If you don’t shirk away from hard work, have a good head for business, and are ready to fix broken toilets any hour of the night, you just might have what it takes to be a landlord. It can be a lucrative business, but there are pitfalls.
May 2, 2018 12:56 PM EDT
Harold Brown had tried his hand at engineering and running his own doughnut shops. A veteran of World War II and Korea, Brown came back to his hometown of Brookline, Mass. in 1952 with aims of trying his hand at a new business: Landlord. He bought a 6-unit building on Commonwealth Avenue, subdivided it into 12 apartments. The rest is history. Mostly eschewing luxury apartments in favor of units targeted at the middle of the market, Brown, now in his 90s, weathered boom times and recessions alike to build and buy a rental portfolio valued today at $1.7 billion.
While stories like Brown’s are unusual, the apartment business has more rags-to-riches stories than one might suspect. Unlike starting a tech company or a small manufacturing firm, the business of buying up apartments and renting them out is relatively simple. Developing your own buildings is a bit more complicated, but once the building is up, the business is the same. Certainly, rising rents and demand for rentals across the country – and especially in major metro markets like Boston, New York, Chicago and San Francisco — can make being a landlord a potentially lucrative profession. After slowing a bit through mid-2017, the pace at which rents are increasing is on the rise again, up 2.7% across the U.S. over the past year through the end of March. “Rental appreciation slowed between 2015 and mid-2017, but is once again picking up steam, reaccelerating over the past nine months,” said Zillow Senior Economist Aaron Terrazas, in a press release. Before you plunge in, here are some things to consider:
Buy now or wait until a downturn: Watching rents go wild, it can be tempting to daydream of buying a couple apartments or even a small building and watch the money flow in. But there’s a catch: Those high rents have driven up the price of what are known as multifamily properties, everything from a house with two or three apartments to more substantial buildings. Sure, home prices have more than doubled since 1998. But multifamily values have tripled, according to the Urban Institute. You’ll be essentially buying at the top of the market, with the threat that an economic downturn and decline in rents could undercut your plans. Alternatively, you save up now, wait until the next recession, and swoop in to buy apartments on the cheap. In the aftermath of the Great Recession, triple-deckers in some Boston neighborhoods were going for as little as $50,000 or less. That can be a great model for success but you’ll have to have the cash and credit reserves and patience to wait things out until the market finally rebounds and rents come back. There is no perfect time to become a landlord – boom times and recessions each come with their own set of risks and rewards.
Are you handy? To make a go of it as a landlord, you’ll have to be ready to spring to action any time of day or night if one of your tenants calls with a problem. If you’re the fix-it type, the man or woman who knows just what to do when a faucet gets leaky, the toilet backs, or the furnace breaks down, you’ll have met one of the big, make-or-break qualifications for becoming a landlord. If not, don’t despair, there’s help for you in the form of a rental management company, though they could demand as much as 5% to 10% of your revenue coming in. If you are buying just one or two apartments, that probably wouldn’t make much sense. Even if you are handy, you’ll need a capable local plumber, electrician, and HVAC specialist on speed dial should you face a serious repair issue beyond your skills.
Know your city and state rental laws: Before you put up a “For Rent” sign and go on the hunt for tenants, you had better read up on your local and state housing regulations. These rules can govern everything from how much you can increase the rent to what you need to do to keep your apartments from running into problems with the local health inspector. You don’t ever want to be in a situation where a renter knows the ins and outs of your local housing ordinances better than you do. If it comes to a dispute over a repair or some other issue and your tenant withholds rent, you could find yourself in a pickle, unable to evict until the case is resolved in housing court.
Best markets to become a landlord in: The best markets to buy apartments in are not necessarily the ones you would first think of. Boston, San Francisco, and New York have some of the highest rents in the country. But after years of relentless rent increases and explosion of new luxury units hitting the market, the market is starting to flatten out, with New York barely moving up at .5% over the past year, and with Boston and San Francisco, at 1.2% and 1.9%, respectively, posting below-market gains, according to Zillow. By contrast, a 1 bedroom in Sacramento jumped 8%, to a median rent of $1,849, with Riverside notching a 6.7% increase to $1,872. Other fast-growing markets include: Atlanta, up 4.4% to $1,394; Seattle, 4.9% to $2,204; Minneapolis, up 4.5% to $1,639; and Phoenix, up 4% to $1,360. (These are aggregate numbers that combine all units in an area, regardless of how many bedrooms or type, as in luxury or not.)
Don’t cut too many corners: Buying and renting out apartments can be a very lucrative business if you can master the mechanics of it. But once you get on a roll, there’s always the temptation to cut corners. While that might work in the short term, a bad incident can tar your reputation and make you a target for city housing inspectors. One local landlord had a glowing feature appear in the local paper the same day a deck collapsed on a building he owned units in. While he blamed the management company, who in turn blamed him, the public relations damage was done