First-Time Landlord

Your Guide to Renting out a Single-Family Home

Janet Portman, Ilona Bray, Marcia Stewart

• Publisher: NOLO
• Year: 2020
• Print ISBN: 9781413327939
• eBook ISBN: 9781413327946
• Edition: 5
• Topic: Business
• Subtopic: Real Estate
• Index: Business

The 101 on earning rental income from a single-family home

Do you own a house you'd like to rent out rather than sell? It's a common scenario in today's market, especially if you've inherited a house, are moving to another home, or are buying an investment property. And it may mean you're about to be a first-time landlord. Follow the advice in this book to ease into your new role and earn substantial profits while avoiding costly mistakes.

• Learn your legal obligations.
• Estimate costs and profits.
• Choose good tenants and avoid problem ones.
• Make the most of valuable tax deductions.
• Handle repairs and property management tasks.

The 5th edition is updated to cover major legal changes, in particular how the Tax Cuts and Jobs Act created pass-through deductions that can benefit landlords. Includes sample forms and budget worksheets.

CHAPTER

1

Will Landlording Bring You Money and Happiness?

Great Things About Being a Landlord

Appreciation and wealth building

Income

Diversification of income

Low-risk investment

Investment diversification

Leverage

Short-term tax advantages

Long-term tax advantages

Part-time commitment

Professional development

Personal satisfaction

Tough Parts of Being a Landlord

Time

Problem tenants

Difficulty renting

Legal risks

Costs

The Unexpected

Location, Price, and More: Features of the Ideal Rental Property

What gives a property “tenant appeal”?

What makes a good rental from the landlord’s point of view?

Special concerns when renting out a condo or co-op

Is Airbnb or VRBO for you?

Is sharing your home with a lodger for you?

Thinking About Buying an Investment Property?

How much cash you can put down

How large a loan you’ll qualify for

Buying a Foreclosed Property

Investigating the home’s maintenance history

Dealing with former owners

Dealing with current tenants

Evaluating resident tenants

What Will Your Monthly Profit Be?

Calculate rental income

Subtract expenses

Estimate short-term profits

Added financial concerns when renting in an attempt to avoid foreclosure

Added financial concerns when buying for a college student

What Will Your Long-Term Gain Be?

Appreciation: Will your rental property rise in value?

Return on investment: How much will you get back?

Setting Your Goals

Being a landlord might sound appealing in theory—you find a decent tenant, collect a monthly rent check, and celebrate your good fortune. If only it were that simple. Before you start fantasizing about a multiunit building on Park Place, let’s look at what it takes to own and manage rental property, and how to decide whether a particular property is actually going to make you money. Along the way, we’ll share some helpful advice from other first-time landlords.

Great Things About Being a Landlord

Owning rental property offers both financial and lifestyle benefits. As Laura, a landlord with properties in Washington, Nevada, and Florida, says, “I like people and the feeling that I’m doing a good job. In fact, I have to be careful not to get too friendly—I have tenants in Florida with adorable kids, and I’m often tempted to volunteer to babysit, but have to remind myself to keep it all business. Of course, it’s also nice to earn money through my efforts, and to be able to take tax-deductible trips. I remember the first time I sold one of my rental properties, and made a nice profit on the sale; it made me very happy.”

Of all U.S. households, 36.1% are occupied by renters.

(Source: 2018 American Community Survey, U.S. Census Bureau)

Below is an overview of the various benefits that Laura and other landlords enjoy. Try to remember these later, when you’re cursing the latest plumbing problem or fretting over how to fill a vacancy.

Appreciation and wealth building

If you hold onto your property long enough, it will almost certainly go up (“appreciate”) in value—eventually. Since World War II, real estate prices in America have risen an average of around 5% a year (with some nervewracking ups and downs in between). And even if the house’s value isn’t rising, renting it might allow you to build equity until you own it outright. Owning investment property is a great way to increase your net worth.

Income

A well-managed investment property, with tenants who pay the rent on time and monthly expenses that are less than the rent, can bring you a steady stream of income. Most landlords who chose to buy single-family homes did so with this purpose in mind.

