02 Mar How to Get the Best Property Investment Loan
Rental Property Pros & Cons
Rental Property Pros: Whether you buy an apartment complex or duplex, the biggest advantage of rental property is the predictable income stream that it generates.
Whereas a three-month house flip venture might produce a $50,000 gross profit on a $200,000 investment, a $200,000 rental property could generate, say, $1,000 a month after expenses. At that rate, you’ll exceedthe “quick profit” amount in 50 months, and the revenues won’t stop there. They’ll keep pouring in month after month, year after year.
In addition to creating profit, rental income will help you pay down the loan you obtained to finance the property. And in some cases, current and future rental income helps you qualify for more favorable loan terms.
The greatest perk of owning rental property may be the tax advantages. In addition to generating income and potential profits from capital appreciation, rental properties provide deductions that can reduce the tax on your profits.
Common deductions include money spent on mortgage interest, repairs and maintenance, insurance, property taxes, travel, lawn care, losses from casualties (floods, hurricanes, etc.), as well as HOA fees and condo or co-op maintenance fees.
Rental Property Cons: If you’ve ever spent time talking with a landlord, you know that owning rental property is not without its headaches and hassles.
If net cash flow isn’t positive after deducting expenses, your rental income may even be tax free!
Besides generating income, rental properties breed expenses that range from 35% to 80% of gross operating income . (Most properties https://paydayloanstennessee.com/cities/manchester/ are in the 37% to 45% range. If your cost estimates fall far below this, double-check your calculations.)
( Note : expenses may not be fully tax deductible. It depends on whether the IRS classifies your rental income as “non-passive” or “passive.” If you don’t spend at least 750 hours a year working on your rental properties, any losses are passive and only deductible up to $25,000 against the rentals’ income. (Fortunately, losses over $25,000 can be carried over to the following year.)
And when stuff breaks – from refrigerators and ovens to water pipes and HVAC systems – you’re the one who has to get it fixed. If you’re not handy, or don’t want to field midnight calls from tenants, you’ll need to hire a property management company to handle such tasks.
The good news is that property management firms can handle some (or even all) the unpleasant chores – from keeping units occupied to overseeing repairs and maintenance, collecting rents, finding reliable new tenants and evicting deadbeats.
A good management company will also have all the necessary leases, applications and other documents to ensure that your building runs like a well-oiled income-producing machine. They will also be experts in the landlord tenant laws of your city and state.
Expect to pay a management firm a monthly fee of 7% to 10% of the rents collected. Additionally, s ome property management firms charge additional fees for performing or supervising repairs, for locating new tenants, or even when a tenant renews the lease. Some also charge vacancy fees, meaning you must pay them even when a unit isn’t producing any income.
There is also the risk of a deadbeat tenant who damages your property, but takes months to evict. Carefully screening prospective tenants and buying property in stable, middle-class neighborhoods can reduce your risk of long-term vacancies and non-paying tenants, but there’s no guarantee you won’t face these problems.
The best investment property financing for you will depend on your particular financial situation. That said, these simple tips should help you finance more property for less money.