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