Buying Real Estate Rental Property – Best Investment Strategies

More and more people are choosing to buy rental property as a lucrative way of receiving passive income, with many opportunities for further investments, massive profits, and a life of luxury and opulence. There is much to consider and research before you make any investment in rental property, but you’re likely going to be quickly looking at cash flow and a realtor lifestyle you could only have dreamed of.

Is Buying a House to Rent a Good Investment? Advantages Disadvantages of Rental Property

There is not one clear answer to whether buying rental property is a good investment. It depends on many factors such as location, the behavior of the market, the tenants, unexpected costs, etc. Therefore it is impossible to say whether it is a good investment for you until you inform yourself as best as you can, and make an educated decision.

Advantages of Rental Property Investments – Tax Deductions, Financial Security

Being a landlord often sounds like a dream job. Essentially you’re being paid because people are living somewhere. It is the most famous and infamous source of passive income. This is perhaps its biggest advantage. In terms of how much work you have to put in per dollar earned, it can be extremely lucrative. Another advantage is that the real estate market tends to be quite stable, which means that the majority of properties (bought in good areas) increase in value. That means, while you’re making a passive income, one day the mortgage will be paid, and despite having made money off of your investment, you can sell it at a higher price than you bought it!

Rental Property Taxes – What Taxes do Landlords Pay?

For one, rental income is not subject to social security taxes. The social security tax rate is currently 12,4% split by employer and employee, meaning that when owning rental property you are paying 6,2% less taxes.

Disadvantages of Rental Property Investment – Difficult Tenants

The biggest downside is dealing with difficult tenants. These can be those that are harmful for the atmosphere (e.g. by being loud), those that damage property (high repair costs), and those that do not pay their rent on time. Another downside is also that you are legally bound quite heavily, as renters are strongly protected by the law. That means that difficulties can arise, and cause a lot of stress. Of course it’s important to decide in what real estate to invest, because if you buy a house, these issues tend to be less serious.

• Damaging Tenants
• Tenants who do not Pay Rent

What does a Landlord Do? Tasks, Responsibilities when Owning Rental Property

In short, a landlord is in charge of general upkeep. That means repairs in the house such as plumbing or electricity which the landlord has to fix. Other things include maintaining the more general facilites. For example, if you own rental property you have to make sure common areas are cleaned, the doors, elevator, etc. all work, and more. Then comes the problem of rent. Some tenants can be quite a hassle when they don’t pay rent on time, in which case you have to contact them and collect the rent yourself.

• Repairs in home
• Maintenance of Property
• Collecting Rent

Financial Planning for Becoming a Landlord

That means paying off all debts, making sure you have enough saved up for a downpayment, and securing your finances for the long-term future. It is also probably a good idea to secure a separate business account.

• Save enough for a Downpayment
• Job Security

Six Steps to Purchasing Rental Property – Buy House, Apartment

The five steps to owning rental property begins with your finances. Next, research and strategy. Where do you want to invest, how is the market in that area, what type of real estate you want to invest in, the general turn of the economy and much more! Now your strategy with short-term vs long-term rentals, buying a house or apartment, etc. Step 4 is finding the property you want to purchase. Step 5 means buying the property (and getting a good deal!). And lastly, perhaps most difficult, find tenants!

1. Order your Finances
2. Research
3. Strategy and Investment Planning
4. Find the Property
5. Purchase Property
6. Find Tenants

Step 1: Order your Finances – Landlord Bank Account, Savings

The most important thing before buying a house or buying an apartment is to get your finances in order. That means having paid off all debts, or nearly all, having a good credit score (otherwise get ready for mortgage insurance). Then, you will want to open a separate account. This can of course be done by registering a real estate LLC in which case you would buy the property over the company. Otherwise you will have to open a new account.

Step 2: Research – Where to Buy, When to Buy Rental Property

This is an important step, as you will need to get a lay of the land of where you want to invest and how. There is no universal manual because, e.g. if you buy a house in New York, it’s different than if you buy an apartment and then even more different if you buy an apartment in L.A. It’s also critical to know about the more specific location, there are always up-and-coming neighborhoods in every city. The top USA real estate neighborhoods are spread out all over, and you could be living near one without knowing! We’ve tracked down the best locations for the biggest players in American real estate:

• Top Neighborhoods: New York
• Top Neighborhoods: Los Angeles
• Top Neighborhoods: San Francisco
• Top Neighborhoods: Miami
• Top Neighborhoods: Las Vegas

Step 3: Strategy, Investment Planning – ROI, Value

The typical question for real estate and rental property investment is the ROI. ROI means return on investment, which is typically expressed in a percentage. It just tells you how much money you make in proportion to how much money you spend. You should know that, unlike stocks, or REITs, rental property will not be valuable or a good investment because it is constantly rising in value. Rather it is an additional income on the side, apart from your normal investments.

