The Pros and Cons of Rental-Property Management

Posted: Oct 17, 2008 12:01 AM
The Pros and Cons of Rental-Property Management

DEAR BRUCE: You have said that when your rental properties are paid for, you should sell them. You have also said that single-family rentals are generally poor investments. Why? -- Reader, via e-mail

DEAR READER: I think that you have paraphrased me with a slight error. What I have said is that, if you are a professional real-estate investor, you shouldn't "own the property." You should have as large a mortgage as possible, reinvesting this capital in yet more rental properties. When your actual ownership exceeds 30 percent or 35 percent, in my opinion, it is unwise to continue with this much equity. You are far better off to refinance it and leverage the same amount of money into controlling much more real estate. The professional investor usually follows this plan.

As to the single-family homes, more often than not, they will bring more on the marketplace in terms of price than a rental can justify. Often, a house that sells for $100,000 can be rented for $700 to $800 a month. Clearly, this is not enough. There are those exceptions to the rule when that same $100,000 house might rent for $1,300 a month, but they are rare indeed. Generally speaking, multiple dwellings are far better investments for rental purposes.

DEAR BRUCE: I'm considering buying a condominium in Florida as a rental property. Do you have a formula that you use to determine whether the income is decent? For example, if I paid $200,000 for a house, what would be the minimum income that I should expect to make it a good deal? -- S.R. in South Carolina

DEAR S.R.: I would look for a minimum return on any rental property of 1 percent a month of the property's value. I would be far more comfortable with 1.3 percent or 1.4 percent. You might observe that this is difficult to achieve, and I would not disagree. But difficult is not impossible and in looking around and carefully surveying a marketplace, you will find that the return of 1.3 percent or 1.4 percent is achievable. It does, however, require effort.

DEAR BRUCE: I am $90,000 in debt. I don't want to go through bankruptcy if I can avoid it. I was wondering what you think about the legitimacy of debt-counseling services? -- Kim, via e-mail

DEAR KIM: Unfortunately, you didn't mention your income. Unless you have a substantial income, I suspect that the only way out is some form of bankruptcy. A debt of $90,000 per individual is an exorbitant sum. How in the world did you get that far in hock?

DEAR BRUCE: I recently paid off the mortgage on my home. The mortgage was purchased from the private individual who financed the entire transaction. How do I file the cleared title? -- Reader, via e-mail

DEAR READER: If the individual were acting as the mortgage company, he would be holding the appropriate releases. Check with him. If he can't figure it out, you might have to hire an attorney to sort it out. Congratulations on being debt-free.