Survival Guide for the Part-time Landlord

How to make the most on your real estate investment.

Sharon dabbles in real estate, with an apartment in Netanya and several more in Kiryat Gat. But he currently lives in the country's central region, some distance from his investment properties. Finding tenants, making necessary repairs, and collecting overdue rent are just some of the things with which he deals on a regular basis. There are also other, less typical problems he comes across as a landlord.

Lat year the police summoned Sharon for questioning, claiming some of his tenants had turned their apartment into a drug den. The tenant of another unit, a cleaning woman, began putting off rent payments after being fired at work. Sharon thought she'd eventually pay and didn't press the issue, but after five months he ran out of patience. He went to the apartment and found it occupied by the tenant's friend, who told him the tenant "left for Russia last week and won't be coming back." Sharon was left with months of uncollectible rent and unpaid bills.

The tenant of a Holon apartment owned by Rachuma missed two rent payments. One day he showed up at Rachuma's store, left her a pile of 20 economics books and apologized, explaining that was all he could give her for rent; then he got in his car and drove away.

Had Sharon and Rachuma conducted more thorough background checks they might have saved themselves money and headaches.

Costs up, investments down

Investors have begun leaving the market lately. Their share in overall home purchases dropped to 23% in the first quarter, according to the State Revenue Administration, the lowest since 2003.

There are several reasons investors have been hightailing it en masse from the housing market in the past two years: First and foremost is simply because of the rise in housing costs, even in the outlying regions. The hike has drastically lowered the return on investment that buying a house can generate. Potential investors are also fearful that values will drop in the near future, and result in financial losses.

Other factors that play a role are rising interest rates and higher purchase taxes on homes bought for investment - both of which raise the property costs that investors must bear. The final blow to the market was the Betterment Tax exemption, which is to be granted to investors who sell one or two homes by the end of this year. Those who take advantage of this exemption can end up saving tens of thousands of shekels. The greatest investor flight has been witnessed in Haifa and Be'er Sheva, where owners have been selling due to particularly hot real estate markets in those cities.

That unwanted feeling is intentional

It isn't coincidental that investors who sell are given tax breaks while those entering the market are being hit with a tax hike, and Israel's small-time landlords rightly feel unwanted by the government. In the belief that the tide of investors in 2009 and 2010 was one of the main factors underpinning the surge in prices during that period, government policy became geared toward piling up obstacles to restrain those investors' activities and push them out of the market.

But for many, property investments still represent the greater part of their savings, despite the difficulties and the inducements to drop out of the market. They find the stock market too dizzying and bank rates too low, and believe property prices will rise over the long haul despite some bumps along the way. Others hold on to old homes they inherited and enjoy the steady additional monthly income. Moreover, the shrinking number of investors has helped buoy up rental prices.

Increasing your ROI

How can an investment in the rental market be improved, and some of the problems that Sharon and Rachuma faced be avoided? Here is a brief guide for investors during this period of falling returns.

The major aspects to renting out homes are setting it up and adapting it to the tenant; understanding market prices; signing a suitable contract; and, more important than anything else, finding reliable tenants.

"The most important thing when renting out a property is the renter, and good instincts need to be developed here," says attorney Boaz Edelstein of Goldman, Erlich, Gaver, Edelstein & Co. "You need to ask questions like where the renter works, request to see pay slips, and get information about the employer and about how long the renter has worked for that employer. It is worthwhile independently verifying the information with the employer."

After finding a reliable renter, the next step is to rent out the property according to its market value. Here it is worth improving the value of a home through small renovations to the kitchen and bathroom like resurfacing, and ridding the place of old-looking furniture.

"Many investors think scrimping on expenses raises profitability, but sometimes an investment must be made to receive a better return on the property," says Bernard Raskin, CEO of the Re/Max Israel brokerage chain. "The added rent income needs to be compared with the investment. If air conditioners are installed in the apartment for NIS 5,000, and NIS 300 or NIS 400 more a month can be charged, then it's worth it. This could be quite significant in the lowlands and southern region."

Sometimes it's worth adapting the property to the renter. Avi Hayoun, the Re/Max Plus franchisee in Be'er Sheva, notes, for example, that students like LCD displays in their rooms, so it may be worthwhile to buy one in an area where students live. "Study corners, closets, and simple renovations attract more students," he says. "If they're comfortable in the apartment they'll stay throughout their course of studies. That way the investor can reduce the risk that the apartment will sit empty."

