Category Archives: Investing

3 Things You Should Know About Rental Income

Buying an investment property can be an excellent way not only to generate income, but to build wealth over time. However, as with any other investment, it’s important to know exactly what you’re getting into before you buy your first rental property. With that in mind, here are three things you may be surprised to learn about rental income.

1. Rental income isn’t the consistent income stream many people believe it is.

stream of moneyThere are several variable costs of owning rental property that can cut into your net income. For example, property taxes and insurance costs change every year — and usually not in your favor. Maintenance expenses can vary dramatically over time, as you can have several trouble-free years and then suddenly be forced to complete an expensive repair, such as replacing an HVAC system.

In addition to the variable costs of property ownership, be sure to consider unexpected breaks in your income stream, such as the possibility that your property will sit vacant between tenants for longer than you anticipate. Hopefully, you’ll never need to go through the process of evicting a tenant, but I can tell you from experience that it can be lengthy and costly.

The point is that the money you collect in rent can produce varying amounts of net income from month to month and from year to year. Be sure to plan for the unexpected when buying a rental property — not just the best-case scenario, as many rookie landlords incorrectly do.

2. If you rent out real estate on a more casual basis, you might not have to pay any taxes on the income you earn.

tax exemptionIf you rent out a vacation home or other property that you use for residential use, then you can qualify for a special exemption that prevents you from having to report the income that your rental generates. The maximum period for which you can rent the vacation home over the course of a year and still qualify is 14 days, but if you stay at or below that level, then the ordinarily extensive reporting requirements essentially disappear. Many people take advantage of the 14-day rule with second homes, especially if they happen to be located in areas where certain annual events regularly happen.

One thing to keep in mind with this rule is that you’re also not allowed to take any deductions for expenses related to the rental of your vacation home. However, with most vacation homes, your personal use of the property precludes you from taking deductions for losses in any event. The 14-day rule lets you get a taste of rental income without all the hassles involved in committing to making your property available year-round.

3. All real estate investors aim to make money on their property, but there’s an upside to losing money, too.

Real estate prices downDepreciation is a real estate investor’s best friend. Over time, the tax code allows you to depreciate the value of a home to zero, even though it is more likely to have gone up in value than gone down. Thus a home purchased for $150,000 would create $5,455 per year in depreciation expenses against the rental income it generates for the next 27.5 years.

Rental income is classified as passive income. However, depending on how much you earn each year, you may be able to use passive paper losses from real estate investments to offset income from other sources. Those who earn less than $100,000 per year in adjusted gross income can use up to $25,000 of losses from passive investments like real estate to offset other income. This benefit eventually phases out for the highest earners, but it can be a significant advantage to investing in real estate, as paper losses can help shield more of your returns from the tax man.

The IDEAL Investment

Rental homes can be the IDEAL investment in today’s market because they offer a much higher rate of return than alternatives without the volatility of ups and downs in the stock market.

IDEAL serves as an acronym to identify the advantages of rental properties:

  • for rentIncome from the monthly rent contributes to paying the expenses and a return on the investment
  • Depreciation is a non-cash deduction that contributes a tax shelter
  • Equity grows monthly as the mortgage amortizes due to some of each payment being applied to the principal
  • Appreciation is achieved as the value of the property goes up
  • Leverage can increase the return on investment by using borrowed funds to control a larger asset

The combination of these characteristics working together makes rental real estate a very good investment for today’s economy and years to come. Increased rents, high rental demand, good values and low non-owner-occupied mortgage rates contribute to positive cash flows and very favorable rates of return.

Contact Elite Team for more information about rental opportunities in our local market.

If I’d Known…

ifWe’ve probably all said or at least thought “if I knew then what
I know now, I would have done things differently.” We should have stayed in school longer. We should have listened to our parents. We should have bought Apple stock in 2002 for $8.50 that sells for $400 today. Or we could have bought gold in 2000 for under $300 for a four-fold profit today.

Years from now, if we look back at 2012, we may say that it was the best buyer’s market ever. Even now, it’s apparent that both housing and mortgage prices are going up and they may never return to the record low levels.

The housing affordability index, which is considered to be good at 100, had increased to over 200 this past December, January and February. Shrinking inventories and rising prices in most markets have caused the index to fall to 172.7 for May 2013.

