Considering Becoming a Landlord?
Question: In today’s real estate market, should more people consider becoming landlords rather than selling their home at a loss?
Answer: Many people are faced with difficult decisions in trying to sell a property which has lost value. Some are even walking away from a home because they can’t make the mortgage payments. In some cases, converting the property, in part or in whole, to a rental can make the finances easier to manage. And, you can retain ownership of an asset which, based on history, is more than likely to increase in value over time.
The objective in renting is to create a positive cash flow to help you offset expenses. By checking local listings of similar properties in your neighborhood you can begin to figure out if you would receive sufficient rent to meet your needs. You might also consider visiting other properties or talking to some landlords of similar type properties.
Once you determine a fair rental price for your property, consider two factors that will cut into your profits. In most instances, rental properties will have a certain amount of vacancy time when you will not be getting any income. This can be due to delays in getting the property rented or turnover of tenants which may produce a month or two of down time.
There are also expenses associated with renting a property, some of which you cannot completely pass on to tenants. Property taxes, insurance and repair costs often are the responsibility of the landlord, not the tenant. And if you don’t want to spend time yourself dealing with tenant issues, you may want to hire a property management company (usually a fee around 10% of the rental).
As a landlord you will enjoy some tax benefits that should be taken into consideration, as well. Your mortgage interest continues to be deductible as will interest payments on loans to improve the property and on credit cards you use to purchase any services or materials related to the rental property.
Your accountant may advise you that you can depreciate (deduct the value of) your rental house over a number of years, that repair costs are likely deductible as is any travel associated with the rental. If you have a home office, that may give you additional deductions.
Whether you plan to rent out your basement, your whole house or start a business owning and renting properties, be sure to learn all you can about landlord/tenant laws in your area. Consult others who are landlords, your tax and legal advisors and a real estate professional to get the advice you need to be successful.
(This article was provided by the Colorado Association of REALTORS®.)