) I easily get tenants and (2) I take a lot of pride in my properties.

4. All the houses I found had cosmetic flaws, mostly around paint and carpet. Paint and carpet are cheap, but the savings are huge. One house we looked at had trim painted aqua (which doesn't blend in ANY neighborhood.) The brick fireplace was painted white with mortar painted black. It looked like a giant spider web and it was hideous. The asking price was $145,000. Karl called the listing realtor and said, "Call me when the price comes down to $120,000." After he hung up, I said, "Karl! I would have paid more than $120,000 for this house!" He said, "She'll call back." I think they hadn't had an offer in 4-5 months. She did call back, we went back and forth, I got it for $127,500. I think I paid $3,500 to have the inside, outside painted, the fireplace stripped, and carpet where needed. It went from dog to creampuff in about two weeks and I've never had problems renting it out. Unlike other realtors we've dealt with, Karl isn't afraid of ticking off the listing agent. He handles the deal like a master. The listing agent was just happy to make the sale!

The first house I ever bought had similar problems; mostly dog stains and smells. They had no offers, no prospects, and this unloved house was a casualty of divorce. The owner wanted to unload it as quickly as possible so he could move on to wife number two. After I bought it, I had carpet people take out the carpet and pad, cover the floor with Kilz, painted the interior, and had the new carpet installed. It went from doghouse to dollhouse, and I lived in it from 1999 to 2003. This house cost me $99,000 with another $3,000 for the facelift. I've never had a problem getting a tenant in this one either.

My last house was a creampuff from day one. Karl and I were driving around looking at listed houses. We drove up on a house that we found by luck (listed for about thirty minutes. They had just put the sign out.) I made an offer that DAY and closed two weeks later. It was underpriced by about $10,000. So much of the house buying game is about timing.

OTHER TIPS AND TRICKS

1. When choosing a tenant, go strictly by the credit score and the payment history with the prior landlord. If you do so, you will never get a dead beat or a vandal.

2. Don't rent to people who receive government subsidies. As Karl put it, you don't want a $250 a month tenant in a $1,200 a month property.

3. If someone says they will smoke outside, don't believe them. It will cost you $3,000 to get the smell out. Only 15% of your prospects smoke, so no need to cater to them.

4. I told Karl the first time we rented that if it took three months to find a good tenant, I would wait. My priority was to protect the property, and I could carry the payments when necessary. Thanks to him, I've never gone more than a month, and usually the tenants are back to back.

5. I asked him long ago why someone with a good credit score would rent rather than buy. Obviously they could afford the payments! He said, " There are lots of people out there that will never come up with a downpayment." Even when mortages were being offered with no down, we never had a problem getting tenants, and never had to bend on the credit score requirement.

6. Why get a property manager?? The answer is, I can be a people person to the extent required by my day job, but in the evening and on weekends, I want to play with my hobbies. Karl and Jean manage 100 properties. They have all the tools at hand and the experience to do it smoothly and inexpensively. I live 22 miles away from my closest house. I don't want to have to get in the car and try to fix a sink, or show a house, or collect rent. I don't want a tenant to know who I am, where I live, or have my phone number. Because I am so dependent on Jean and Karl, it has to be a relationship/friendship built on trust. I know I can leave the country for six months and the houses will be completely safe and the payments will magically appear in my checking account on time, every month. Everyone I know who thinks owning property is a nightmare manage it themselves. I don't know that I couldn't do it, but I do know I'd never want to do it. Karl and Jean make it look easy. The picture above are my friends, Jean and Karl Kennerly.