Ins and Outs of owning rental properties
Rental properties can be excellent investment vehicles because they offer the potential to provide both short-term and long-term returns on investment. With proper planning, you may also be able to have passive streams of income by investing in rental property.
Many people dream of buying rental properties as an investment, but there are plenty of things to consider before making the plunge and purchasing your first property. The benefits are many—as well as the pitfalls—so it’s important to understand both in order to make a smart decision about your future business or career in real estate
So, this guide will help you do just that by examining some of the best and worst aspects of owning rental properties, as well as how to tackle each one head-on with practical suggestions and examples:
What Every Property Owner Needs to Know About Rental Properties?
Managing your liabilities
Being a landlord, you got to know t rights of your tenants as well as the rules of rental properties set by federal, state, country, and city authorities. Even if you’ve paid full in cash for a rental property, still there’re additional expenses to take care of.
You need to make sure your rental property is safe and fully satisfies with implied warranty of habitability. You need to take care of things like the roof doesn’t leak, doors can lock, plumbing system is fully functional, heating and HVAC is in good condition. You also need to know the safety requirements set by local property codes like the need of a smoke detector in every bedroom, having security devices along exterior doors, or having a security bar in sliding doors, etc.
So, the best way to reduce your liabilities is by keeping up with important repairs and maintaining the rental’s habitability and safety.
Insurance fees and property taxes
When you own rental property, you're responsible for paying both insurance fees and property taxes. These can be significant expenses, so it's important to factor them into your budget when considering whether or not to purchase a rental property.
A lot of first time investors are shocked by finding their property tax bill. You may have to pay taxes to multiple governing bodies and district departments. Moreover, the insurance on rental properties is higher than homeowner’s insurance policy. The average landlord insurance runs around $1950. But your expenses don’t just ends here; you may incur additional expenses like homeowner association annual fee.
Dealing with rental depreciation
Rental property depreciation allows owners of rental property to utilize tax deduction for their property. Obviously you can utilize the value of building and not the land – as it is not a depreciable asset. One way to deal with is by knowing the market value of the land and subtracting that from the total purchase price. This is the most common practice to separate the cost of building from the land. So, you can manage the cost of buying and improving the rental property by using rental depreciation.
Anyhow, this deduction is going to spread out over the entire useable life of the property until the property is sold, exchanged, or converted to personal use. For most of the rental properties, the depreciate rate of 3.646% is used each year for 27.5 years.
Managing tenant issues
If you're thinking about becoming a landlord, there are a few things you should know about dealing with tenants.
First, it's important to have a well-written lease that spells out the expectations and rules for both the landlord and tenant. It must include things like the notice period, procedures if tenant fails to pay utility bills, procedure for failing to pay rent, the eviction process, and parking rights in multi-family residences. You may also need to disclose certain information for the tenants like the steps to make requested repairs, and need of security devices. So, you should research and know legally what statements to include in the lease agreement.
Second, rent collection can be tricky - you'll need to be firm but fair when it comes to collecting rent from your tenants. Obviously you’re not always lucky to have excellent tenants who pay the rent on time, take care of your property, and submit legitimate maintenance requests. You can spell out the late fee provision in lease agreement to impose fine in case of late submission of rent.
And finally, if you do have to evict a tenant, make sure you follow the proper legal procedures - otherwise, you could find yourself in hot water. You need to understand the time when you can and can’t start the eviction process. Some state laws require you to give at least three days’ notice to tenants to move and you may also have to issue a written warning to tenants in case the rent is overdue.
Tackling Maintenance
Maintenance is one of the most important aspects of owning rental properties. Every property requires some repairs in the lifecycle. You can avoid major expenses down the road by adopting preventive maintenance steps. You need to make sure that your property is in good condition and that any repairs are made in a timely manner.
That’s the point where property management companies come handy. But be sure to know the range of services a company is offering like some companies don’t include things like landscape maintenance and pest control. Anyhow, if you’re unable to find a company with suitable rates, tackle the repair and maintenance yourself.
The bottom line
Whether you are looking to buy your first rental property or thinking about adding to your portfolio, there are always considerations to be made when deciding whether or not rental properties are right for you.
First, it's important to have a well-written lease that spells out the expectations and rules for both the landlord and tenant. Second, rent collection can be tricky - you'll need to be firm but fair when it comes to collecting rent from your tenants. And finally, if you do have to evict a tenant, make sure you follow the proper legal procedures - otherwise, you could find yourself in hot water.