Instead, buyers wanting to wring cash out of a home are eyeing an immediate payoff: rental income. The foreclosure crisis has scared off or prevented thousands of families from owning a home. But the lure of a nice home and yard endures: According to the Urban Institute, there are nearly 15 million units of single family housing units in the U.S., making up about 35 percent of rental housing units.
More folks looking to rent prompts more people to consider becoming landlords. “Investors of all types approached us to ‘teach’ them on how to become a successful real estate investor,” says Jim McClelland, president of MACK Companies in Tinley Park, Ill., which purchases rentals for investors.
“Being a landlord is more like running a small business than it is like investing in stocks,” says G. Scott Haislet, a Lafayette, Calif., an accountant by trade who also owns rental properties. “With a stock, you spend some time before investing doing research, but then you don’t have to do much but watch it.
“Even if you use a management company, you’re going to spend time being a landlord … the management company will call to ask if you want to make certain repairs, for instance,” Haislet says.
Here, the rental basics a potential landlord should know:
It costs more to invest
Don’t dream about collecting rent unless you already have healthy cash reserves. Seeking a mortgage for a property you intend to rent typically requires a 25-percent down payment, explains Brian Siebert, past president of the Michigan Mortgage Professionals Association.
Lenders also may want six months of mortgage payments in reserve when the purchase is closed.
Property insurers view rentals as riskier, so expect to pay about a 25 percent more for coverage than on a traditional homeowner’s policy, says Chris Hackett of the Property Casualty Insurers Association of America.
Profitability depends on the property
Selecting the right property isn’t as much a personal decision as a business analysis: What are the comparable rents? How about vacancy rates?
While would-be landlords may be drawn to the many attractively priced single-family homes, a house may not be the best choice, says Robert Boyer of the real estate investment site FinestExpert.com, which scores specific addresses for their investment potential. A duplex might rent each side for $700, while a single-family home of the same square footage of both duplexes could rent for just $1,200, he says. “It’s easier to rent multi-family units because the rent charges are cheaper.”
Don’t forget about taxes
If landlords didn’t realize they were getting into a business, they will when they file their income taxes. You’ll probably be filing Form 1040 Schedule E, Haislet says, whereby you can take a host of deductions to minimize taxable rental income.
Knowing all the possible deductions, such as depreciation on the building structure, and backing them up with records is something that “people who do it themselves get wrong a lot,” Haislet says.
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