This market applies equally to acquiring a home to live in or a home to use as a rental. It is estimated that about 30% of the property purchased last year was done by investors. It is understandable because the positive cash flows far exceed most other investment alternatives.housing affordability

Homeowners moving up in a rising market may sell their home for more by waiting but it will also cost them more for a new house. Typically, a person buys a 50% larger home when they move up. If they wait for prices to go up 10% on the $150,000 home they’re selling, they’ll realize $15,000 more but will pay $22,500 more for the new home purchase. They’ll actually net $7,500 less by waiting for prices to go up and may have to pay a higher mortgage rate too.

The question home buyers and investors alike are faced with today is whether they will be saying years from now that they seized or missed an opportunity of a lifetime.

Annual Maintenance

home maintenance 250.jpg

Annual Maintenance

A common expectation of homeowners is to want the components and systems in their home to work when they need them. Periodic maintenance is just as important as having a trusted service provider to make necessary repairs.

Victims of Murphy’s Law can attest that their air conditioner goes out on the hottest day of the year or the water heater fails when you have out of town visitors.

If the convenience of having things work doesn’t justify maintaining your home’s systems, consider that it can be less expensive than the results of neglect causing repairs or replacement.

  • Replace burned-out, dim or missing bulbs in light fixtures and lamps. Consider switching to LED bulbs.
  • Dryer exhaust vents build up lint even though you may be cleaning the filter regularly.
  • Fire extinguishers need to be recharged or replaced after expiration date.
  • Establish a recurring appointment on your calendar to change filters in your HVAC.
  • Replace missing or damaged caulk around sinks, bathtubs, showers, windows and other areas.
  • Clean gutters.
  • Schedule an inspection with a pest control a minimum of once a year unless you have a service contract.
  • Schedule a chimney cleaning prior to using the fireplace for the first time in the season.
  • Keep all tree branches and shrubs trimmed away from the home.
  • Pressure wash exterior, deck, patio, sidewalks and driveway.
  • Keep levels of insulation in the attic above your ceiling joists.
  • Check appliances with water lines for leaks or worn hoses.
    • ice maker  • washing machine   • dishwasher   • others
  • Test all GFI breakers and reset.
  • Inspect all electrical outlets for broken receptacles, fire hazards or loose fitting plugs.
  • Have furnace and air conditioner serviced annually.
  • Test smoke and carbon monoxide detectors and change batteries.

The early fall is a great time to take care of these items before the weather becomes harsh.

Category Archives: Investing

3 Things You Should Know About Rental Income

Buying an investment property can be an excellent way not only to generate income, but to build wealth over time. However, as with any other investment, it’s important to know exactly what you’re getting into before you buy your first rental property. With that in mind, here are three things you may be surprised to learn about rental income.

1. Rental income isn’t the consistent income stream many people believe it is.

stream of moneyThere are several variable costs of owning rental property that can cut into your net income. For example, property taxes and insurance costs change every year — and usually not in your favor. Maintenance expenses can vary dramatically over time, as you can have several trouble-free years and then suddenly be forced to complete an expensive repair, such as replacing an HVAC system.

In addition to the variable costs of property ownership, be sure to consider unexpected breaks in your income stream, such as the possibility that your property will sit vacant between tenants for longer than you anticipate. Hopefully, you’ll never need to go through the process of evicting a tenant, but I can tell you from experience that it can be lengthy and costly.

The point is that the money you collect in rent can produce varying amounts of net income from month to month and from year to year. Be sure to plan for the unexpected when buying a rental property — not just the best-case scenario, as many rookie landlords incorrectly do.

2. If you rent out real estate on a more casual basis, you might not have to pay any taxes on the income you earn.

tax exemptionIf you rent out a vacation home or other property that you use for residential use, then you can qualify for a special exemption that prevents you from having to report the income that your rental generates. The maximum period for which you can rent the vacation home over the course of a year and still qualify is 14 days, but if you stay at or below that level, then the ordinarily extensive reporting requirements essentially disappear. Many people take advantage of the 14-day rule with second homes, especially if they happen to be located in areas where certain annual events regularly happen.

One thing to keep in mind with this rule is that you’re also not allowed to take any deductions for expenses related to the rental of your vacation home. However, with most vacation homes, your personal use of the property precludes you from taking deductions for losses in any event. The 14-day rule lets you get a taste of rental income without all the hassles involved in committing to making your property available year-round.

3. All real estate investors aim to make money on their property, but there’s an upside to losing money, too.

Real estate prices downDepreciation is a real estate investor’s best friend. Over time, the tax code allows you to depreciate the value of a home to zero, even though it is more likely to have gone up in value than gone down. Thus a home purchased for $150,000 would create $5,455 per year in depreciation expenses against the rental income it generates for the next 27.5 years.