• ROI = Return on Investment
• Real estate is about cash flow

Step 4: Find the Property – House Hunting, Realtors

Next step is to find property, this can turn out to be quite difficult or quite easy depending on the region. Typically this is also the point where you will decide whether you choose a fixer-upper or a ready house. For experienced investors this is a normal thought, but if you are just starting out, a fixer-upper can be extremely risky and bankrupt you. Unless of course you want to get into flipping houses.

• Fix-Up or ready house?

Step 5: Purchase Property – Mortgage, Cash, Downpayment

Of course with a cash purchase you can circumvent a lot of the additional real estate purchase costs, but not all (think mortgage tax and transfer tax, and moving expenses). Still, as soon as you purchase with a mortgage you will be paying more in the form of mortgage interest. There are different opinions on the specifics, but it is always important that even if you are absolutely in love with a house, to let cooler heads prevail. There are many reasons to buy a house for rental property, but these are all related to finances and strategy.

• Real Estate Closing Costs
• Logic should decide whether you buy

To learn more about what happens when you get to the point of actually buying a house, you can take a look at our article on all the taxes you will pay when you buy a property or real estate.

Real Estate Purchase: All Taxes

Step 6: Find Tenants – Advertising, Location

This is the point that it can get very very frustrating, or very comfortable. If you’re living in a place like L.A., this can be quite easy with very high demand making a good tenant easy to find. In other places you may have to wait for the right one. Important though, if you get the feeling that the fit isn’t right, don’t sign a contract! It is near impossible to force a tenant out legally, and one more month without the extra income won’t make the difference.

• Don’t rush the search
• Easier in bigger cities, with higher demand

Top 5 Tips for Buying Rental Property! LLC, Saving Taxes

There are many things to be aware of, and things to take into account for buying rental property for real estate investment. It’s important that you research a lot so as to make a smart decision. Still, there are a few secret tips that are very important to ensure quick profit from rental property!

1. Do the Math!
2. Landlord Insurance
3. Found a Company
4. Buy or Finance?
5. Go out of State

Do the Math! Research, Calculation of Costs for Rentals

This is critical. Of course, before investing in rental property the most important thing is extensive and intensive research. This does not only consist of informing yourself about e.g. mortgage or mortgage interest, and a downpayment. The main question is: for each dollar that you invest in this real estate rental investment, how much will you get back. Factor in the time, and then compare to your finances. It is possible that your investment strategy only offers returns after two years. Can you hold out that long?

For each dollar you invest, how much will you gain? When is your investment profitable?

Get Landlord Insurance! Recover Lost Rental Income, Liability Protection

There are going to be accidents, unwanted injuries and more on your property. You need to protect yourself from this. One possibility is with a limited liability company or the similar s corporation (see below), but this is not going to protect you legally, rather than just make sure that a legal action does not bankrupt you. So you have to get landlord insurance! A landlord insurance covers lost rental income (great for the rare difficult tenant), damage to the property, and of course, as mentioned liability protection against injuries or worse on your property. Remember, itemizing insurance costs is one of the top methods of real estate tax deductions!

• Protection against lost rental income
• Damage to property
• Liability for injuries on property

Found a Company – LLC, S Corp or C Corp

As mentioned above, it’s important to protect yourself from possible liabilities. Even with landlord insurance, you should likely put in the effort and cost to found a real estate entity which owns the buildings in your place. The main examples are the LLC, S corporation, C corporation, and Limited Partnership. These all differ in the degree to which they protect you from liability, but also to the degree in which they prevent double taxation, a common problem with other real estate investment entities.

• LLC
• S Corp
• C Corp
• Limited Partnership

Buy or Finance? Mortgage or Cash for Rental Investments

You will hear many voices insuring you that the only smart choice for buying a rental property is to finance it, in other words to buy it using a mortgage. This is true in most cases, but if you have the money available, buying cash can be even better. No mortgage interest, no uncertainty, and you profit right away. Of course you’ll be a few thousand dollars lighter, bt this comes in with rental income over time. It’s also seemingly forgotten at times that a house purchased with a mortgage still requires a substantial downpayment, as well as significant additional costs buying real estate, which means even with a mortgage, where, e.g. a 20-year plan can hound you for years, you have some saving to do before starting to invest and reap profits.

• Buy with mortgage
• Consider alternative cash options

Go out-of-state! Rental Investments Far away – Is it Profitable?

