Do you have what it takes to be a landlord?

By Liz Pulliam Weston

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."

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