It Pays to Own

The homeownership bug bit Magda Brown when she was just 26 and sharing a $1,400-a-month apartment in Brooklyn, New York, with a friend. But her dream was not merely to have a home of her own. She wanted to create another stream of income. “My landlord owned a few buildings and I loved his lifestyle,” says Brown, now 30. “I wanted to become a landlord, too, and be able to live off of my properties.”

So in 2008, the obstetric-gynecologic nurse practitioner set out to invest in real estate. Always a serious saver, Brown had amassed approximately $60,000 to fund her vision. She’d worked three jobs while in college and banked her school refund checks. Since her mother had passed away when she was 17 and most of her family lives in South Africa, “my mentality was store, store, and store in case there is an emergency,” she says. When she started working as a registered nurse, she began regularly saving $1,000 a month in an account that had no ATM access. “I have to show up in person at the branch to take money out,” she says. “It’s one added way to make sure that money stayed in savings.”

Brown eventually found a three-family home on Craigslist.com valued at more than $600,000, but going for an asking price of $465,000 from a couple in their 60s who were anxious and ready to move to North Carolina. She managed to talk the owner into selling it for $412,000, which included closing costs, instantly giving her $200,000 in equity.

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Brown qualified for a 30-year fixed FHA loan at a 5% APR for which she only had to put down 3%. To prepare the home for renters, she used approximately $30,000 to have a gut renovation done, including replacing electrical systems, adding gas to the home, updating plumbing, and other modifications that split each unit’s utilities. Finally, she took an additional $8,000 to finish the basement, adding a heater, a washer and dryer, and making the area more presentable. She sought advice from real estate investment books, such as Real Estate Investing for Dummies, on the renovation process. “I had to fire contractors because I realized that they were wasting my time, supplies, and money,” she says. The end result: three one-bedroom units, with the topmost apartment also having an office space.

ontent-custom-banner ampforwp-incontent-ad2"> Brown settled into the bottom apartment then set out to find two tenants. Since the units weren’t the same size, she decided to charge $1,200 for one and $1,100 for the other, plus tenants pay all of their own utilities. That left only $700 for her to pay to make the $3,000 mortgage, which includes taxes. “You can’t get the space that I have in New York for $700,” she says of her 1,244-foot apartment in an up-and-coming area of Crown Heights in Brooklyn.

Rather than hiring a property manager to handle tenant issues, Brown does the work herself. Most days, there’s not much for her to do, but when she loses a tenant “it is crunch time,” she says. In those weeks, she’s running credit checks, making phone calls, and setting appointments. The rest of the time she has to make sure the property stays neat and orderly. Recognizing that tenant emergencies can come up at any time, she also has to be flexible and on call. “There are times when my tenants have been locked out,” she says. “Once I planned a whole weekend away and I couldn’t go because I was in the basement on my knees trying to figure out how to light the pilot.” She keeps extra money in a money market account for tenant and household emergencies such as a broken window or burst pipe.

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Brown’s not concerned by the fluctuations in the real estate market. Rather, she’s focusing on the long-term value of having a steady stream of rental income. “I don’t want to rely solely on a job to survive,” she says. “I want to be able to generate a comfortable living while I sleep.”

– Don’t depend on rental income. Whether you end up with a deadbeat tenant or your tenant decides not to renew his or her lease, there will be times when you’ll need to have money set aside to pay the entire mortgage amount. When calculating her monthly budget, “I imagine myself without the rental income,” Brown says. Brown’s real estate lawyer also created a prepaid contract for her to send to tenants who have not paid their rent. “It’s a warning proceeding with an eviction,” she says.

– Protect yourself. Brown requires all tenants to pay first month’s rent, security, and says she puts everything in writing. Furthermore, she advises landlords to get additional homeowners insurance to protect themselves from a fire or if someone gets hurt on the property.

- Use digital tools. When Brown was searching for her home on Craigslist.com and other property sites, she still had a licensed real estate agent check the property out. She also uses online listing services to advertise her apartments, come up with rental rates, and screen tenants. For example, E-renter.com runs credit checks and filters out those with credit scores below a designated point, and PropertyShark.com helped Brown create landlord verification forms and provided tips on apartment advertising.

– Build good tenant–landlord relationships. A happy tenant is more likely to renew his or her lease. “If they’re loyal about giving you their money every month, you need to be just as loyal if they have a splinter hanging out of their wall,” she says.
n Take advantage of tax deductions. “You can write off or itemize anything from the paper you buy to print rental applications, to repairs, renovations, and even my own utilities because I provide electricity and heat to the main landings,” she says. “Make sure to save receipts for everything.”