This week, there’s a story in Newsweek called “The Accidental Slumlord.” It’s a six-page story from the Boston-based reporter Daniel McGinn, talking about how he, as a fairly ordinary Joe, meets the tenants of his $62,000 investment property in Pocatello, Idaho, for the first time.
I would recommend that anyone considering investing in property read it, especially if you’re an ordinary Joe or Jane and you’re not sure what you’re getting into by being a landlord. Keep in mind that this guy is not Carleton Sheets -– he’s not going to extol the joys of property investment just so he can sell you a $99 CD. Rather, he’s a middle-class Bostonian who bought a scruffy duplex 2,500 miles from his house because he wanted that experience of surfing the real-estate boom. Sure, he got a book out of it (the wonderful “House Lust,” which I had the honor to blurb), but now he’s got to deal with late rent checks and old linoleum, just like any other property owner.
So here, courtesy of my recent interview with McGinn, are some tips from a sadder-but-wiser landlord:
- Buy nearby. “Back when I bought the property for $62,000 in 2006, I couldn’t have afforded anything within driving distance of my house,” notes McGinn. “But if something were to go horribly wrong, and I’d have to get on a plane -– that’s three or four months’ rent! If I were to buy now, I would get something within driving distance of my house.”
- Think about the next buyer. “The realtor had recommended to me to buy something nicer [and therefore, more expensive]. If I had bought something nicer, there would be the possibility of selling to an owner-occupant now. And it might have been newer, so there would have been fewer maintenace headaches.”
- Hire a great property manager. “My first property manager … it turns out that she’d been collecting the rent in cash, skimming the cash, and sending the money late, or not at all. The property manager I have now, the one the realtor recommended to me, he’s done a fabulous job. I know he really earns his keep, and having him insulates me from the property’s day-to-day problems.”
- Buy for cash flow, and hold long-term. If McGinn had bought a condo in Vegas hoping that prices would go up, he’d be cooked. However, he bought a property in a less-glamorous area because it had good cash flow. “When these things work, you are paying off the mortgage, getting decent cash flow, and on paper losing money and getting a tax break, which is pretty fantastic,” notes McGinn. However, for a cash-flow strategy to work, an investor also has to have the resources to buy and hold. McGinn’s Newsweek story points out that if he had to sell the duplex now, he’d list at $50,000 -– and after transaction costs, suffer a loss of $18,000. It’s the ability to hold onto the property for decades that will make this one a steadily producing investment.