"In apartments aimed at young people or students it is worthwhile offering appliances and closets," says Dror Aloni, the director of the Anglo-Saxon branch in Haifa. "This will help in renting out the apartment quickly and at a higher price. The same goes for adding a solar water heater, modern electricity that includes a safety circuit breaker, and even changing the toilet seat for NIS 100, which will give a property the sense of renewal and being well-maintained."

But if furniture and other things have been left in the apartment, the owner should specify in the contract that these remain. There have been cases of renters making off with items in the apartment that do not belong to them. One owner describes how, just before vacating the apartment, one troublesome tenant ripped out the sink.

It's all a matter of price

How should the rental price be determined? Like everything else, you start by surveying the market, says Raskin. "The price asked shouldn't be too low, but neither should it be too high. The most common and costliest mistake is actually asking too much, sticking to the amount, and wasting precious time. Every month the unit remains vacant lowers the annual return by 8%. A two-month delay wipes out 16% and, by the time a decision is finally made to compromise a bit, nearly a fifth of the annual income has been decimated.

"It is worth connecting with local realtors and pumping them for information on prices in the area," continues Raskin. "Comparing prices listed on the internet is often not enough, since one apartment isn't necessarily like another - particularly in places like Tel Aviv where the variety can be diverse. The bottom line is that having a good tenant is worth more than setting a high price. It's better to compromise by NIS 200 a month and find someone who won't whine about every little thing, especially if the unit is far from where the owner lives."

The best time to rent out a home is during the summer months, moving season for families and students. So even if the contract starts in the middle of the year, it is worthwhile extending it until the following summer and shortening the time needed to find a new tenant.

What is the optimal way to market a home and suffer the least headaches? "Set a specific day of the week and a specific hour to show the unit, like Friday, 10 A.M.," says Tomer Bohbot, an Anglo-Saxon real estate agent in Be'er Sheva. "Having a number of potential renters together can create the feeling that the apartment should be snapped up. In any case tenants should be asked for permission to show the apartment several months before their lease runs out."

Protect your interests

After choosing a tenant and deciding the price, the next stage is the lease, which should protect your interests. "It is important for new landlords to have a lawyer look over the contract. Don't scrimp on this," says Edelstein. "More seasoned landlords can get away with making modifications to a contract prepared for them in the past. "One of the most important things in a lease is security to guarantee rent payments," he adds. "But there are different types that can be insisted on. A bank guarantee is the best of all since it releases the landlord from the risk of non-payment: The landlord receives a bank guarantee from the tenant totaling three to six months rent, allowing the landlord to collect the guaranteed amount until a certain date." This alternative is less popular among tenants, however, and it involves a fee.

Another possibility is a promissory note with guarantors whose pay stubs can also be checked. In this case collecting the debt requires going through the bailiff's office. "Predated checks covering rent payments need to be taken," says Edelstein. "It is also worthwhile demanding open checks made out to the municipality and other bill issuers like the Israel Electric Corporation and water supply for paying the tenant's debts, with guarantors signing on the checks."

Before signing the lease it is a good idea to film the apartment as proof of its physical condition in case of damage, photograph the electric meters, and insure the apartment - including repairs. The municipality should be notified of the tenant's identity so that if he owes taxes when leaving he'll be directly liable. Otherwise city hall can claim any unpaid taxes from the owner.

What happens if the tenant refuses to vacate and doesn't pay? "The way to deal with this is through the bailiff's office," says Edelstein. "Nowadays, as opposed to in the past, it takes the bailiff six months to evict a tenant. It took much longer four years ago."

Tips to turning your real estate investment into profit

1. Make home repairs, get rid of old stuff, and do some minor renovating.

2. Do a market survey for prices among real estate agents, don't insist on rent that is too much above market value.

3. Schedule an open house to show the home efficiently and as a marketing ploy.

4. Learn what you can about the renter, check employment background, and speak to the employer.

5. Sign a lease through a lawyer and make sure to get good guarantees.

6. Photograph the apartment before the tenant moves in so a claim can be filed in case repairs are needed later.

7. Try to end the lease during the summer.