All Things Real Estate: Tim Jones
Q: I will be retiring from the Air Force this month after 29 years of service. My wife and I would like to invest in some residential homes to help increase our retirement income. Using my wife’s IRA and a small inheritance that I have, I think we can put a decent amount of money on two of the rental homes and maybe have a positive cash flow from the start. So with the housing market going up the way it is, we think now would be a good time to pick up some homes. My question is very general: What do we need to know and what should we look for? Although I have been a tenant many times during my career, I have never been a landlord.
A: It’s nice to see someone try to see the big picture before jumping into becoming an owner. Just to get this out of the way: I can’t advise the wisdom of investing in real estate at any given time. If I had a crystal ball, I would write this from the top of a mountain in an Italian villa. But just to refresh your memory, just over a decade ago, people were proving that you could actually lose your money shirt in real estate if you’re not careful, just as you can in any other investment.
So advance planning is essential.
There are many places to invest a retirement nest egg. But unlike most of them, owning residential real estate requires you to actively participate in your investments.
If you buy a stock, mutual fund, or CD, you can invest the money and forget about it if you want to. Not so with a rental property.
True, you might be lucky and have some tenants who pay rent on time, just need some sensible repairs here and there and act responsibly. Or you could have the other kind that lawyers see who carry out evictions day in and day out.
And remember, your stock or CD will never sue you. You do not have such confirmation from your tenant.
In other words, being the owner is not a one-size-fits-all proposition, and certainly not for everyone.
So, if you still want to venture into the real estate investing world, here are some ideas gleaned from over 25 years in the real estate industry.
When you’re shopping for rental homes, remember that homes are for renters who may not have the same appreciation for architecture and appointments as you do.
I’ve seen many amateur investors buying a “cute little Victorian” as a rental. Six months later they discovered that a bad tenant had tore up all the expensive gingerbread, destroyed the double-hung windows with ropes and a hardwood roller, and smashed the clapboard and plaster walls.
The home you buy should be simple in design, fairly modern in construction, and relatively cheap to repaint and rebuild. Flooring must be flexible. The carpet should be on the dark side to hide stains. Cabinets are best if they are paintable.
Likewise, landscaping should be simple and easy to care for. This translates to tough lawns to field in lawns, and tolerant plants.
Now you’ve purchased a home, completed any necessary repairs and are ready to find a tenant.
Unless you really want to jump into this with both feet, my strong advice is to hire a professional property management company to find a tenant and manage the property. They’ll take about 10% of the combined rent as their fee, but it’s the deal of the century.
Their job is to learn all the landlord/tenant laws in California and help you safely avoid conflict with them.
But at the very least, pay them to help you find your first couple of renters. The difference in your personal life between a good renter and a bad renter can be the difference between going on tropical vacations or going bankrupt.
Finally, even if you use a management company, get a good book on California landlord/tenant law and save it. A company in California called Nolo Press makes a few very good books for landlords.
Finally, to play this one last time. Above all, remember that you are buying an active and ongoing business and not the kind of investment that you buy and forget.
Tim Jones is a real estate attorney in Fairfield. If you have any questions related to real estate that you would like answered in this column, you can send an email to them [email protected].
