I’m out to buy another rental home … It seems like a wise investment

Jen A. Miller picture

I recently walked into an empty Collingswood, N.J., home with a flashlight and camera in my hands and boots on my feet.

I wasn’t sure what to expect, but I was hoping for a deal.

The house was a short sale and had seen better days.

Ivy had grown into the basement through a window. The hot water heater was rusted through. Everything was covered in a thick layer of dirt and dust.

But the foundations were solid, the floors still new. It was close to a commuter line and active downtown. The sale price was low.

With about $10,000 of work, it could be turned into a great three-bedroom, one-bath rental home.

I put 20% of every check into my retirement account, but since maxing out my Roth IRA for the year, I've been dropping that money into a savings account instead. The reason: If I find the right place, I'm buying another rental property.

Let's be honest, stock prices have been essentially flat and incredibly volatile for more than a decade. I'm still concerned that a second recession or the mess in Europe could crash the markets again.

CDs are certainly safe and stable, but interest rates are so appallingly low that it’s impossible to make any money with them.

Real estate seems like a smart bet right now.

Mortgage rates remain near record lows, property values are still depressed and 20-somethings — either out of fear or because they’re loaded down with too much student debt — aren’t out there competing for the starter homes I’m interested in.

I'm already a landlord out of necessity.

My boyfriend and I both owned our homes, but mine was smaller and also near the Collingswood shopping district and train station. I didn't want to sell at the bottom of the market, so I rented it out.

Besides, when I bought it in 2006, I always had "rental" in the back of my mind.

It didn't take much to convert it. I replaced an aging heater, added central air and repainted the interior.

Two weeks after I listed the property on Craigslist, a lease was signed.

The experience was so good, and alternative investments so dreary, that I decided to do it again.

Now, of course, being a landlord isn't without risk. Big risk.

Houses are expensive, and renters can destroy your property.

Even though you do credit screenings and check references, there is no guarantee that renters will be respectful of your property. I've heard too many horror stories about evicting tenants and the destruction they leave in their wake.

The financial gain isn't immediate, either.

The rent covers my mortgage, taxes and insurance, with some money left over, and I get to deduct the mortgage interest on my taxes.

But most of the extra cash the house generates is needed for maintenance.

The profit will come when I eventually sell the place, which won't be for years down the road.

This is part of my retirement portfolio, not something I'm looking to flip. I'm in it for the long haul.

If you're looking to become a landlord, come with cash.

Landlord insurance is more expensive than homeowners insurance (mine jumped about 15% when I converted my property, to just under $1,000 a year).

If I buy a second rental home, I’ll be expected to put down at least 20%, and preferably 25%, of the sale price, and interest rates are slightly higher for investment properties.

I spoke to local banks about financing my purchase because they appreciate our area’s robust rental market and seem more willing to work with someone who is self-employed.

But you'll need even more liquid cash on hand to fix things that break in a rental.

I might be able to live with a broken dishwasher for a few weeks, but I can't expect my tenants to do so.

When my insurance company decided that I needed to replace part of the back deck, I didn't have a lot of time or choice to make the repair.

And if tenants are late in paying, you still have to pay the mortgage on time.

If my tenants don't stay a second year, I'll need to clean, repaint and find new tenants. That could mean a month or more when I'm covering the mortgage myself.

The need for a cash cushion is why I passed on the house with the ivy growing through the window.

I could have handled pulling the ivy, repainting the interior and exterior, replacing the hot water heater, repairing windows and hiring cleaners to give the place a thorough scrubbing.

But it also needed a new kitchen. That would have eaten up my cash cushion, so it wasn't the right property for me.

I'm still looking.