Note: I am not an accountant or a financial expert. You must consult a certified tax accountant or attorney to determine if and how your rental property can benefit you during tax season.
I recently read an article about the tax benefits of owning rental property[1]. The author was a mortgage broker who had interviewed a certified public accountant (CPA) who told her that “many investors don’t take advantage of the many deductions that are available for rental property.”
Honestly, I had always had a vague notion that rental properties were just barely worth it given the incredible hassle of keeping them up or the profits lost paying a management company to do so. Combine this notion with the popular marketing technique used by many gurus teaching flipping of belittling rental ownership as the way to wait as long as possible for your money, the way to stress and distress, and a good way to lose all family and personal time, and you can probably see why I had a general feeling – as I imagine many investors do – that rentals are just too much trouble.
However, when you look at the list of tax advantages that come with rental properties, it might be worth re-thinking. For example, did you know that depreciation deductions can allow you to take up to 25,000 dollars in losses per year, depending on your income? Frankly, that alone makes owning a rental property much more interesting, and might even make those infamous late-night phone calls a little easier to stomach.
In a market where the heaviest media coverage is focused on how many people are going to be renting in the years to come, it seems like now might be a good time to start reconsidering rentals. The writer also stated that other deductions include insurance, maintenance and repairs, real estate taxes, mortgage interest and utilities.
Thank you for reading the Bryan Ellis Real Estate Letter – your comments and questions are welcomed and encouraged!
[1] http://www.bradenton.com/2010/05/10/2271203/how-to-buy-rental-property.html
If you do not like the late night phone calls, then use a property management company that is what they are for and what their expertise is.
Watch out about relying on the deductions, many are going away sooner than you think and will not be coming back any time soon.
It;s not just tax breaks, but many benfits to investing not available in other alternatives. It’s been said to be the “Ideal” because real estate provides the following features and benefits Income, Depreciation & Tax Deferral (Tax benefits), Equity Build Up, Appreciation and Leverage. It is NOT a short term investment and speculating and flipping is NOT investing. It is a path to building net worth over the long term. With the current state of the housing industry it is one of the best times ever to invest. With more support from lenders and less interference from government true investors could help the recovery. It’s when investors are penalized and villified for the actions of speculators that slow the recovery and reduce opportunity. Of course many of the speculation problems were brought on by the poor lending practices related to government policy……
Flipping is a job, buying and holding is investing. Either is fine, it all just depends on what you want to do.
I find it interesting that there are still so many “gurus” (ha!) selling courses even in a down market. But you know, Warren Buffet said it best – Be fearful when others are greedy and greedy only when others are fearful. I would say that the current real estate market is fearful.
I stopped investing in real estate back in 2004 when I couldn’t find any homes to buy at less than 8 times gross monthly rent, historically a good price to pay for residential real estate. Well now we’re buying at 3 – 4 times gross monthly rent. Is that a good deal? No… its a great deal. But we’ll have to hold on to them to see the large return. That’s fine, our homes are Section 8… we get paid like clockwork.
I can see most of you are a sleep at the wheel if you think buying single family and holding them for long term is good.
I can prove you wrong my friend on one sheet of paper over 18.5 years of doing them.
When the time gets better sale them owner financing and get out from under fast because I can tell you some one has not showed you the big picture.
Best of luck
NINJA
I have owned rental property for over six years. I also agree that the tax breaks are phenominal. Not only all that was mentioned but there are many more. Improvements to your property ( labor, materials, etc which equals appreciation), phone expenses, vehicle miles, advertizing costs, and more. I like offering utilities! Here’s a good one for you! Take the yearly total from the previous year of the utilities and divide by 12 to get a monthly average then add $40-80 (you make a little) to it and add that to your rent price. Here’s the advantages:
1. The utilitities are alway on so you can show at any time day or night!
2. ” ” have it cleaned etc
3. ” ” dont have to switch to your name ever time a tenant moves out.
4. The tenants only have to pay one deposit — to you!
5. Tenant knows their payment every month so their more comfortable and manage money better.
6. If they had a default utility bill it does not matter- utilities are in your name.
7. Your deposit can make the deposit equal your rent price and justify it with your utilities included.
8. If they move out early in the month it’s your gain.
9. They dont really use any more than they normally would especially if you send out utility efficiency mailers saying we need to keep it low so rents remain the same.
10. BEST OF ALL!! AT THE END OF THE YEAR I GET A PRINT OUT FROM ALL THE UTILITY COMPANIES OF MY EXPENSES FOR THE YEAR AND TURN IN ON MY TAX’S AS AN OPERATING EXPENSE!!!! IT REALLY ADDS UP AND THEY PAY FOR IT, NOT YOU!!!
I include the water, elec, sewer, gas, trash pick up, and water bill. I Iet the tenants cover their own cable and telephone b/c plans vary etc. I hope this helped shed some light on everyones thoughts on rentals!!
Jared
It’s hypocritical to promote buying-and-holding and to malign flipping as forms of investing. Both techniques are forms of investing, and they both have pros and cons. Serious investors know how to outsource all of the “manual labor” that they don’t want to do, so that they can focus on the activities that they enjoy (or at least gives them the greater return on the investment of their time). Flipping is a short- to mid-term strategy; it’s like the “day trading” of real-estate investing. Buying-and-holding is a long-term strategy; it’s like “going long” on one’s position in stocks or options.
Instead of thinking that one HAS to flip or rent, I find it more effective to incorporate some of both–along with some buying/selling with creative financing, buying/selling notes, etc. In a sense, this is one of the ways that we real-estate investors can diversify our investments.
I like rentals, because give us a way to lower our tax basis. In fact, some investors occasionally will acquire properties with negative cash-flow to help offset their other income (of course one should work with a competent CPA [preferably who also invests in real-estate] to implement this). We can also depreciate the chattel, and we can qualify for various tax credits or other incentives in some cases.
Selling with seller financing (with a properly structured note) can deliver similar benefits too.
Don’t want to mess with managing the properties then just hire a property management firm. Be the investor not the plumber, gardener, etc. Outsource what you don’t like to do.
I agree with NINJA, don’t get holding the bag when the next round of bubbles come. Get out now with owner financing to tenant buyers.