Do you have what it takes to be a landlord?

It's not exactly life on easy street. Difficult tenants, costly repairs and falling rents can eat into your profit. Here's how to know if you're up to the job Owning rental property can be a nightmare -- or a good way to steadily build wealth.
The difference between a profitable investment and a disaster, experienced landlords say, is often the amount of work an investor is willing to put in. Not everyone is cut out to screen tenants, track down overdue rents and field middle-of-the-night repair calls.
We'll discuss the details of finding good rental properties in a future column. For now, let's talk about the temperament and skills needed to be a successful landlord.
Adjust your expectations Ignore those late-night infomercials, the ones that promise huge returns with no money down. Experienced landlords agree that the upfront costs are usually higher, and the returns lower, than those promoters would have you believe.
Lenders typically expect down payments of 20% to 25% for rental property, said Bill Moore, co-founder of Landlord.com, and some lenders want as much as 40% down. Your loan will be more expensive than a typical residential mortgage, as well, because lenders believe investors are more likely to walk away from a rental than they are from their own home.
"Lenders charge interest rates that are anywhere from one to two [percentage] points more on a rental-property loan than they would on an owner-occupied home," said Moore, whose Web site provides education and information for property owners.
You do have some alternatives:
Specialty lenders. Some lenders are willing to accept smaller down payments in return for a higher interest rate.
Seller financing. Sometimes current owners are willing to be your bank. In other words, you'd make your loan payments to the person from whom you buy the property. Your interest rate and down payment may be less than if you had used a traditional lender.
Owner-occupied loans. You can usually get a less expensive loan if you're willing to live in one of your units, a technique that often helps first-time buyers qualify for bigger homes in better neighborhoods than they might otherwise be able to afford.
How big a loan can you get? Lenders usually will take into account 75% of the rent you could charge for units in determining how much they're willing to lend you, said Robert Cain, publisher of the Rental Property Reporter newsletter.
If you bought a duplex and rented each side for $1,000, for example, the lender would consider 75% of that total -- $1,500 -- in determining how much you could borrow. If you rented one side and lived in the other, $750 would be added to your monthly income to come up with the size of your loan.
Consider, but don't overweight, the tax advantages Remember, too, that you'll be getting special tax breaks. What you spend on upkeep and repairs for a rental is typically tax-deductible. You also get a break for depreciation, which is an allowance for the wear and tear over time on your property. You may even be able write off up to $25,000 in losses each year if your modified adjusted gross income is under $100,000.
But you shouldn't count on tax breaks to help you make a profit, experienced landlords caution. They typically look for properties that will rent for more than the monthly mortgage, insurance and tax payments, to ensure they have enough cash to cover needed maintenance and repairs.
You may also need to adjust your expectations about profit. A good return from rental real estate is anything more than 10% annually, and many small landlords will find they earn less, even after the property's rising value is taken into account.
Maintenance, repairs and the occasional empty unit eat into profit, landlords say. A major repair, falling rents or a costly eviction can be a disaster for your bottom line.
So far, Peter Berardi has found good tenants and hasn't had a vacancy in his two-family rental, located in a nice, tree-lined neighborhood in Hartford, Conn. But the accountant and controller for a small company says he still figures his return, including appreciation, has been about 7.5%.
"Most people keep very simple records, and think they're getting a great return" because they only look at appreciation or cash flow, Berardi said. Being an accountant, however, Berardi knows how to factor in all costs -- mortgage payments, taxes, insurance, maintenance and repairs among them.
Still, Berardi, 41, says he's happy with his investment, which he expects to help support him in his later years. Once the property is paid off, most of the rent can be used to supplement his income.
"I'm setting myself up for a good retirement," Berardi said.
Find good tenants Not everyone is so delighted with being a landlord.
Scott and his wife bought a duplex in Lakewood, a suburb of Cleveland. Strapped for cash, they rented the upper unit to the first couple who showed up on their doorstep.
"We knew we probably should [run a credit check]," Scott said, "but we needed the rent money to pay the mortgage."The couple turned out to be the tenants from hell. When the husband wasn't punching the wife, he was punching holes in the walls with his fist or an ax. The couple sold drugs, stole Scott's tools and had screaming arguments in the middle of the night -- right over the heads of Scott's two children. They also stopped paying rent.
The tenants were eventually evicted, but so were Scott and his family. They had fallen so far behind in their mortgage payments that the lender foreclosed.
"Now, when anyone talks about being a landlord, I say, 'Don't do it,' " Scott said. "It's just not worth it."
Other landlords say such disasters can be prevented by putting in more work up front.
"The key is screen, screen, screen," Carolyn, a landlord in Houston, wrote recently on the Start Investing Community. "Verify references, ask questions."
In addition to running credit checks, Carolyn calls previous landlords to ask whether the tenants paid their rents on time and kept their apartments clean. She believes such diligence is one reason she's only had to evict once in seven years.
Credit checks can be done for less than $10, said Cain, who offers such a service on his Web site. A more complete report, which includes a public records search for lawsuits, previous evictions and criminal convictions, can be had from tenant-screening companies for about $20. Cain takes the extra step of making sure the phone numbers applicants list for their employers and previous landlords actually match the publicly listed numbers. That can help ensure the applicant isn't simply directing him to a friend who's been instructed to provide a phony reference.
Cain, who currently owns six rental properties, said he's never had an eviction in nearly 20 years of being a landlord. He's convinced the difference between profit and loss is such advance screening.
"I always tell people there are only two times a landlord gets into trouble," Cain said. "When he's in a hurry, or when he feels sorry for someone."
You can, of course, hire a property manager to do all this for you. The manager can also handle the repairs, tenant disputes, midnight move-outs and neighbor complaints, all for a flat fee or a portion of each month's rent. Some landlords have had good experiences with property managers, while others feel that no one cares as much about their investment as they do.
Such an arrangement also can eat up 10% of your rental income, which could consume much of your profit, depending on the property.
Get your hands dirty Indeed, the more tasks you hire other people to do for you, landlords say, the less you'll earn from your investment.
Berardi said his returns would probably be higher if he didn't need to pay professionals to do most of the work around his rental, other than cutting the lawn.
"But I'm just not handy," he confessed.
Mike, a landlord in Orange County, Florida, is just the opposite. Mike paid $15,000 for his first rental in 1993, a shabby three-bedroom townhouse desperately in need of repairs. The rental income more than covered his costs, and he sold the property this year for $98,000.
Mike estimates he did 90% of the fix-ups himself, using skills he learned as a volunteer for Habitat for Humanity, which builds houses for the poor.
"I would advise people considering buying rentals to try this to learn what really goes into building a house," Mike wrote in an e-mail interview. "So when you have a repair job, you can make an educated decision if you can do the repair yourself."
Get educated If you're still interested in being a landlord, you have one more task ahead: learning the landlord-tenant laws in your area. Potential landlords should educate themselves thoroughly on their rights and responsibilities, Cain said, exercising particular caution when it comes to rental agreements.
A poorly worded or outdated form, for example, can make getting rid of a problem tenant expensive, if not impossible.
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Preferred format:HTMLPlain TextLearn more about newsletters"Professional bad tenants know the law . . . and landlords can be so stupid," Cain railed. "They won't spend 50 cents for a new form but they'll spend $2,000 for an eviction."
Local landlord associations can provide up-to-date forms, education and legal help. Other resources are available at the Small Property Owners of America Web site.