Rental income is classified as passive income. However, depending on how much you earn each year, you may be able to use passive paper losses from real estate investments to offset income from other sources. Those who earn less than $100,000 per year in adjusted gross income can use up to $25,000 of losses from passive investments like real estate to offset other income. This benefit eventually phases out for the highest earners, but it can be a significant advantage to investing in real estate, as paper losses can help shield more of your returns from the tax man.

The IDEAL Investment

Rental homes can be the IDEAL investment in today’s market because they offer a much higher rate of return than alternatives without the volatility of ups and downs in the stock market.

IDEAL serves as an acronym to identify the advantages of rental properties:

  • for rentIncome from the monthly rent contributes to paying the expenses and a return on the investment
  • Depreciation is a non-cash deduction that contributes a tax shelter
  • Equity grows monthly as the mortgage amortizes due to some of each payment being applied to the principal
  • Appreciation is achieved as the value of the property goes up
  • Leverage can increase the return on investment by using borrowed funds to control a larger asset

The combination of these characteristics working together makes rental real estate a very good investment for today’s economy and years to come. Increased rents, high rental demand, good values and low non-owner-occupied mortgage rates contribute to positive cash flows and very favorable rates of return.

Contact Elite Team for more information about rental opportunities in our local market.

If I’d Known…

ifWe’ve probably all said or at least thought “if I knew then what
I know now, I would have done things differently.” We should have stayed in school longer. We should have listened to our parents. We should have bought Apple stock in 2002 for $8.50 that sells for $400 today. Or we could have bought gold in 2000 for under $300 for a four-fold profit today.

Years from now, if we look back at 2012, we may say that it was the best buyer’s market ever. Even now, it’s apparent that both housing and mortgage prices are going up and they may never return to the record low levels.

The housing affordability index, which is considered to be good at 100, had increased to over 200 this past December, January and February. Shrinking inventories and rising prices in most markets have caused the index to fall to 172.7 for May 2013.

This market applies equally to acquiring a home to live in or a home to use as a rental. It is estimated that about 30% of the property purchased last year was done by investors. It is understandable because the positive cash flows far exceed most other investment alternatives.housing affordability

Homeowners moving up in a rising market may sell their home for more by waiting but it will also cost them more for a new house. Typically, a person buys a 50% larger home when they move up. If they wait for prices to go up 10% on the $150,000 home they’re selling, they’ll realize $15,000 more but will pay $22,500 more for the new home purchase. They’ll actually net $7,500 less by waiting for prices to go up and may have to pay a higher mortgage rate too.

The question home buyers and investors alike are faced with today is whether they will be saying years from now that they seized or missed an opportunity of a lifetime.

Annual Maintenance

home maintenance 250.jpg

Annual Maintenance

A common expectation of homeowners is to want the components and systems in their home to work when they need them. Periodic maintenance is just as important as having a trusted service provider to make necessary repairs.

Victims of Murphy’s Law can attest that their air conditioner goes out on the hottest day of the year or the water heater fails when you have out of town visitors.

If the convenience of having things work doesn’t justify maintaining your home’s systems, consider that it can be less expensive than the results of neglect causing repairs or replacement.

  • Replace burned-out, dim or missing bulbs in light fixtures and lamps. Consider switching to LED bulbs.
  • Dryer exhaust vents build up lint even though you may be cleaning the filter regularly.
  • Fire extinguishers need to be recharged or replaced after expiration date.
  • Establish a recurring appointment on your calendar to change filters in your HVAC.
  • Replace missing or damaged caulk around sinks, bathtubs, showers, windows and other areas.
  • Clean gutters.
  • Schedule an inspection with a pest control a minimum of once a year unless you have a service contract.
  • Schedule a chimney cleaning prior to using the fireplace for the first time in the season.
  • Keep all tree branches and shrubs trimmed away from the home.
  • Pressure wash exterior, deck, patio, sidewalks and driveway.
  • Keep levels of insulation in the attic above your ceiling joists.
  • Check appliances with water lines for leaks or worn hoses.
    • ice maker  • washing machine   • dishwasher   • others
  • Test all GFI breakers and reset.
  • Inspect all electrical outlets for broken receptacles, fire hazards or loose fitting plugs.
  • Have furnace and air conditioner serviced annually.
  • Test smoke and carbon monoxide detectors and change batteries.

The early fall is a great time to take care of these items before the weather becomes harsh.