Rules For Buying Rental Properties:
The difference between a profitable rental property and a disaster, according to seasoned landlords, is how much work an investor is prepared to put in. Buyers of rental homes must select properties that provide a positive cash flow, which includes more than just the rent covering the mortgage payment. It is a mistake for someone purchasing rental properties to believe that they can deal with negative cash flow by waiting for the property's value to rise and then "flipping" it for profit. Just ask those who purchased a home in 2007 and attempted to sell it in 2008 or 2009.
The three biggest mistakes people make when owning rental properties are underestimating expenses, expecting to get rich quickly with no money down, and not screening potential tenants.
The first big blunder is underestimating the cost. To be safe, assume that 40 to 60 percent of the rental income will be spent on items like insurance, taxes, vacancies, and damages on a monthly basis (depending on whether you hire someone to manage the property). What accounts for such a high percentage? A big repair, such as a new roof or furnace, might put you in a lot of trouble. Finding out what rents go for around your property and dividing that by 0.01 is one technique to determine out how much you should pay for a rental property. That means you should spend no more than $100,000 for a house that rents for $1,000 per month.
The second big blunder is believing the infomercials that promise "no money down, fast riches." Those people in advertisements who live on a yacht after purchasing rental houses with no money down have no connection to reality. Renting out a home is more of a business than a passive investment that you can sit back and watch develop. If you want to manage the property yourself, be ready for your phone to ring at any time and to deal with any burst pipes or damaged windows that your tenants report. Expect to pay roughly 10% of the total monthly rent if you employ someone to handle the property for you.
The third big blunder is neglecting to screen incoming tenants. Prepare to pay a lot of money if you're in a rush to rent a home out or if you feel sorry for someone. Credit checks might cost anything from $10 to $20. Verifying references may seem inconvenient, but it is necessary. It's time well spent contacting prior landlords to inquire about their rent payment history, cleanliness, and damage to rental apartments.
Take the time to learn the landlord-tenant regulations in your area, even if you employ someone to manage the property for you. You can be sure that the "professional bad tenants" are well-versed in the law. Just keep in mind that while legal documents may be inexpensive and time-consuming to complete, the time and money spent on an eviction is significantly more costly and time-consuming.
Purchasing rental homes, like any other investment, can be a good or bad decision. When it comes to assessing expenses and cash flow, there are a few general guidelines to follow. You'll also need to be able to assess rents in the area you're interested in, not just the rents at a specific address. You'll need to learn how to evaluate capital investments and determine whether or not a major repair on a home you're interested in purchasing is a deal-breaker. Buying rental properties can be a rewarding method to supplement or even replace your primary income if you go into it with your eyes open and don't believe the infomercial hype of no money down and immediate wealth.
Rental Property Tax Benefits:
People who own residential rental units are eligible for a variety of tax breaks. You are able to deduct rental expenses from your rental revenue. If you own rental property, it's vital that you understand the tax benefits available to you so you can protect your income and reduce your tax liability.
If you own rental property, the IRS allows you to claim the following deductions on your tax return:
Mortgage Interest - The interest you pay on your rental property's mortgage payment is deductible.
Depreciation - You can depreciate your rental property by claiming a portion of the cost on your annual tax return. According to the IRS, you must depreciate the residential property over a period of 27.5 years. Prior to calculating depreciation, you must EXCLUDE the value of the land from the value of your home.
Repairs - The cost of repairs is deductible. Repainting your home, repairing gutters or floors, repairing leaks, plastering, and replacing broken windows are all examples of repairs.
Travel Expenses - If you own a rental property, you can claim a tax deduction for your rental activity when you drive elsewhere. You can deduct travel expenditures when you drive to your rental property to deal with a tenant complaint or go to Home Depot to buy a part for a repair.
If you use your personal car for rental purposes, you can generally deduct the costs using one of two methods: actual expenses or the standard mileage rate. For all business miles in 2006, the usual mileage charge is 44.5 cents per mile.
Home office - As a home office deduction, you can deduct expenses connected to your personal dwelling. These expenses include utilities, insurance, depreciation, and maintenance related to your home's business use.
Independent Contractors and Employees - You can deduct the salary or services of anyone you pay to execute services for your rental business as rental business expenditure. Whether the worker is an employee (for example, a resident manager) or an independent contractor, this is the case (for example, a repair person).
Insurance - For your rental activity, you can deduct the premiums you pay for nearly any insurance. This covers the rental property's fire, theft, and flood insurance, as well as the landlord's liability insurance. If you pay your insurance premiums in advance for more than one year, you can deduct the portion of the payment that applies to that year each year. You cannot deduct the entire premium in the year in which it is paid.
Fees paid to attorneys, accountants, property management companies, real estate investment advisors, and other experts can be deducted from your income. If the fees are paid for work relevant to your rental operation, you can deduct them as operating expenses.