Reply #3: Look at It on a Cash Flow Basis [View All]

Make sure there is plenty of margin between costs and rentals. I know that's simplistic, but most landlords fail because they don't have deep enough pockets to survive periods of high vacancy or major unexpected costs. Some books say you're lucky if you can cover the mortgage in the first year. I would want a bigger immediate return than that.

As far as timing goes, it depends on the market. Even if there is not a double-dip recession, any jump in interest rates will cause the markets to drop. Sometime in the next five years, I think prices will hit a point 20-25% lower than right now. Housing costs are typically 25-50% of take-home income. It's bumping against the upper limit right now.

I live in suburban Maryland, near DC, and the housing market here is overheated. I refuse to buy at these prices.

The market in working-class parts of Baltimore is different, however. There are 14,000 abandoned houses in the city and lots of people looking for a place to live. I bought three rowhouses early this year for a total of $79,000. (They each took $15-20,000 of renovations). On the first, I pay $525 for mortgage, tax, and insurance, and receive $970 in rent. I was inexperienced, slow, and sloppy, but that's is enough margin to allow for mistakes.

On the other hand, if you're going to hold for 30 years, the total of interest plus principal is more important than just the retail value. If prices drop and rates rise, you may not save any money over the life of the loan. That's why cash flow is best way to look at it.

The biggest variable may be job security in the town. If the town is dominated by a single employer in a single industry, there's a much bigger risk of mass layoffs and the bottom dropping out of the market entirely. Personally, that would be my biggest fear.

But good apartment buildings don't always come along. If you're going to be a landlord, you're much better off with multiple units than single-family houses.