Jonathan Carter

Do Your Homework

If You're Serious About Rental Property

Owning rental property seems like a "no brainer", right? Someone else's rent will cover your monthly payments and expenses, while you build equity in valuable property and gain tax advantages.

But it's not quite so simple.

If you're considering becoming a landlord, do your homework to gain a firm understanding of all the aspects involved with owning rental property.

Think it through

Indeed, becoming a landlord can be profitable, but there's no guarantee that you'll hit the jackpot. A U.S. Census Bureau survey taken a few years ago showed that 44 percent of landlords renting out small, single-family homes lost money.

It's not just deadbeat tenants who don't pay their rent that's the problem. Slow demand can result in a vacant property, and you're stuck with a second mortgage payment to pay.

Then there are the intangible concerns that include ongoing worry about how your tenants treat your property, or calls at all hours of the day and night about maintenance problems. There are management companies to handle such situations, but they'll cost you 10 to 12 percent of the monthly rent for their services.

It's do-able

With that said, if you address some key steps and be patient, you can improve your chances of becoming a successful landlord.

Know your market.
Is there a demand for rentals in your selected area? Often during a housing boom like we're experiencing, it's tough to find renters. Low interest rates and a desire to invest in options other than Wall Street have sent home sales up nation-wide. Many renters are becoming homeowners.

Check your local newspaper to see how many landlords are advertising properties and inquire about them. What are they charging? How competitive is the market? (Local rental associations can also help answer these questions). If it's a saturated market, you may want to hold off, or look at a different area.

Put yourself in renters' shoes.
You may find yourself in a potentially rich rental market. Now it's time to think like a renter. What would make a most appealing home if you were looking to rent? Where is the property located? Is it in a safe part of town? Is there adequate space, or are rooms cramped? Are there amenities like a dishwasher?

Experts recommend renting out new dwellings because the cost of upkeep---money and time---won't be as great.

Determining the rent.
Think this through thoroughly. There's quite a difference between someone renting their vacation home for a few months of the year just to help cover expenses, and someone who rents properties for a lot of money. The first situation allows for flexibility in setting prices. The second requires close attention to what you charge and what you can reasonably expect.

You must know what your rental property costs in maintenance and mortgage before you can set prices. Ideally, rental income will pay for those expenses and leave you with some extra funds for capital improvements and profits. Although there's no set formula, but some experts say 15 percent over your costs should be sufficient.

Compare the rent you need with the rental rates in your market. If you're way higher than others, you may be in trouble.

Check out potential tenants thoroughly.
The wrong people in your rental property can spell disaster. Run diligence checks: credit checks, criminal background checks and eviction histories. Groups like the National Apartment Association can help you with those, as well as other concerns small landlords must deal with.

Although most tenants are reputable, it is well worth it to do your research.

Make Uncle Sam Work for You

• Tax breaks can be substantial for rental properties. Landlords are potentially able to deduct their mortgage interest and taxes, and depreciate the dwelling over 27.5 years. They may also write off maintenance costs.
• If you lose money, you can deduct up to $25,000 in rental losses a year if your adjusted gross income does not exceed $125,000. (Individuals earning more than that have their loss write-offs phased out).
• Be aware that the tax break you can claim depends largely on how long you rent the property.
• If you want the full rental deduction, you can't personally use the property more than 14 days out of the year, or 10 percent of the time the property is rented.
• If you don't meet the criteria, the property is considered own residence and you aren't required to report any of the rental income on your taxes. However, you are not able to deduct maintenance and other operating costs.
• When you sell your rental property, you lose some tax advantages. Presently, you can claim a $250,000 capital gain exclusion ($500,000 for married couples) for primary residences, but not rentals.
• But if you sell a rental and swap it for another, paying capital gains taxes are delayed under the "like-kind exchange".

The bottom line

Rental property is like any other investment. Go slowly. Do your homework!  Let us help by contacting us today to schedule an appointment.