Diversification of income

You never know what life is going to throw at you. If you’re laid off from your job, or your health takes a turn for the worse, your primary source of income—presumably your salary—could be jeopardized. Owning an investment property diversifies your income stream and can give you somewhat of a cushion.

Low-risk investment

Unlike more volatile investments, the returns on real estate are fairly steady. While stock values can fall or even disintegrate entirely, land and property won’t disappear on you. And history shows us that they almost always hold their value—or at least bounce back after a tumble.

Also, even when property values are down, people need places to live—a fact that keeps rents relatively high even during recessionary periods.

Investment diversification

Owning property also diversifies your investment portfolio, which is a cardinal rule of investing. The reasoning for the rule is pretty easy to understand, if you get the idea of not putting all your eggs in one basket: Should something unforeseeable happen to your riskier investments, such as stocks, you’ll have the backup of a tangible, relatively low-risk asset. As you approach retirement, it’s good to start shifting into lower-risk investments, to ensure the cash you need doesn’t disappear when you’re relying on it.

Leverage

Unlike other investments, a little bit of cash will buy a lot of real estate: A down payment of 20%—or in some cases, as low as 10% of the value of the property—is usually enough to get you started. You could, for example, buy a $400,000 property with a $40,000 down payment, while that same amount will buy you only $40,000 worth of stock. And if the value of that stock were to increase by 10%, you’d have a $4,000 profit, whereas if the value of the property increased 10%, you’d have a $40,000 profit. (These are, of course, rough figures, in that they do not account for sales commissions, depreciation, capital gains taxes, and so forth.)

This is called being highly “leveraged”—in one sense, deeply in debt, but in another sense, poised to gain high returns based on a relatively small up-front investment. Leveraging your investment allows you to trade up to more profitable properties.

Short-term tax advantages

While the rental income from your property is taxable, you can deduct most of the expenses related to owning and maintaining the property. Among these are mortgage interest, insurance, repairs, and upkeep. They also include your business expenses, such as your phone line, office supplies, professional fees (for example, to the accountant who helps you figure out your business taxes), and more.

Another major tax advantage is the ability to “depreciate” your property—to take an annual deduction that reflects the decreased value of the property caused by wear and tear. (In the most literal sense, depreciation could turn out to be a fiction if the value of the property goes up a lot—but it can be a wonderful fiction for tax purposes.) Chapter 6 of this book discusses tax issues in detail.

Long-term tax advantages

Even if your property skyrockets in value on paper, the IRS won’t expect you to pay taxes on that increased value until you sell. (Your state and local property taxes will probably be another matter, however, rising steadily to catch up with the property’s value.) Unfortunately, when you do sell, you might lose the advantage of the capital gains tax exclusion ($250,000 per owner), if you haven’t lived in the place for two out of the previous five years. However, there are several strategies you can use to decrease your tax liability. We’ll discuss those in Chapter 11.

Part-time commitment

If you own just one property and it’s not too far from where you live, you can probably handle its management in your spare time, while still working a full-time job. A little job flexibility will help, of course. Al...

Table of contents

• Cover
• Title
• Copyright
• Acknowledgments
• About the Authors
• Table of Contents
• Your First-Time Landlord’s Companion
• 1 Will Landlording Bring You Money and Happiness?
• 2 So Happy Together: Landlording With Family or Friends
• 3 Preparing and Marketing Your Rental Property
• 4 Screening and Choosing Good Tenants
• 5 Preparing a Lease and Getting the Tenant Moved In
• 6 Manage Your Rental Income to Maximize Tax Deductions
• 7 Keeping Things Shipshape: Repairs and Maintenance
• 8 Landlord Liability for Injuries, Crimes, and More
• 9 Living in Perfect Harmony? Dealing With Difficult Tenants
• 10 Don’t Want to Do It Alone? Hiring a Property Manager
• 11 Ready to Quit? Exiting the Rental Property Business
• 12 A Slower Exit: Rent-to-Own Arrangements
• 13 Renting Out a Room in Your Home
• Index