Are you thinking about becoming a landlord? Rental real estate can be an excellent investment decision. However, it is important to consider the three “T’s” of real estate: Tenants, Toilets and Taxes.
Tenants – If you have a loan on your rental property, cash flow is incredibly important. Even good tenants can fall upon hard times. You need to consider if you will be able to cover your fixed obligations (mortgage, property taxes, HOA fees, etc.) in the event your tenant can’t pay their rent.
Toilets – Household repairs and maintenance are a fact of life with rental properties. Many tenants won’t treat your property with the same respect you might. Plumbing, carpets, paint, landscaping and appliances are just a few things to budget for.
Taxes – When planned right, you can be cash flow positive on your rental property and not pay income tax on that profit. You may even get the benefit of a tax loss. This is because of depreciation. Residential rental properties must have their structures depreciated over 27.5 years. This depreciation expense will offset some or all of your net income. However, what the IRS giveth, the IRS taketh. When you sell your rental property, you will have to “recapture” all the depreciation you have taken over the years. This can lead to an unexpected tax bill upon the disposition, which catches many by surprise.
The best thing you can do when considering owning rental property is to develop a strategy. A strategy which provides generous free cash-flow which can be banked away to cover unexpected situations. In addition, before converting your primary residence into a rental property, you may want to consider the tax benefits of selling first, then buying a more ideal property to rent out. And finally, before selling your rental property, always consult with an experienced tax professional to understand the tax implications of the sale.