3 Things to Consider Before Buying a Rental Property

1. Understand the Different Types of Rental Agreements Possible

When considering buying a rental, it’s important to set out clear expectations and uses for the property. There are several different reasons people decide to purchase a rental. Perhaps it’s to add additional income via long-term lease arrangements or maybe it’s to have a vacation home that can be used for short-term rentals. Either way, it’s important to figure out which type of rental agreement works best for you.

Long-Term Lease: When thinking about buying a property for rental purposes and/or for additional income, most people think of long-term leases. In this rental agreement, the property owner works with tenants to sign a lease agreeing to usually 6-months to a year; occasionally longer term agreements may be available as well.

Rent-to-Own: This option is popular for home and property owners who aren’t able to sell their house. It’s also a strategic way for renters to eventually buy a property. In this arrangement, property owners offer a clause in the lease agreement for renters to eventually have the option of buying the property after a set amount of time.  A portion of the rental payments are typically set aside to cover the future down payment of the house. Landlords can charge a bit over market value because of these benefits.

Vacation Rental: Properties are increasingly being used as vacation rentals due to the rise of sharing companies like Airbnb. In this type of rental agreement, the property owner advertises the property as available for short periods, like a few days or up to a few weeks. The prices are set significantly higher than long term lease agreements. If you’re considering buying a property to use as a vacation rental, location is key. The property needs to be located in a popular, high-traffic area.

2. Make Your Decision Based on ROI

There are many factors to evaluate when considering purchasing a home. The ROI, or return on investment, needs to meet your goals and expectations. There are several factors we advise you to consider. Ask yourself these questions:

  • How easy will this be to rent out?
  • Is the location in a desirable area? Is it close to public transportation, major thoroughfares, shopping centers, restaurants, city life?
  • What amenities might you offer renters? Will bills be included in the price?
  • What type of renters are you looking to attract? Single families? College students?
  • Do you want to work with a property manager? Do you have time to manage the property yourself? Or, would you prefer having someone else do the leg work for you?

3. Eligible Tax Deductions on Rental Properties

An important consideration when deciding whether or not to buy a rental property, or to rent out your current property, is the tax ramifications. There are many specific tax deductions that landlords are allowed to take that can be to their advantage. Below, we’ve listed some of the top tax deductions for rental properties. Note: it’s best to always consult your accountant for information regarding your specific situation.

Mortgage interest: One of the biggest tax deductions for landlords is mortgage interest paid on loans used to acquire or improve a reta property. This expense can be thousands of dollar yearly. Taking the deduction on your tax form can make a significant impact on your year end taxes.

Ordinary expenses: Expenses for managing, conserving, and your rental maintaining property are tax deductible. So, if you have to repair the roof or fix a broken faucet, those costs are tax deductible. However, it’s important to note that improvements to your rental property, i.e. anything done to make your rental more desireable, is not an approved deductible expense.

Insurance costs: As a landlord, you’ll want to make sure you have the proper insurance coverage. Types of insurance like landlord liability insurance, flood, fire, and theft are all recommended. The premium costs for these services can be deducted on your taxes.

Independent contractors: If you hire independent contractors, like a repairperson or a freelance resident manager, to do work on your property you can deduct the costs of these services.

Travel: As a landlord, you may need to travel to and from the property often to assist tenants or make repairs. The cost of the travel and the mileage can be deducted – for both local travel and international travel. So, if you have a property in the States and you live abroad, the airfare, hotel costs, and other costs may be deducted. You’ll need sufficient evidence to back up this deduction.

For more specific questions on purchasing a rental property to add to your portfolio, please contact your financial advisor to set up a portfolio review.