By Robert Bruss
Tribune Media Services Writer

I'll never forget the day I was enjoying breakfast at the coffee shop counter of Caesar's Palace at Lake Tahoe. An older gentleman seated next to me, dressed in a business suit, asked if I was there for the real estate conference. I said I was. So was he. Then I asked him what aspect of real estate he was in. "Rental houses," he replied. "Would you like to see them?" he quickly added.

Not knowing what to expect, I watched as my new friend pulled out photos of all his rental houses from his coat pockets. He owned several hundred of them around High Point, N.C., where he was a furniture salesman. And he wanted to show me photos each one.

Fortunately, the conference was about to start, so we finished breakfast and went to the first session. Later at that same meeting, I met a man from Norfolk, Va., who owns over 900 rental houses. I soon learned owning rental houses is big business.

Why own rental houses?

As the owner of rental houses that have proved to be excellent investments, I'm always interested in learning more about them. With the real estate market escalating in most towns and the favorable 1997 Tax Act capital gains rules on the books, rental houses are regaining investment popularity.

The major rental house advantages include appreciating market values, depreciation income tax shelter deductions, leverage, cash flow and resale profits.

But there's a dirty four-letter word involved with rental houses. It's W-O R-K. There's work finding each rental house, acquiring it, fixing it up and renting it. But if it's done right, managing rental houses isn't hard work, as those investors I met who own hundreds of houses demonstrated to me.

What to look for

My St. Louis friend, Mike, often example, his latest acquisition is a sound, well-located, brick, four bedroom probate-sale house he bought in a good neighborhood for $35,000. It needed about $8,000 of fix-up work, such as stripping off the old-fashioned wallpaper, complete painting, removing the wall-to-wall carpet to expose the beautiful hardwood floors, and kitchen repairs. His bank appraised it at $72,000. It rents for $800 per month.

That's fantastically high rent; most rental houses rent for less than 1 percent per month of their market value.

Incidentally, Mike makes his tenants supply their own appliances. He says they make the best tenants if they bring their stove and refrigerator.

Of course, rental house prices in other parts of the country are much higher. But the basic principles for buying rental houses are the same everywhere:

• Good location. Stay away from high crime or slum areas because the potential for market value appreciation is low there. Also, avoid high income neighborhoods, because rents aren't high enough in relation to house market values. Top quality school districts add to the profit potential.
• Sound condition but needing cosmetic fix-up. If the house is in tip-top condition, it will be hard to buy at a bargain price at least 25 percent below fixed-up market value. Paint, carpets, landscaping, cleaning and the installation of new light fixtures are inexpensive, cosmetic improvements that often add $2 of market value for each $1 spent. However, avoid houses needing expensive improvements, such as a new roof, foundation repairs, plumbing, wiring and structural work.
• Motivated seller who offers reasonable price and terms. I've found the best houses to buy for rentals are those being sold at reasonable prices by retirees who need retirement income. They often own the house free and clear, enabling them to offer easy financing by carrying back the first mortgage for retirement income.

How to protect yourself

The best bargains are often foreclosures and distressed properties. Some are in the local multiple listing service but haven't sold because they need repair.

Don't be afraid to make a low purchase offer on listings that have been for sale over 60 days. The seller is probably getting anxious and will listen to any reasonable offer.

However, be sure your purchase offer contains a contingency for a professional inspection with a five-day deadline. After the offer is accepted by the seller, be sure to accompany the inspector to discuss any undisclosed defects discovered. What often looks like a serious problem can frequently be corrected inexpensively.

Estimate profits before purchase

The long-term trend of home values is always up. But there are severe peaks and valleys along the way. Even if you plan to keep the rental house for many years, it pays to estimate the resale profits before purchase.

If the invested dollars will be too great in relation to the potential profit, keep looking. Further details are in my special report "Today's Best Real Estate Opportunities: Fixer-Upper Houses and Investment Properties" available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010. Credit card orders are welcome at (800) 736-1736.