Rental Property - Things to Consider

With the housing market the way it is a lot of people are deciding to rent out their houses instead of trying to sell them for less than what they may have paid. Others may be choosing to purchase rental properties during the down market as investments. I wanted to discuss some things that you should keep in mind if you are thinking of renting out a home.

First of all, if you live in an HOA you will need to check your Covenants Conditions and Restrictions (CC&R's) to make sure there are no rules against renting this property. Some HOA's restrict people from renting out properties. You will also need to register with your municipality and county as a rental property.

There are some tax and insurance implications to consider. If you want to rent a home that you currently live in you should switch your homeowners insurance to rental insurance. You can also consider making it mandatory that any prospective tenants purchase rental insurance to protect their private property. You will also now be paying taxes on the rent that you receive because it is income. Of course if you are paying a mortgage on the rental property, you can still deduct the interest on the mortgage, your property taxes and any expenses related to the property. Expenses could include marketing your property for rent, utility payments, management and legal fees, etc.

Each year you can deduct depreciation from your taxes. If you take the purchase price of your home, divided by 27.5, plus any repairs that you needed to make, this is the amount of depreciation that you can deduct each year. Another important thing to consider is the capital gains tax. If you make a profit on a real estate transaction you need to pay capital gains tax, however, there is an exception if it is your primary residence for 2 out of the last 5 years. If it is your primary residence, you can then not pay the capital gains tax on up to $250,000 for a single tax payer or $500,000 for a couple. So if you are renting out a place for several years, you will have to consider the capital gains tax. Of course, there are other possible ways around paying capital gains such as a 1031 exchange, but that is for another article. If you are even thinking about the capital gains tax during this market you should just consider yourself lucky.

So if you have considered all of these things and you still want to rent out a property how do you begin finding tenants? Advertise is the obvious answer, but there are some other things to consider when screening potential tenants. Many people require a credit and background check. This is highly recommended. Through a background check you may find they were convicted of a drug related offense and the credit check may disclose that they are notoriously late paying any of their bills. The way things are right now, some people do not consider a foreclosure a gigantic red flag, but instead think that steady employment is more important. It is a common practice to charge the prospective tenant for their own credit check. You should also consider charging a security deposit of at least the equivalent of one month's rent to pay for any damages. You can decide whether or not you want to allow pets in your property, but if you do you can charge an additional pet deposit or even a monthly pet rent.

Once you have your tenant in place there are specific laws that need to be followed based on the legal actions and rights of a landlord. These laws will vary from state to state. In Arizona, you can refer to the Landlord Tenant Act of the Arizona Revised Statutes. These will provide you with information including the legal requirements for dealing with a tenant who fails to pay his or her rent.

Purchasing a rental property can be a great investment, but, like anything else, it also has its risks. If you can keep good tenants in the property and have their rental payments cover your mortgage, you could basically have someone else pay for your house. In other words you can end up with a great asset while putting little or no money into it. In the best case scenarios, you may even be able to find a property that has a positive rental cash flow and you can make a monthly income while paying off your house. Just remember to be prepared for the unexpected and do not count on always having your property occupied.

There are great rental properties and investment opportunities available right now. Visit my website at www.robbohr.com or call me today at 602-478-7015 if you are interested in seeing what is out there.