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Landlording: The Buy And Hold Strategy

Buy and Hold

This is the process of becoming a landlord. While this can provide long-term wealth, it is a tricky business that requires a lot of patience.

Similar to buy and renovate, much is the same except when all the repairs are done you find a tenant, rather than a buyer.

Currently in Florida, this is a challenging business to make money in. The rising costs of property taxes from our latest appreciation run and increased property insurance from hurricanes Wilma and Katrina have Investors scrambling to other areas such as North Carolina or Tennessee.

Real Estate can be a great long-term investment. Historically, Real Estate Investor's have enjoyed average annual rates of return in the range of 9 to 10 percent.

We have all heard the saying, "They're not making anymore land!" Also, you can usually borrow 80 percent of the purchase price. I say usually because at the time of this writing, lenders are unusually gun-shy. I can't say I blame them though.

When you leverage your down payment such as you can with rentals, you earn returns not only on your down payment, but also on the banks money.

In the case of my parents, rental Real Estate appreciated in value and also provided them with rental income for living expenses. During the past ten years or so, they have sold properties to supplement my father's retirement and enjoy their retirement more fully. Make sure you check with a good accountant as to the taxation requirements when you sell.

Monthly Cash Flow

Cash flow is the amount of money that a property brings in and the amount you have to pay out for expenses. Some homeowners-turned-rental-property-owners can't cover all the costs associated with the â"now rental' property. In the worst cases, such property owners end up in personal bankruptcy from the drain of negative cash flow (that is, when expenses exceed income). In other cases, the negative cash flow hampers property owners' ability to accomplish important financial goals, such as: saving for retirement or helping with their children's college expenses.

Before you consider becoming a landlord, make some projections about what you expect your property's monthly income and expenses to be.

Tally up the Income

On the income side, determine the amount of rent you're able to charge. Look at what comparable properties currently are renting for in your local market. Check out the classified ads in your local paper(s). Speak with some leasing agents at Real Estate rental companies. Be sure to allow for some portion (around 5 percent per year) of the time for your property to be vacant - finding good tenants takes time.
Consider Your Expenses

On the expense side, you have your monthly mortgage payment. And, of course, you have property taxes. Because you probably pay them only once or twice yearly, divide the annual amount by 12 to arrive at your monthly property tax bill.

You may end up paying some or all of your renter's utility bills, such as: garbage, water, or gas. Estimate from your own usage what the monthly tab will be. Expect most utility bills to increase a bit because tenants will probably waste more when you're picking up the bill.

Don't forget repairs and maintenance. Figure that you'll spend about 1 percent of the property's value per year on maintenance, repairs, and cleaning. Again, divide by 12 to get a monthly figure.

Finding good tenants takes time and promotion. If you choose to list through them, rental brokers normally take one month's rent as their cut. If you advertise, estimate at least $100 to $200 in advertising expenses, not to mention the cost of your time in showing the property to prospective tenants. You must also plan to run credit checks on prospective tenants.

Estimate the Cash Flow

To estimate your cash flow you total all the monthly expenses and subtract that number from your estimated monthly income, allowing for vacancy and other non-payment factors.

If you have a negative cash flow, you might be okay when you factor in a rental property tax write-off known as depreciation.

You have to break down the purchase of your property between the building, which is depreciable, and land, which is not.

You can make this allocation based on the assessed value for the land and the building or on a Real Estate Appraisal. Residential property is depreciated over 27-1/2 years at a rate of 3.64 percent of the building value per year.

For example, if you buy a residential rental property for $250,000 and $175,000 of that amount is allocated to the building that allocation means that you can take $6,370 per year as a depreciation tax deduction ($175,000 x .0364).

However, if you plan to be a landlord with any significant amount of property, make sure that each property puts money in your pocket each month. I have seen it happen much too often where an Investor looks to recoup based on depreciation and then they are sitting up late nights wondering how they are going to pay their property tax bill.

These are just a few of the items to consider when considering a property for long-term rental. There are tons of books on the market and plenty of other info on websites that delve into this subject more fully.


Hope this helps,

Matt Gerchow

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