3 Things You Should Know About Rental Income

money houseBuying an investment property can be an excellent way not only to generate income, but to build wealth over time. However, as with any other investment, it’s important to know exactly what you’re getting into before you buy your first rental property. With that in mind, here are three things you may be surprised to learn about rental income.

Matt Frankel: As a former rental property owner, I would have to say that the biggest thing to keep in mind about rental income is that it isn’t the consistent income stream many people believe it is.

There are several variable costs of owning rental property that can cut into your net income. For example, property taxes and insurance costs change every year — and usually not in your favor. Maintenance expenses can vary dramatically over time, as you can have several trouble-free years and then suddenly be forced to complete an expensive repair, such as replacing an HVAC system.

In addition to the variable costs of property ownership, be sure to consider unexpected breaks in your income stream, such as the possibility that your property will sit vacant between tenants for longer than you anticipate. Hopefully, you’ll never need to go through the process of evicting a tenant, but I can tell you from experience that it can be lengthy and costly.

The point is that the money you collect in rent can produce varying amounts of net income from month to month and from year to year. Be sure to plan for the unexpected when buying a rental property — not just the best-case scenario, as many rookie landlords incorrectly do.

Dan Caplinger: One aspect of rental properties many people don’t know about is that if you rent out real estate on a more casual basis, you might not have to pay any taxes on the income you earn. If you rent out a vacation home or other property that you use for residential use, then you can qualify for a special exemption that prevents you from having to report the income that your rental generates. The maximum period for which you can rent the vacation home over the course of a year and still qualify is 14 days, but if you stay at or below that level, then the ordinarily extensive reporting requirements essentially disappear. Many people take advantage of the 14-day rule with second homes, especially if they happen to be located in areas where certain annual events regularly happen.

One thing to keep in mind with this rule is that you’re also not allowed to take any deductions for expenses related to the rental of your vacation home. However, with most vacation homes, your personal use of the property precludes you from taking deductions for losses in any event. The 14-day rule lets you get a taste of rental income without all the hassles involved in committing to making your property available year-round.

Jordan Wathen: All real estate investors aim to make money on their property, but there’s an upside to losing money, too.

Depreciation is a real estate investor’s best friend. Over time, the tax code allows you to depreciate the value of a home to zero, even though it is more likely to have gone up in value than gone down. Thus a home purchased for $150,000 would create $5,455 per year in depreciation expenses against the rental income it generates for the next 27.5 years.

Rental income is classified as passive income. However, depending on how much you earn each year, you may be able to use passive paper losses from real estate investments to offset income from other sources. Those who earn less than $100,000 per year in adjusted gross income can use up to $25,000 of losses from passive investments like real estate to offset other income. This benefit eventually phases out for the highest earners, but it can be a significant advantage to investing in real estate, as paper losses can help shield more of your returns from the tax man.

Source: fool.com

80 Questions to Consider When Interviewing Your Next Property Manager – Part 4 of 4

shake handsAs a self-managing landlord I pride myself on being able to manage my properties myself. Unfortunately, self-managing is not for everyone for various reasons whether it’s not your thing OR you are not in a position to do so, or anything in between. Even myself, the self-proclaimed self-manager will someday use a property manager.

Over the years I have learned that not every property manager is made equal. Therefore your job as the owner, is to find a property manager to find that amazing property manager who will make your house into an amazing asset not a financial liability.

As a self-managing property manager my lease is my bible that has 38 addendums and is 16 plus pages long (http://www.reluctantlandlord.net/create-a-rock-solid-lease/). Your property manager should be treated the same way. You, the owner, are ultimately the one who has to answer for all that happens with your investment, so you need to make sure you are hiring right manager. You can do this by properly vetting your manager.

Here are the next 20 questions to ask yourself when you are vetting your property manager. View Part 1Part 2, and Part 3 for additional questions.

Author’s Note: Many of these questions can be solved by examining the lease/property management contract first. Personally, I would want a copy of the property management contract before my first interview so I could put together all my questions from that BEFORE I talk to the property management. This way, you are not asking questions that are answered in the contract AND you can follow up directly from the contract. Remember: it doesn’t matter what they say, it comes down to what is in writing, i.e your contract.

