December 2004  Email this  Print this
 License or reprint this article
REAL ESTATE
21st-Century Landlords
by Jeffrey R. Kosnett
Fresh out of grad school in 1998, Keith Colacioppo moved back home with his parents in the Bronx to save money. He lived frugally and opened a 401(k) retirement account at work. But Colacioppo wanted to do more to cut his taxes and kick his savings into high gear. "My accountant kept telling me it was time to buy real estate -- buy, buy, buy," says Colacioppo. So he did. His motives, and success, explain the surging interest in buying rental real estate. For several years, Colacioppo scoured the Bronx for just the right property -- not to live in, but as an investment that would produce more in rental income than it would cost in expenses, and that he could hold for long-term appreciation. But it turned out to be easier to find a job than to find a suitable property in good condition. Colacioppo looked at more than a hundred houses, and "most of what I saw was overpriced garbage," he says.
Finally, in 2001, a neighbor gave him a tip that the owner of a 50-year-old, two-family house wanted to sell and move back to Italy. Keith made a private offer of $315,000, agreed to wait for the owner to leave, and closed in June 2002. The duplex has a 600-square-foot, one-bedroom apartment on the ground floor, plus a 1,000-square-foot, two-bedroom unit upstairs. His instincts paid off. Both apartments were clean and livable and have been occupied almost continuously. His mortgage, insurance and taxes total $1,700 a month, and his apartments rent for $900 and $1,300, plus $175 for both parking spaces.
In all, says Colacioppo, he ends up hundreds of dollars ahead each month, unless he has an unusual expense, such as a high gas-heating bill during the winter. He uses some of the income to improve the fixer-upper he and his wife, Kim, bought to live in themselves last year in White Plains, N.Y.
Colacioppo, now 29 and a chemical engineer at a Procter & Gamble facility in nearby Connecticut, lives about 20 minutes from his rental property. His proximity, and the fact that he does the routine maintenance himself, hold down his expenses. When he does hire contractors -- as he did recently to rebuild the concrete porch steps -- the workers "immediately want to make me an offer for the house." He's had unsolicited bids as high as $440,000. The offers tell Colacioppo that his property has appreciated as much as 40% in two years, at least in the minds of prospective buyers.
One-two punch
The one-two punch of positive cash flow plus future appreciation is a powerful lure for small-scale real estate tycoons -- especially with the stock market stuck in a rut. Owning a rental property also gives you more control over your investment than with stocks and bonds. After all, if you buy a property, upgrade and maintain it, and find trustworthy tenants who won't trash the place -- or move if you raise the rent -- you can profit by your own hand.
And it's true that real estate appreciates steadily. In the U.S., the average price of a single-family home has risen an average of 7.3% each year over the past five years, and 5.5% over the past decade. Despite significant appreciation over the past few years, home prices nationwide jumped 9.4% over the 12 months ended June 30. The last time home prices fell nationally was during the fourth quarter in 1994, and that was by just 0.25%.
But national statistics obscure local bubbles and busts. In some areas, prices have shot up so high that a decline is inevitable. Cities such as Las Vegas, Miami, San Diego, Riverside/San Bernardino, Cal., and Fort Lauderdale, Fla., are particularly vulnerable. At the same time, house prices in other parts of the country, such as Wichita, Kan., and Youngstown, Ohio, have barely budged in five years.
Even when house prices are on the way up, rents don't rise in lock step. Rental charges in the U.S. are up an average of 4.8% a year over the past five years and 3.4% over the past decade. Nationwide, the vacancy rate stands at 10.2%, its highest level since 1960. With mortgage money cheap and home prices surging, more households are scrambling and stretching to buy a house, and rising vacancy rates give renters an edge.
1
2 3 4 NEXT 
|
|
MAGAZINE
