Tax Advice for Rental Property Owners

My vacation rental business owns 23 properties on which we make over $200,000 in principal payments annually. Since we make $195,000 in annual profit, every year we end up in the hole financially. We take depreciation on the properties, but it doesn't offset our taxes by much. Is there a way to deduct the principal payments we're making on our properties? —D.P., Cartersville, Ga.

No. "You cannot deduct principal payments on loans," says Bill Fleming, a managing director at PricewaterhouseCoopers. "This is a typical issue with any leveraged investment—especially real estate, since that is nearly always leveraged."

When business owners make principal payments to pay down debt, such as you are making on your real estate mortgages, your cash flow is impacted negatively. However, making those payments means you are building equity in your assets, so they are not expenses that reduce your profit and therefore cannot be used as tax deductions.

Consider Refinancing

A business such as yours is typically considered a long-term wealth generator, assuming you can keep the properties in good condition long enough to sell them for substantially more than you paid for them. (In today's real estate market, of course, this strategy may be much tougher to achieve than it was a few years ago.)

Since interest rates are extremely low currently, you might consider refinancing any of the properties that have gained significant equity since you purchased them, suggests Michael Hanley, a CPA based in Smithtown, N.Y. "At today's lower rates, you should be able to reduce monthly payments, or pay down mortgages on other properties that don't have enough equity to refinance but are encumbered with high-interest-rate mortgages," he says.

You could also check with your state's licensing board to see if you meet the tests to be considered a qualified real estate professional. That status might allow you to deduct more of your losses in a given year, Hanley says.

Look Into Shorter Depreciation Schedules

Another idea is to have a cost-segregation analysis done on your properties. This is a strategic tax tool used for commercial and rental property firms that can reduce your tax liability by shortening depreciation schedules on some of the assets installed in or associated with your properties, Hanley says. "Typically, on commercial and rental properties, mortgages are amortized over 15 or 20 years. However, the property is depreciated over a much longer time frame—usually 27½ or 39 years. This means that your principal payments may end up being double the amount of your depreciation deduction."

A cost-segregation analysis would identify components of your properties that would qualify for depreciation over more rapid time frames, such as 3, 5, 7, or 15 years. Doing that would enhance your cash flow by reducing your tax liability now and more effectively match your depreciation expenses to your mortgage payments, Hanley says.

Specialty accounting firms do cost-segregation analyses but the fees can be substantial, so explore the cost and the potential for tax savings with your own accountant first. In order to withstand a challenge from the Internal Revenue Service, you'll need to obtain a certified cost-segregation analysis report if you decide to have one done, Hanley says.

Source:Business Week

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How to Market Your Rental Property

Marketing your rental property can be challenging. There are different mediums to use ranging from the classified section of newspapers to real estate magazines, posting fliers outside neighborhood grocery stores or bandit signs. The newest medium and undoubtedly the best and most effective method is using the internet. Using a specialty rental real estate marketing website like BuyRenter.com can allow you to market your property to a wide spectrum of potential renters and at a cost cheaper than all the other mediums. BuyRenter.com has strategic partnerships with dozens of internet sites which allows millions of people access to view your rental listing on a daily basis. Add that to the per per lead model, where BuyRenter.com only charges you after a potential renter contacts you with interest in your property. Try BuyRenter.com today and get your property rented fast.

Now is a Great Time to Buy Rental Property

With real estate prices down, interest rates at record lows and rents holding steady, its never been a better time to get into rental real estate. One can purchase rental property with a down payment of 20-25%. As a rule of thumb, you want to make sure the price you pay for your rental property is no more than 12 times the annual rent you will be receiving. For example you purchase a home for $150,000. You want to make sure annual rent is at least $12,500 which would be $1042 on a monthly basis. Keeping this rule of thumb will allow you to achieve a good rate of return on your investment.

BuyRenter.com is a leading provider of online marketing services for landlords and property managers. Using our strategic alliances we at BuyRenter.com are able to advertise your property across the internet to a wide spectrum of potential renters. Go to BuyRenter.com today and sign up for our services.

How to Screen Tenants in 5 Easy Steps

STEP 1: First Contact

From the very first contact with the tenant, the screening process has begun. Whether you are the landlord, real estate agent or property manager, the same still holds true.

First Contact is usually by telephone, so you need to ask the right qualifying questions in order to decide if you should proceed to step 2. Advise customers of your up front rent and security deposit requirements and other important facts regarding the rental that may help disqualify the prospect.

I suggest you make a list or prospect card of questions to ask and have it handy while you conduct your first contact interview.

Please note that anyone who has a problem answering your questions (as long as you ask them politely), probably will not qualify for your rental. Serious customers want to make a good impression on you and should be happy to answer your questions. This process can save you and customers a lot of time and trouble.

STEP 2: Showing the Property

From landlords to real estate agents, we all have our own style in showing the rental. I think we all need to be aware of certain telltale signs to watch for while evaluating your prospective new tenants.

