Rentals income: Study up

Low mortgage rates have made buying houses more affordable and turned rentals into attractive options for investors.

"In this market, at this point, it's a sweet spot," says Chris Princis, a senior executive at financial advisory firm Brook-Hollow Financial and owner of two rental properties in Chicago. "You're getting the market where it's just starting to rebound, but still at the bottom, with what's looking to be a great recovery."

Here are tips on becoming a landlord or investor in rental property:

Understand what it means. If you elect to buy a property for the long-term investment potential, the goal should be to ensure that the rental income covers the cost of your mortgage and monthly maintenance costs.

If you buy a foreclosed home, you'll have to factor in the cost of repairs to ready the home for renting. And if you have a mortgage, you'll need to be prepared to cover the costs for however long it takes to find a tenant.

"Real estate is a great investment if people are paying their rent," says Princis. "If they're not paying their rent, it's a horrible investment." 

Buy in an area with strong demand. Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.

Condominiums and similar properties in communities with homeowners' associations can be a great option because the association arranges for upkeep on the property. But check the fine print on your mortgage and homeowners' association rules to make sure renting isn't forbidden.

If you're going to buy a foreclosure, be prepared to compete with other investors, many of them paying cash. And because many require upgrades and repairs, expect that it will take longer to generate rental income.

Foreclosure tracker RealtyTrac Inc. recently ranked U.S. metro areas with a population of 500,000 or more according to the supply of available foreclosures for sale and their discount versus other homes, among other criteria. Among the top 20 cities deemed the best places to buy: Philadelphia; Miami; Chicago; El Paso, Texas; and Poughkeepsie, N.Y.

Claire Thomas, a retiree in Phoenix who owns 10 rental condos in Las Vegas, says that landlords looking to keep their properties income-generating for many years should look into areas that are not too expensive.

"I would rather have a middle-of-the-road rental that stays rented than a higher-end" property, she says.

Consider using a management firm. Determine whether you want to select the tenant and handle property issues or hire a company to do it. If you take on the responsibility, you are obliged to fix leaky faucets, broken furnaces, etc., or find professionals to do it.

"Are you prepared to do all of this on your weekends or evenings or get calls while you're at work because a pipe burst and it's flooding?" asks Jim Warren, chief marketing officer for property management company FirstService Residential Realty. "What's that threshold worth to you?"

Property-management firms can charge a percentage of the rent, sometimes 10 percent or more.

Do the math. Although prevailing rental prices will go a long way toward determining what you can charge, start with making sure you're going to get enough rent to cover expenses and costs.

Princis' formula is charging 15 percent above monthly mortgage and maintenance costs. So if those costs add up to $1,000, he'll look to charge $1,150.

Of course, flexibility might be called for if you're unable to get a tenant in for months and months. Experts recommend starting with popular rental listings in newspapers or on websites such as Craigslist.com, Trulia, and Zillow to see what comparable apartments or rooms are going for.

Get familiar with landlord laws. Two good resources are the U.S. Department of Housing and Urban Development's website (www.hud.gov) and the Landlord Protection Agency (www.thelpa.com), which includes state-specific rental guidelines and standardized forms for rental agreements. A lawyer or the Landlord Protection Agency also can help you craft a well-written lease. It will help you evict a tenant or hold the tenant accountable for damage, if necessary.

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