By John Drachman
Part 2 of a series on rental real estate investing, this article goes beyond the income and tax benefits discussed in Part 1 to a broader exploration of the costs unique to rental real estate.
As more investors discover the joys of rental income, the US rental property market continues to absorb an ever-larger chunk of the U.S. real estate. At $18 trillion, the US rental real estate market now accounts for half of the domestic market. A fertile world for investors, rental properties offer the potential for monthly cash flow, tax breaks, growth potential and financial leverage.
Still, Rental Real Estate Isn’t for Everyone
Successful rental property investing takes a trusted network, some self-education, patience and resources. No one can turn on the rental income spigot without attention to tenants, property condition and regulations. Beyond legal and administrative costs, proactive attention to insurance and taxes; maintenance; and a buttoned-up P&L statement will keep your positive cash flow streaming.
- Insurance and Taxes Surprise #1: Your rental home will cost about 25% more to insure than your primary residence, according to the Insurance Information Institute. Most real estate experts recommend between $500,000 and $1 million in liability coverage.While your tenant’s rental income should cover insurance expenses, keep an eye out for restive residents who might leave before their lease is up. You’ll find though that most insurers have landlord policies to cover virtually anything that can happen – some will even replace your rental income in the event of a covered loss.
Taxes can be much higher for rental properties. In South Carolina for example the taxes on a $100,000 rental home average more than 300% more than on a comparably priced owner-occupied house.
- Maintainance It’s a fact of life. Everything breaks or wears out eventually — including hot water heaters, roofs, electrical lines and much more. If you can manage it, it’s better to renovate your rental property from day one. Investing to fix up your property today will save more on maintainance over the long term. According to the real estate site Zillow landlords should set aside a minimum of 1% of a property’s value annually for maintenance.
- A P&L of Your Own Every successful landlord is also a bookkeeper – or knows how to hire one. Excellent records are required to track cost basis, income, and expenses. Staying on top of your bookkeeping is the solution to safeguarding your business and maximizing your income flow.Be sure to familiarize yourself with the basics of real estate bookkeeping. For single-property beginners, this free P&L template can get your bookkeeping started. For those with more than one property, Zillow offers this convenient P&L Excel template. Appropriate sections are broken down by month and by property. Each section automatically calculates the totals to provide your gross income, net income and total expenses for the year.
For digitally minded aspiring landlords Fortune Builders offers rental income classes and app information toward making your rental income dream come true.
Entrepreneur, bookkeeper and maintainance expert – just how many hats can a landlord like you wear? Fortunately, you don’t wear them all by yourself. Licensed financial advisors, tax planners and realtors can guide you on your journey to rental income world. Consider enlisting the services of a professional to explore your ideas, review your portfolio, credit score and savings before making your move.
John Drachman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.