Are Rental Properties Right For You?

March 16, 2009 by  
Filed under Real Estate Investing

Any type of action or investment pursued in life requires knowledge of what you’re about to undertake. The same goes for real estate rental properties and managing them. There are a few considerations to be taken into account when determining if you want to hang on to a property and turn it into rental income, or sell it quickly for a fixed profit. Both options entail their own tax implications and legal liabilities, as well as different levels of capital appreciation.

As the owner of a rental property, you will be held responsible for all costs and maintenance associated with it. Mortgage finance payments, homeowner’s and liability insurance, taxes, and so on. Even if damage or negligence on the renter’s behalf contributes to a needed repair, you will also need to be prepared to deal with this situation.

Angry tenants or those that lose a source of income may stop paying rent altogether, forcing you to file eviction charges and official notices with the sheriff’s department. Different state and local laws may require a landlord to allow a certain time period, sometimes months or years, to pass before physically removing a tenant from a property.

Many of these problems can be addressed more efficiently if you’re prepared to deal with them prior to even purchasing a rental property. Sufficient knowledge of the current housing market in the area, interest rates on mortgage loans for investors, and the general direction of housing prices can help you make the best educated guess of whether to rent or not.

Next, consider the difference in tax consequences between renting and flipping a property. Rental properties require higher property tax brackets, but maintenance expenses will be deductible as a business expense. Any income from the property may also involve tax obligations, much like profits from a flip sale.

Legal advice should be sought from a real estate attorney, and general contracts should be drafted. This way, as soon as your property is ready to rent, you’ll be ready, too. Applications for renters should include information that will allow you to perform standard background checks with references and past landlords. Employment should be verified, and a consumer credit report may be ordered to note any late payments or judgments.

Contracts between a landlord and tenant should clearly outline each party’s rights in the relationship, and who is responsible for what. Plain language should be used to prevent any claims in the future that state the tenant did not understand the contract. Also include deposit amounts received, monthly rent, and possible changes to future rents after the end of the current lease.

Accurate records should be kept at all times to be able to create a quick glance at payments received, expenses and any late payments. Include in your contract clear requirements for the frequency of and day of payment, as well as a grace period of at least a day or two and late charges – everyone has a hard month now and again, and it’s best to work with your tenants a little rather than upset them and cause more damage to your money-making machine!