Many first-time investors make the decision to buy close to home. They hear a great offer for a house nearby in an up-and-coming neighborhood and choose to buy because it’s just a few minutes drive away. It’s true of course that this has its advantages; if a renter has an issue or a repair, you can come by quickly and fix it, you can give personal house tours with no problems, etc. At the same time, it’s a calculation game. There are extremely profitable neighborhoods in many parts of the country. Buying a rental there can give you much larger profits in much shorter time. These profits would offer the possibility of a property manager, reduces your involvement and makes the now-larger income even more passive.

• Advantages to buying nearby
• Far away can be much more profitable

Gross Rental Income – Top Tip for Saving Taxes

Easily explained: rental income is taxed as your normal income would be taxed. That means you add it to your salary as you would a normal job. Rental income can include the following types of payments: Advance payments of rent, non-returned deposits, services provided in exchange of rental income. Now we know what the income consists of, but the question is how can you pay less of it?

What can be Deducted from Rental Income? Itemizing Tips

You can deduct more than you think from your rental income. That includes things like the mortgage interest of your property, the insurance costs and property taxes. Along with these it is also typically possible to deduct fees such as those for advertising your properties, and those for legal assistance and for the Homeowner’s Association.

• Depreciation
• Property Manager Payments
• Mortgage Interest
• Insurance Costs
• Property Taxes
• Advertisement Fees
• HOA / Condo Fees
• Legal and Professional Fees

There’s so many more tax deductions you can use when you own real estate, whether as residence or as a landlord!

Real Estate Tax Deductions

Best Gross Rental Income Deduction! Depreciation

The most important concept here is depreciation. Depreciation is the answer to every time you wondered why real estate moguls and landlords pay so few taxes. Large items bought for business purposes can be deducted from your taxes, but not all at once. That means e.g. a property worth $250.000 which is deducted from taxes over a 27,5 year period, leads to a reduction in your taxable income of

$250.000 / 27,5 y = $9.090

per year! Add that to all the other possible real estate tax deductions, and many owners pay no taxes on their rental income!

Let an Apartment or House – the Right Tenants and Rental Contract

How do I set the rental price correctly? How does my advertisement appear attractive? And how do I draw up a suitable and fair rental contract? A future landlord asks himself all these questions, because in order to successfuly rent out a property, a lot of knowledge and experience is required. But if you follow a few simple steps, you will make the leap to a successful landlord and profit from the earnings.

The most important things:

• Landlords have many duties and tasks, including, for example, organizing the change of tenant or the annual preparation of a service charge statement for the tenant
• The rental price can be set with the help of the local rent index, but it must always be taken into account whether or not the affected region has a rent brake
• The rental contract should be fair for both tenant and landlord and regulate all important points
• When choosing the right tenant, it is not only the sympathy effect that counts, but also other important factors, such as creditworthiness
• The expose should contain all important facts about the property and convince with professional pictures
• The visit is possible both as open and closed date and depends mainly on the number of interested parties
• The apartment will only be handed over after payment of the rent deposit and the first month’s rent. At this time a protocol is made, which documents meter readings and existing damages.

The daily rental business – tasks of a landlord

If you want to be a landlord, it must be clear that a property does not maintain itself. Also the landlord has tasks and duties to maintain the tenancy. These tasks include, for example, the annual preparation of an ancillary cost statement for the tenant, the annual presentation of the economic efficiency for the tax office, the organization of a change of tenant, renovations or repairs to the property and, of course, participation in the owners’ meeting. Depending on the initial situation, a large part of the tasks can be taken over by an administrator, but the task as a landlord always involves a time consuming effort. If you want to keep it as low as possible, you should try to sign an unlimited rental contract in order to achieve a long-term commitment.

• Landlords have many duties and tasks
• These include, for example, the organization of tenant changeover or the annual preparation of a service charge settlement for the tenant

The right rental price – the rent index

The right rental price is not only crucial for success, but also enormously important for the rental. When determining a suitable rent, you should always orientate yourself on the local rent index of the respective city. This offers criteria such as location, size, year of construction or equipment of the apartment, according to which the own property can be categorized. If this has been done successfuly, the so-called “local comparative rent” can be read. This provides an orientation value for landlords. If there is a rent brake in the region concerned, the rent for the property may be 10% above the “local comparative rent”. If there is none, the rent may be 20% above the “local comparative rent”.

Exceptions will only be made if it can be proven that otherwise losses would be made. However, if the rent exceeds 50%, the law assumes “usury”, so there are limits here too. The rent must always be determined in the individual case. Depending on the region and the property, it is advisable to adhere to the “local comparative rent” or to exceed it up to a reasonable percentage.

