If you are interested in investing in a rental property, you also need to know how to maximize your income, despite the costs. Because investment properties are decidedly riskier than buying a home, you need to make sure that you pare down the amount you’re paying for the mortgage loan. To keep within range, the down payment should fall around 20% for one unit or 30% for a property that features two to four rental units. You can also expect to pay the lender about 1.5% more than the advertised rates. Don’t forget the landlord’d insurance as well.
Property Taxes: Location, Location, Location
You also have to consider the property tax rate as well as the homeowner’s insurance premium. Is the rental in a high-crime area or is the location considered safe? Expect to pay more, of course, if the property is located in a neighborhood that has a high number of burglaries or robberies. Also, if you’re just now looking at investment rentals, check to see if the area is prone to such perils as windstorms, flooding, or fires. Naturally, the less hazard-free an area is, the lower the premium.
Negotiate Below Market Value
Like any immovable, the ability to make the purchase below market can drastically reduce your monthly expenses by reducing the size of your mortgage. There are many ways you can negotiate the property’s purchase price down to something you are more comfortable with. Real estate agents, however, are not very likely to present them in a favorable light to the home owners – even if the offer could sell their property faster, thus saving them thousands of dollars on carrying costs. Alleviating the middle-man puts the home buyer in direct contact with the home seller. FSBO solutions, like ComFree.com and Owners.com, connects the buyer with the seller and remedies the conflict of interest by removing the commission pressure. This drastically increases the chances of coming to a more mutually beneficial agreement.
Ask for a Security Deposit
The cost for upkeep must be addressed as well. You should be able to set aside a certain amount of money every month, just in case one of your properties needs repairs. At least 10% of the amount you receive in yearly rent should cover these types of expenses. Requiring a security deposit can protect your interest in case you’re the victim of any tenant-inflicted damages. Ask that the tenant to provide you with first and last month’s rent and, if you can, a security deposit.
What about Home Owner Association Fees?
If you’re considering ownership of a condo, then don’t forget that association fees are also included in your payments. Make sure that the association doesn’t have any statutes that will prevent you from renting the property.
The Cost of Utilities
When maximizing the amount of rental income you receive, you might want to include the utilities in the rental price or ask that the tenant pay for them instead. Before you do so however, obtain the average usage for all the utilities, including electricity, gas, water and sewer. If you think you can add the amount to the rent, then it will take some of the stress off of making the payments yourself. The tenant will also be more conscientious about usage if he has to factor the utilities in with his rent.
Ask the Prospective Tenant for a Non-refundable Application Fee
Finding suitable tenants is essential if you want to maximize the amount you receive for your rental units. Therefore, charging a non-refundable application fee is a good idea if you want to find a tenant who is serious about leasing your property.
Allow for Unit Vacancy
Don’t make the assumption that you can rent the property for a full twelve months. Allow for some leeway in this regard when you’re establishing rents. Study the market and determine the average time that a rental property typically remains vacant in your area. Generally, you can permit about two months of vacancy when you’re collecting rental income for a property.
Include the Rental Income When Filing Your Tax Return
To make the most of the income you receive, you’ll want to make sure it is properly reported on your tax return. Typically, you need to include all the rental amounts you receive for a year as part of the gross income you receive annually.
Deductions: A Helpful Way to Maximize the Rental Income
Deductions can be taken for rental properties to maximize the amount you receive. Usually, you can make deductions for rental expenses in the same year that they are paid. Rental expenses can be deducted on condos, on the rented part of a property in which you reside, or if you change a home into a leased property. Consult an accountant or tax attorney to get informed on what sort of deductions are permitted in your area.
Deducting Operational Expenses
Costs you pay to advertise your rental property as well as attorney’s expenses that are paid for evicting a tenant can both be deducted. You can also take deductions on what you pay to upgrade or repair a rental property. Deduct the cost of such items as landscaping equipment, cleaning supplies, snow removal equipment, and insurance premiums. The cost to repair doors, windows, locks and utilities can, in most cases, be deducted too.
Deduct the Interest on your Mortgage Loan
In addition to the aforementioned incidental expenses, you also can deduct any expenses that you incur from owning the rental. Therefore, you can write off such items as recording fees, attorney fees, and mortgage points and interest.
Depreciation Expense: Obtain the Help of a Good Accountant
If you’re forced to replace any appliance, an item of furniture, or plumbing fixture, such as the hot water heater, you can deduct the cost for the replacement. You’ll just need to depreciate the value of the item before you deduct it from your tax bill. Depreciation values are established by the government tax authorities for such appliances as stoves, dishwashers, washing machines and dryers. As long as you keep track of all of your expenses and obtain the assistance of a good accountant, you should see a good return on your rental investment.