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When Linda Graves, a design engineer at Ameritech, purchased her two-family brick home in 1992, she was planning for her golden years. Just 43 at the time, she had already raised two sons and had begun thinking about retirement from the large Midwestern telecommunications company. She figured that she could use the rental income from the first-floor apartment to pay off her mortgage. So far, everything is going according to plan.
Graves (no relation to Earl Graves, publisher of black enterprise), who lives in Shaker Heights, a prosperous suburb of Cleveland, has had good fortune in renting her apartment. For one thing, she’s located near University Circle — the bustling district that is home to such cultural, medical and educational institutions as the Cleveland Clinic and Case Western Reserve. "I’ve gotten a lot of professional people," says Graves, who now rents to a couple who are fellows at a local hospital. To gain advice, contacts and tenant referrals, she regularly attends seminars conducted by the Shaker Heights Housing Department.
Her current status is vastly different from that during her days as a novice landlord just five years ago. In 1994, she bought and managed a four-unit investment property in nearby Cleveland with disastrous results. "I got all the rent from all four units once," she reflects. "After that, if I got rent from two tenants in one month, I considered myself lucky."
Her plan was to collect $1,000 in rent from her tenants, use $600 for mortgage payments and expenses, and pocket the rest. But Graves usually ended up footing the mortgage payments. "I said to myself, ‘This is not going to work.’" Within a year, she sold the building.
Graves is not alone. A Census Bureau survey of the owners and managers of rental properties shows that roughly 28% of owners of multiple-family properties with fewer than five units lost money in 1994. And nearly 45% of the owners of single-family properties lost money or barely broke even.
Clearly, you don’t become a landlord just because you enjoy early morning calls about leaky faucets and faulty heating systems. Asserts the battle-scarred Graves: "You should go into it expecting to get an income. That’s why it’s called rental income."
Experts agree. "Many people buy property because their gut tells them it’s a good investment," says John Baiardi, a tax partner at Mitchell & Titus, a New York-based accounting firm. That’s not enough. As with any other business, you have to have a plan. Owning rental properties can be a profitable investment, offering steady income and property appreciation. But don’t underestimate the risks — if you aren’t prepared, you might end up shoveling dollars down a money pit. Here’s what you need to know about purchasing and managing residential rental property for prosperity — not pain.
FINDING THE RIGHT PROPERTY
It’s an old cliché, but the top three considerations in buying rental property are the same as in spotting a place of