• It must always be considered whether the affected region has a rent brake or not

The rental contract – fair for both parties

The preparation of the rental agreement is very important and it is usually not easy to rely on the first best form from the Internet. Depending on the regulations, the contract is either landlord or tenant friendly. Ideally, it should be both and cover all important points. For example the regulations over the keeping of domestic animals, the cleaning obligations of the tenant, the renovation work when moving out, the subletting possibilities or however the height of the additional expenses pre-payments count for this. Avoid here unclear regulations or regulations which are clearly disadvantageous for the tenant.

At best, the lease is fair for both parties and leaves no room for interpretation. Prefabricated rental agreements from the tenant or landlord protection association are usually very detailed and well suited, but should always be checked in individual cases. If there are any open questions or problems, a professional real estate agent can help and provide remedy. Our guide helps: real estate agent.

Finding the right tenant – agreeableness and important key data

Choosing the right tenant is not always easy and can cause many problems and costs if a wrong decision is made. When choosing a tenant, not only the sympathy effect should be considered, but also important key data should be obtained. These include a credit check and obtaining receipts for the last income, a tenant self-disclosure and a certificate of no rent debts. If all these key data are to your satisfaction, the personal impression of the potential tenant is important. A personal meeting at the viewing appointment can clarify many questions and help with the decision. The sympathy effect should not be ignored, because a good relationship between tenant and landlord helps to avoid future problems and disputes and to achieve a long-term lease.

• The rental contract should be fair for both tenant and landlord
• A rental contract should regulate all important points

The exposé and the viewing appointment – the way to the ideal tenant

The Exposé is the A and O with the tenant search. This is the first thing the potential tenant sees of the apartment and must therefore make a good first impression. Beside the most important basic data, like size, equipment, rent, additional expenses and situation landlords are obligated to publish the most important key data of the energy document of identification in the real estate announcement. Additionally, special features of the property should be highlighted here. A roof terrace, stucco or a fitted kitchen provided by the landlord represent characteristics increasing the residential value and justify for example a higher rent and arouse additionally the attention of prospective customers. Please note the correct indication of the number of square meters in the exposé. Since the rent is measured at this, it must be correct, since tenants can demand otherwise also afterwards still too much paid mine. When calculating the rent, it is especially important to consider roof slopes, low ceilings and the correct calculation of terraces or balconies.

The inspection can be done in different ways. With many prospective tenants, an open viewing is possible, in which all potential tenants view the apartment on their own and then submit a small application with a self-disclosure, a covering letter and other documents. Based on these you can then select a tenant. In addition, closed inspections are possible, with which you can show the dwelling to the prospective customers and clarify so again the advantages and get to know the persons better. Which type you prefer is left to your individual taste.

• The exposé should contain all important facts about the property and convince with professional pictures
• The tour is possible both as open and closed appointment

The correct apartment handover – handover protocol and the deposit

Before the apartment is handed over, the rent deposit and the first monthly rent should already have been transferred by the tenant. If this is not the case, this fact already makes the tenant’s payment morale doubtful and is usually not a good sign. If the handover of the apartment takes place as planned, a handover protocol is kept. In this protocol, any existing suggestions in each room of the apartment, the cellar, the garage and the attic are documented. Additionally, the meter readings of electricity, water and gas are documented. When handing over the apartment, it is advisable for each party to take a second person as neutral as possible as a witness and to ensure the existence of the protocol in case of disputes in court. However, the protocol should be signed by both parties in any case after leaving the property and kept in the documents.

• The apartment will only be handed over after payment of the rent deposit and the first monthly rent
• At the time of handover, a log is created that documents meter readings and existing damage

The most important questions about renting a house or apartment

Especially for inexperienced or beginners, the topic of real estate rental raises many questions. Who is the right tenant? How do I draw up a fair rental contract? What are my duties as a landlord? With these questions the support of an experienced real estate agent helps, but this option always involves the loss of money. To make sure that all questions are clarified for you and that you successfuly start off as a landlord, the experts of Lukinski answer the most important questions about renting a house or apartment.

What are the most important contents of an advertisement?

The advertisement should contain all important information about the property, such as size, location, equipment, energy performance certificate, floor plan, rental price and additional costs. Especially important, however, are the photos, which convey the first impression of the property to interested parties.

Must the rental agreement be checked by a notary ?

The rental agreement does not have to be checked by a notary. At most, he can check whether all existing regulations are legally permitted, but the document does not have to be notarized by him.

Is the apartment handover certificate mandatory?

The apartment handover protocol is not required by law, but it is usually done anyway. It protects both the tenant and the landlord and is only beneficial to both parties.

Must the rent be determined by the rent index ?

The rental price must be determined by the rent index. This helps to keep the prices within a certain range and to ensure justice for tenants.