1. Appearance. Is the prospect neat and clean? Did he or she make an attempt to make a good impression? In most cases, an unkempt person keeps an unkempt lifestyle and home.
2. Car. Does the prospect have a nice car? Is it clean? Although we can't judge people by their car, we should take note of it along with other details.
3. Attitude & Manners. Does this prospect behave respectfully? Does he or she show indications of being difficult to deal with in the future? Did the prospect wipe his or her feet when stepping into the house? Did the prospect walk into the rental while smoking? You can learn a lot about people even before speaking to them. Sometimes it helps to pay attention to details.
4. Criticizing the property. Are the prospects pointing out legitimate concerns, or are they trying to come up with items to negotiate price?
5. Yes or No? Can the prospect make the decision now or will they have to think about it? If they know now that they want your rental, did the prospect come ready to give you a deposit and fill out an application?

STEP 3: The Application Process

The first thing you need is a quality rental application. Let the applicant know that his or her application will be considered along with others, and you will notify the applicant once a decision is made. Advise the applicant(s) that it is very important to fill out the application as completely as possible. If you (and I recommend you do) run a credit report on the applicant, I suggest you be sure to collect a screening fee. This is a provision in the The LPA Rental Application.

Inform your prospective tenant that the application must be returned as soon as possible to avoid the risk of losing the rental to a competing prospect.

Review and verify the application thoroughly and look for inconsistencies and "red flags". When you are satisfied, you will proceed to approving your new tenant in step 4.

STEP 4: The Approval Process

This is usually a fun part, but keep in mind that you are still screening the applicant while preparing him or her for the next step. I like to congratulate the applicant on being approved and let them know they came in 1st place. Also, let them know if you made any special concessions just for them, such as overlooking minor credit infractions, etc.

This process is also an opportunity for you to make sure the applicant can and will deliver. Set the time, date and place for your lease signing. Instruct the applicant(s) to bring the proper amounts of monies, identification (if you don't already have it), and how you prefer to be paid. (Check*, money order or cash)

* Be sure to tell your new tenants that possession or keys will be given only after checks have cleared.

STEP 5: The Lease Signing

It is very important that you have a quality residential lease. You'd be surprised at how many people would just sign a lease without reading it! And I don't just mean tenants! I believe it is crucial to read the entire lease with the tenants at a lease signing. It is your agreement with them. Shouldn't you both know what is really being agreed to? As you read the terms of the lease with the tenants, you will be able to conduct your 5th and final step of screening. Does the tenant argue on every item? Is the late charge an issue? And so on.

Of course, if you are unhappy with how your prospect responds to you and/or your lease, you must not rent to this person. I believe: "It is better to have NO tenant than it is to have the wrong tenant."

For more information on listing your rental, visit us at www.buyrenter.com

10 Tips on Being a Successful Landlord

One key to being a successful landlord is taking the time to pick the best tenants and keeping the rental property maintained. If you do not have the time to keep up a property on your own, or if you own several rental properties, you can quickly become overwhelmed.

The ten tips provided below are the most common ways to ensure your success as a landlord.

1. Always check references. Recurrent problem renters are usually quite accomplished at giving a good impression and can fool even the most jaded landlords. Always ask for references and take the time to follow up on them.

2. Get it in writing. In order to protect your interests and the interests of your tenants, get everything in writing. This means everything from a rental application to a code of conduct. If a tenant needs to have something fixed in their dwelling, ask them to provide the request in writing in addition to telling you on the phone or in person. This will help you with you income tax deductions and create a history for each tenant.

3. Provide a clean and secure residence. Keep the grounds of the property clean and free of debris. This will help you with property liability and keep your rental property looking its best. Depending on the location of the rental property, you may want to provide extra security measures. This can help keep your tenants safe and secure, and may even lower your insurance premiums.

4. Pick your managers carefully. If you do not have the time to personally manage your rental properties, you will need to hire a manager. Find your manager by visiting us at BuyRenter.com.

5. Get insured. Make sure that you have the maximum amount of rental insurance, property liability insurance, and any other type of insurance that may be required in your state. This can help protect you from devastating losses.

6. Make repairs promptly. Your tenants deserve to have decent living conditions. In the case of furnaces and other necessary appliances and fixtures, repairs simply cannot be put off. Try to imagine yourself in your renter's position. Could you live without running water for three days?

7. Respect the privacy of your tenants. Adhere to your state's guidelines for entry into a rented dwelling. Most states require at least a 24 hour notice before a tenant is required to allow their landlord to enter their rented dwelling.

8. Do not discriminate. Follow the Fair Housing Administration Act when you screen prospective tenants. A discrimination lawsuit is extremely costly and completely avoidable. Give everyone an equal chance to rent your property, regardless of their race, religion, or beliefs.

9. Have a well-drafted lease. It is imperative that the form of lease you use with tenants be well-drafted and pro-landlord-oriented.

10. Always be fair. In addition to avoiding discrimination, strive to treat all of your tenants fairly. Try to understand their position and keep in mind how they may perceive your actions. While you may not be able to get along with everyone, having a good rapport with your tenants will reduce vacancy problems.

Visit us at BuyRenter.com for more information on listing your rental or rent to own property.