  1. What do you charge for your application process? Some companies charge a high amount to applicants, others charge the owners, and some may include it in your monthly fee.
  2. What form do you use for the move in/move out inspection? Personally, I would want to see the forms as this is what you can use to prove the tenant did damage.
  3. Do you take video or pictures? What is your criteria for what you put down on the forms? The more detailed the company is, the easier it will be if you ever need to go to court.
  4. How often do you do inspections during a tenant’s term? Many property management companies do yearly or quarterly inspections.
  5. How do you document the inspection and do you send it to the landlord? If they are supposed to do inspections you want to make sure you receive a copy. You also want to make sure the inspections are documented.
  6. How do you handle the security deposit? You want to know where the security deposit will go and who holds on to it. Will it be given to you or will they be holding on to it?
  7. How do you charge for tenant’s damage during their lease term? You do not want everything to wait until the security deposit is due at the end of the leasing term. You want it to be taken out as the damage is done because the security deposit is their incentive to not cause an issue.
  8. If there are damages upon move out who does the accounting (you or the owner)? If the tenant does a ton of damage you want a property manager who is going to pursue the tenant for you. First, by taking it out of the deposit and then by sending them a bill for the rest.
  9. If the tenant has damages that exceed the security deposit do you come up with the documents and pursue the tenant? Every company does this differently, so it is important to know who is responsible for what.
  10. When do you return the security deposit? Do you get approval from the landlord first? There has been a lot of issues with property managers returning the money too soon and missing deductions for tenant damage. Personally, I use almost the entire time provided by law so I can make sure there is nothing missing before I return the deposit. I do not return the deposit at the move out or even during the first week.
  11. Do you do a pre-inspection prior to the tenant move out? I only do one in California as required by law, but requirements and standards may differ among companies and states.
  12. What is your maintenance minimum/policy? A lot of companies have a number, say $200, in which they will approve any repair under that amount. It is important to take note of this as these can really eat your profit.
  13. Do you charge for an additional fee for maintenance? Some companies charge 2% or more on the repair costs or maintenance.
  14. Do you get multiple bids from vendors?  I personally like multiple bids, especially when the scope of the work is large.
  15. Is your maintenance in-house or from a vendor? This could determine cost of maintenance and also could indicate how well they are able to handle spur of the moment emergencies.
  16. How do you handle off hour emergencies?  Does the company’s staff receive the calls 24/7 or do the calls go to an answering service? Also check if there is a surcharge if there is a night or weekend emergency.
  17. What do you consider emergencies? What is their definition of an emergency? This will tell how quickly a tenant’s problem will linger or if they will get service right away.
  18. Do you ask permission or just fix and bill? Some emergency repairs can cost a small fortune. If you want to decide what gets fixed and know how much it will cost you, you should make sure that communication will be present.
  19. How much time do you leave between tenants? I try to schedule things as quickly as possible so my downtime and therefore vacancy is as close to zero as possible. The key to this is being on top of things. Some people schedule weeks in between tenants, so you’ll make sure this amount of time is at a minimum.
  20. Do you show the house while the current tenant is in the home? One of my ways to keep costs down is to show the house while the tenant is still in the unit, instead of waiting for them to move out. Although scheduling may be more difficult, it helps fill a vacancy quicker.

While this list seems very long and complex, many of these things will be answered in the lease and property management document/contract. This is not supposed to be a complete list, but rather a starting point to begin your interview and selection of the best property management.

Happy Property Manager Hunt!

 

ElizabethBio: Elizabeth is an entrepreneur who is turning her love of rental properties into a work-from-home positions that she self manages anywhere in the world. Follow her at Reluctant Landlord. Looking for a jump start to writing your perfect lease? Check out her book, The Everything Lease Addendum: How To for Landlords. It includes all 37 addenda with wordings and the explanations. Elizabeth hopes her passion for turning her ulcer inducing moments into a solid lease helps you learn these lessons vicariously and not through the trials and pains she experienced.