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RENTALS CATCH ON AS INVESTMENT
Published on November 9, 2002
© 2002- The Press Democrat
BYLINE: SHERI GRAVES
THE PRESS
DEMOCRAT
It may take some fancy footwork to get started, but buying rental
property continues to be one of the best ways to accumulate personal wealth,
according to area real estate brokers.
The inventory of duplexes in Sonoma County remains low.
Triplexes and fourplexes also are hard to find. But there are many condos
and single-family residences available for $350,000 or less, and they make
excellent income property.
``I don't mind being a landlord,'' said
Sheila Giovan, a real
estate agent [now with Windermere Wine Country Properties]. ``When you choose tenants carefully,
being a landlord isn't that much work.''
Giovan said she is seeing investors flee from
the stock market to invest in real estate because the returns are more
dependable.
``In one month,'' she said, ``I lost $40,000 in one
account in the stock market. Other people have lost more. It's depressing.
But it's a good reason to invest in real estate.''
There are pitfalls in real estate investing, financial
planners cautioned. Landlords need to invest time overseeing their property.
They don't have instant access to their money. Property values can fall, as
they did in Sonoma County between 1992 and 1997. Rents can fall and vacancy
rates can rise, as they have in Sonoma County this year. And investors need
to study the market carefully, to be sure the rents they hope to charge are
realistic. For example, the typical three-bedroom single family home in
Santa Rosa currently rents for $1,400 to $1,700 a month, property managers
said.
Giovan owns seven rentals in Sonoma County and
is the listing agent for a number of similar income properties. She said she
has income-property clients who have earned $500,000 or more per year by
investing in real estate.
One such client is Tom Glenn, who started buying income
property in 1978. He owns seven rental properties in Sonoma County and is in
the process of buying more in Redding.
``My first income property was a 16-unit building in
Guerneville,'' Glenn said. ``I bought it with a friend of mine.''
His experience with that property taught him that
pre-purchase inspections are very important. That property was in a flood
zone and needed a great deal of work.
``I immediately realized I was in over my head and I
sold it as fast as I could. I made a profit, though. Now I sometimes have a
general contractor go through a property before I buy it so he can give me
an idea of what to expect,'' Glenn said.
The secret to income property, according to experts, is
knowing when to buy and when to sell. Glenn said he watches the housing
market and, when values start to escalate, he buys income property. Income
property is any property that produces an income for the owner, usually
through rents, rather than being the owner's principal residence.
``There's a lag time between the increase in real
estate values in the general housing market and increases in values of
income property,'' Glenn said. ``If you can buy during that lag period, you
can turn your investment around faster.''
Now is a good time to buy, he said, but Sonoma County
has very little inventory that enters the market as income property.
``I just bought a home in Rincon Valley,'' Giovan
said. ``It was $500,000, but it has a granny unit I can rent out for $1,100
per month. In essence, that rent money will service at least $100,000 of the
debt on the property.''
There are more people who can afford this type of
property than can afford to buy apartment complexes of 16 or more units,
real estate agents agree.
``A house selling for $435,000 might rent for $2,500
per month,'' Giovan said. ``You could put down about $100,000, and
you could pull that out of the equity on your own residence. If you had an
adjustable rate mortgage, you'd have a loan of $335,000 that would be
serviced by the rent payments.''
As the property increased in value, she said, a prudent
investor might pull out some of the equity to invest in yet another rental.
``It's hard for people to do this for the first time,''
she said. ``But once they've done it, they want to keep doing it.''
For singles or young couples without children, one of
the best ways to get started in building personal wealth through income
property is to buy a duplex, live in one unit and rent out the other. A home
with a granny unit or over-the-garage apartment would accomplish the same
thing.
``I like to buy new properties,'' Giovan said,
``because they increase in value faster and have fewer maintenance and
repair problems. The $300,000 to $400,000 range is best because they
appreciate the fastest. Homes costing more than that have a slower rate of
appreciation.''
Giovan said she has experienced appreciated
value of $150,000 or more in less than four years when buying newly
constructed homes. Building equity at that rate makes it easier to continue
investing in income property.
Glenn said he likes duplexes and multiple-unit
properties. He owns a pair of ``twin'' houses separated by a carport on
Santa Rosa's Morgan Street. Purchased in 1986 and constantly occupied, the
property so far has provided sufficient income for him to invest in a duplex
and a fourplex in Ukiah.
Giovan and Glenn have some advice for those
planning on becoming landlords:
* Don't buy properties in run-down neighborhoods.
* Don't improve a property beyond the market value of
neighboring properties.
* Do buy newly constructed homes when possible,
especially those priced below $400,000.
* Plan to hold the property at least five to seven
years before selling.
* Screen tenants carefully and check all references.
* Go to the prospective tenants' existing residence to
see how they take care of the property where they have been living.
* Look at the cars of potential tenants to see how they
care for their property.
* Consider hiring a gardener to maintain the exterior
landscape, and add that cost to the rent.
* Require an additional deposit for those who have pets
or don't accept such tenants.
You can
reach Staff Writer Sheri Graves at 527-9078 or sgraves@pressdemocrat.com.
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