Owning rental property is a sound strategy for creating retirement income. As Jason Hartman advises, purchasing a fixed-rate mortgage on a single-home or multiplex property can provide a regular income from tenant rents, with healthy tax benefits for the life of the property. But in order to maximize the return on your investment, good business practices are essential to ensuring that your rental property yields a profit, not a loss.
Purchasing and maintaining rental property is a business undertaking. In order to make things run smoothly, it’s important to establish a plan for managing your property and to take steps to keep expenses and other property-related issues separate from other aspects of your life.
Establishing a Home Office
For many property owners, setting up a home office is the first step toward establishing the business end of managing a property. Expenses related to a home office are tax-deductible, but since this deduction is often abused, claiming a home office on tax returns can be a red flag for auditing. In general, home office space and related expenditures can be claimed as deductions if they are exclusive to the business you’ve established and not used for any other purposes.
As with other expenses related to maintaining your rental property investment, it’s important to maintain exact records of everything related to your home office, including receipts, expense sheets and other documentation that establishes that your office is dedicated to your property management activities.
Calculating Rental Profit
In order to reap the income benefits of owning rental property, the property needs to show a positive cash flow. Tracking expenses carefully can reveal areas where adjustments need to be made to improve the income potential for the property. Rents may need to be raised, or measures taken to reduce expenditures in some areas. And, of course, careful documentation is essential when claiming rental property deductions on taxes.
Determining your property’s monthly rental profits and losses is the first step toward making the changes needed to maximize that cash flow. Generally, your rental cash flow is simply the rental income from the property minus all expenses. Rental income primarily comes from the rents paid by tenants, but other kinds of rental income can include any penalty collected from a tenant for breaking leases, or any repairs or renovations a tenant pays you to do which are outside the ones stipulated by the rental agreement.
Rental property expenses, on the other hand, can include a wide variety of expenditures. Although utilities, property repairs and maintenance are the most obvious of these costs, it’s important to include costs paid to advertise vacancies, as well as to pay insurance premiums and fees paid for the services of lawyers, real estate professionals and anyone else involved with taking care of property issues.
Included, too, are the hidden losses of vacancy – the amount of rent you lose if the property remains without tenants for a long period of time – and any wages paid to property managers or other employees.
Rental income and expenses can include a number of hidden costs – and also benefits. To create the best retirement income possible from your investment, it’s essential to keep in mind that as a rental property owner, you’re in the landlord business. (Top image: Flickr | Zach_Beauvais)
The Heroic Investing Team