NEWS & RESOURCES

Authored by: Matt Foos, CPA at Cordell, Neher & Company, PLLC

Investing in rental properties can potentially be a lucrative opportunity for those who are looking to diversify their portfolio. Real estate has always been a popular choice for investors because of its long-term capital growth potential and passive income generation. However, as with any investment, there are risks to consider. In this article, we will discuss some of the essential rental property considerations that every investor or landlord should be aware of.

Return on Investment (ROI)
The potential ROI is one of the essential factors to consider when investing in rental property. You must understand the cash flow mechanics, which means the income from rent versus the expenses to maintain the property. A high ROI means that the rental income will cover all (or most) expenses, including mortgage payments, maintenance and property taxes, while still leaving room for profit.

Tax Benefits
The current tax code provides several benefits that make investing in rental property more attractive, including:

• A 25% maximum tax rate on depreciation recapture upon sale and the opportunity to exchange real estate and defer tax using a 1031 exchange. Typically, with a 1031 exchange, you can defer payment of any capital gains tax if the new property’s value is equal to or more than the old property’s value. Additionally, if you hold the property for an extended period, you can potentially pay little tax on the gains and may even profit from a step-up basis upon passing at death.
• Depending on your situation, you can accumulate rental properties throughout your life and potentially use the sale of home exclusion to liquidate your properties during retirement, eliminating up to $500,000 of capital gains per property.
• Your rental income can trigger a qualified business income deduction, or your rental losses can reduce ordinary income by up to $25,000 per year.
• You can stay at your rental for up to 14 days per year without reducing expenses for personal use.
• Depreciation and mortgage interest can eliminate taxable rental income, resulting in a zero-tax cost of purchasing real estate while benefiting from appreciation in the real estate market.

Liability Protections
Placing your rental property under an LLC offers some liability protections, but it can add significant costs to insure, manage or secure financing. A limited liability company protects the owner’s personal assets, should any legal issues arise. Setting up an LLC is a crucial step in protecting your investment and minimizing personal liability for your investment.

Mortgages and Insurance
Investing in rental properties can oftentimes require a significant amount of capital upfront, and selecting the right lender is essential. Many lenders require a higher down payment and more strict lending criteria for investment properties versus owner-occupied properties. Inquire with various lenders, including banks, mortgage brokers or credit unions to find the best option for your property type and financial situation. On top of that, ensuring adequate insurance coverage, including general liability insurance and property insurance, is another crucial aspect of managing a rental property.

Property Management
Being a landlord means dealing with tenants and all the associated responsibilities, including collecting rent, handling maintenance and repairs and finding new tenants. Some landlords choose to hire a property management company that can handle these tasks, but this can bring more expenses. Therefore, doing your due diligence to find the right tenants, maintain the property and pay attention to market trends can often be rewarding and cost-effective in the long run.

Investing in rental properties comes with a range of potential financial benefits and drawbacks. Knowing all these critical rental property considerations can help you decide if this investment type matches your financial goals and risk tolerance. If you are committed to making the most out of rental property investments, it can be a lucrative strategy that helps you develop your financial future.