Investing in rental real estate

It has been said that the thing you know best you do best. The majority of Americans know how to evaluate rental properties, particularly residential housing. Since most home owners in America have been renters at one time or another, or have bought or sold homes, most have the ability to evaluate good rental real estate—at least when compared to buying commodities, stocks, or mutual funds.

Therefore, rental properties are a logical source of investments—but not necessarily for everyone.

Wise investment?
No investment during the last 25 years has been consistently better for the average investor than single-family rental houses.

That doesn't mean that residential properties will appreciate that way over the next two decades, but right now there doesn't appear to be anything on the horizon that would prevent it either.

Housing costs are out of the price range of many young couples, and since they have to live somewhere most of them rent, at least temporarily. Therefore, rental housing is one of the soundest areas of investing for the average family.

However, there are some specific considerations that need to be addressed before investing in rental property: (1) Look for residential housing in your area or in a good rental area. Without a doubt, the three key factors in buying any rental property are location, location, location. (2) Be certain your rental house is a “fair” deal for the renters and for you. (3) Be sure your personality is conducive to being a landlord. (4) Have enough equity to ensure a good cash flow. If the house won't stand as collateral for its own mortgage, pass it by. The principle of no surety must be maintained when purchasing rental property. (5) Make sure you have enough funds set aside to ride out the times when the property has no tenant. (6) Make sure you have enough funds available to cover needed maintenance and improvements, without having to borrow.

One of the attractive aspects of rental property is that the initial investment is not excessively large in many areas and usually the property can be purchased with a relatively small down payment.

An additional benefit is that once the property is rented the tenants pay off the mortgage with their rent payments, and much of the generated income is sheltered through depreciation, interest, and taxes.

Alternative to purchasing outright
If you do not have the initial funds to purchase a rental property, you might want to consider a joint venture of the rental home with a couple who will be living in it. Usually this means the investor provides the down payment and assumes a 50 percent interest in the property.

The tenant couple then pays the mortgage payments and all other associated costs, including maintenance.

When the house is resold, usually after no more than 10 years, the investor receives the down payment back and the two parties split the profits equally.

Although there is a risk that the property will not appreciate, that is the risk you run with any investment.

Rental housing negatives
There are some negatives that need to be considering before investing in rental housing.

1. Unless you have a strong personality and are willing to eject nonpaying tenants from time to time, you need to avoid becoming a landlord.
2. If you don't want to be a landlord, don't buy rental housing.
3. If you aren't able to maintain and manage your rental property, many of the benefits decline.
4. It's not always easy to get money out of the property if you need it.

Other rental housing options
An alternative to investing in single-family rental housing is to invest in duplexes and triplexes. The chances of a unit being vacant are cut proportionately to the number of tenants it will accommodate, so your income isn't limited to one renter.

The flip side of the coin is that they require a bigger investment and more maintenance, and you really do become a landlord.

If you don't have the money to get into a duplex or triplex by yourself, there are two alternatives.

You can invest in limited partnerships offered by individuals who purchase and manage duplexes and triplexes, or you can invest with another person.

The key factor to keep in mind is that the managing partner has total control.

No down payment real estate
Although no money down real estate opportunities have been available for a number of years, they are very dangerous ventures.

Since purchased properties are highly leveraged with no down payment, this financing procedure would be in violation of biblical principles of surety, as well as a typical example of the get-rich-quick mentality so prevalent in our country today.

In addition, there are serious questions about the legality of these programs that need to be answered. Even the possibility of obtaining a loan through the techniques offered in these types of programs is questionable in many instances.

Most lenders would not carry such leveraged properties on a loan, so if you were to be involved in such a project, you probably would be carrying very high interest rates with questionable lenders.

Conclusion
Whether to invest in rental property depends on people's goals and their present financial structure.

If they are comfortable with handling real estate and rental property, rental property can be an attractive investment and a portion of a balanced investment portfolio.

Even in a bad economy people will need somewhere to live, but those interested need to evaluate whether they would have enough cash flow if rent goes down or the property is vacant for a month or two.

The more equity an individual has in rental property, the more likely the value of the property will never drop below the loan value on the property.

BuyRenter.com

Rental Income and Expenses - Real Estate Tax Tips

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. Publication 527, Residential Rental Property includes information on the expenses you can deduct if you rent a condominium or cooperative apartment, if you rent part of your property, or if you change your property to rental use. When to Report Income Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. For more information about when you constructively receive income, see Publication 538, Accounting Periods and Methods. Advance Rent Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Example: You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year. Security Deposits Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it. Expenses Paid by Tenant If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information. Example One: Your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Example Two: While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Based on the facts in each example, include in your rental income both the net amount of the rent payment and the amount the tenant paid for the utility bills and the repairs. You can deduct the cost of the utility bills and repairs as a rental expense. Property or Services in Lieu of Rent If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Example: Your tenant is a painter. He offers to paint your rental property instead of paying 2 months' rent. You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months' rent. You can include that same amount as a rental expense for painting your property. Personal Use of Vacation Home or Dwelling Unit If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. See Figuring Days of Personal Use and How To Divide Expenses in Publication 527. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses. See How To Figure Rental Income and Deductions in Publication 527. References/Related Topics Publication 527, Residential Rental Property Tax Tips - Real Estate BuyRenter.com