Am I nuts -- or not?

Question: I'm seriously thinking of purchasing a small (six-unit) apartment building in a college town. I've never been a landlord and I'm already a single father of two with a full-time job. Am I NUTS?

Here are my particulars: I'm mid-40s, good job, no debt other than a mortgage, in which I have at least $150,000 in equity. I max out contributions to my 401(k) and a Roth. My kids have a 529, along with a pre-paid tuition plan. I have enough money in (non-retirement taxable) CDs and investments to cover the large capital expenses that it would require for the up front capital to buy the place. It looks like the place should provide a cash-on-cash return of at least 6 percent with a net-positive cash flow around $12,000-$18,000 per year. And that includes a cost for a management company so I'm not plunging toilets at 3 a.m.

I've never done anything like this before, but I'm getting a "nothing ventured, nothing gained" kind of vibe. I like the idea of a stream of income that would be provided. Right now, I don't need the added income. However, it might be nice down the road to help an ease into a semi-early retirement. Thanks for any advice you can lend. Clay, College Park, MD  

Answer: Do I think you're nuts? No. Not at all. A rental property can be a good investment, depending on the purchase price, the quality of tenants, the rent you can charge and the cost of upkeep. You've already done a lot of homework, and nothing in personal finance is crazy with research and planning.

So, here are some thoughts to toss into the idea hopper as you consider the wisdom of this investment: 

When you own rental property, you're a small-business entrepreneur. It looks like you've done this, but you need to analyze this investment with an eye toward rental cash flow, the cost of maintenance and repairs, the cost of insurance, the tax benefits and liabilities, and so on. The bottom line: Is this a good business opportunity with a positive cash flow even if it takes years for the value of the property to appreciate?  

I would also take the time commitment into account. It takes time to be an entrepreneur.  You already have a lot going on between your day job and being a single father.

Grasp for the downside. Let's say you make the investment and it turns out to be a dud, or maybe you lose your job. It's important to figure out how you come out financially if the investment goes sour. It's a simple point, but I'd carefully think through the downside as well as the upside before acting on this investment.

Any landlord will tell you that the business is highly dependent on the quality of your tenants. It's a highly regulated business and landlords are sued more than any other group of business owners in the country. What is the experience in your area and with this property?

You've probably heard the real estate mantra, "Location, location, location." Well, with this endeavor I would consult, consult, consult. It's greatly underappreciated, but most entrepreneurs are generous with their knowledge and experience. They want new small-business owners to do well. Talk to landlords in your area about their experiences and go to some local landlord meetings. Maybe your "fee" can be a cup of coffee or a lunch at a favorite spot. "Most people who have difficulties as a landlord have problems for one or both of two reasons," a successful landlord emailed me a while back. "Either they have not done their homework to know what to expect, or they have decided to manage their own properties and do not like the headaches that go with having to collect rent and fix the properties." 

A good resource for additional research is Nolo.com's Every Landlord's Legal Guide by Marcia Stewart, Janet Portman and Ralph Warner.  Good luck.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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