While it’s usually not fun having a landlord, being one is a whole different story. Not a laugh-a-minute, mind you, but owning residential income property can be a lucrative investment and a fulfilling business. People purchase investment property for several reasons. These include reselling for profit, to improve monthly cash flow during retirement, for the real estate’s long-term appreciation or for the tax benefits. Maybe you’re considering becoming a landlord for a combination of these reasons.
Types of Residential Income Properties
One of the first decisions to make when considering the purchase of investment property is what type to buy. The most common types of income properties are:
- Multi-unit properties - These include the duplex, triplex and apartment building. While the income for these properties may be higher, the expenses are as well. Plus, you will be dealing with multiple tenants instead of just one.
- Single-family dwellings - This is one of the best choices for the landlord who wants to deal with only one tenant.
- Condominium units - Another single-tenant situation that, depending on the complex and the Homeowners Association fees, may be the least expensive of all three choices.
Tax Benefits of Investment Properties
Tax laws change, so it’s best to speak with your accountant before purchasing to find out just what tax benefits you’ll realize. Typical rental property-related tax deductions include:
- Interest - Usually the largest expense the landlord deducts, interest deductions include credit card interest when the card is used in the rental business and interest payments on loans used to buy and repair rental property.
- Depreciation - Landlords deduct the cost of rental property over the course of several years.
- Repairs - Painting, repairing plumbing problems, broken windows and other routine repair costs are deductible expenses.
- Travel - Travel expenses, both local and long distance, to deal with your income property, are deductible.
- Insurance - The cost of most insurance premiums for income property are deductible.
- Legal and professional services - Fees paid to attorneys, property managers, accountants and investment advisors are considered operating expenses and, thus, deductible.
Drawbacks of Buying Investment Property
The landlord business brings with it a slew of headaches that many first-time investors don’t consider. Here are a few things to think about before looking at residential income property:
- Mortgage - The mortgage for an “absentee owner” or “non-owner occupied” property may carry a higher interest rate than the typical owner-occupied loan.
- Vacancies - Vacancy rates fluctuate. If you can’t keep a unit occupied, will you have the cash to cover the monthly costs and repairs?
- Eviction - While a fact of life for landlords, an eviction can be a lengthy process; it’s expensive and emotionally draining.
- Maintenance - To avoid potential legal liability, most landlords don’t want tenants performing any work on the unit. This means doing it yourself or hiring someone else to do it.
- Insurance - It may cost more to insure the property than it would if it were owner-occupied.
What to Look for in an Investment Property
You don’t think “location, location, location” only matters for your personal home, do you? Tenants initially look at properties in their price range in a preferred location. Your first consideration, then, is to find a property in an attractive location. If you’re buying in a low-income area, this may mean finding a building on the bus line. If purchasing a house as an investment property, school proximity may be important to your potential tenants. Crime rates are important to look at as well.
Think about what you looked for in a rental when you were a tenant. It’s a safe bet that those same items will be attractive to your potential renters.
Take care when evaluating a potential rental property. Since the goal is to make money with your purchase, make sure the property is in good condition so you're not saddled with a lot of repair costs right out of the gate. A contractor’s inspection of the property is worth the money.
Finally, it’s just as important to know when to sell your income property as it is when to buy. When the property costs more to own than you earn from it, sell.