Welcome to the Edmonds Real Estate News. Each week we will cover a topic of importance to either buyers or sellers of real estate. Please make comments and suggest topics for discussion.
Our second article focuses on rental property. If this is your first time giving this some thought, here is some advice from someone owned 37 houses in Indiana and Michigan. First, stay with a one-story small house; it is easier to take care of. Purchasing a two-bedroom house could be the answer. Fewer people will be living there, which means less wear and tear.
For your first house, find one that needs cosmetic improvements only. If you find a good deal and a new roof is needed, can you be a roofer, or can you afford to hire someone to do the work for you? If you are not handy, owning rental property will cost you more. If you do not want to collect rent and take your renters to small claims court; it will cost you more to hire someone. If I have not discouraged you yet, please read on.
I can help you find a property, and give you an idea of what needs to be done to prepare a house for rental property. There is a difference in the amount of work to get a house ready to rent vs. ready to sell. A home that you want to sell needs more work. When purchasing a rental, put down on paper your costs, what you can expect in rental income and what your monthly mortgage payments will be. I will recommend that you make an offer contingent on a home inspection. I do not want you to look at a house real close and then find out you overlooked a major flaw in the foundation, electrical, etc.
Ok, you have purchased your home. Now you have the list of what needs to be painted, fixed and cleaned up. You have already gone online months ago to study the Washington Landlord and Tenant laws. For example, if you purchase a duplex and live in one unit, who you pick to live in the other side, is entirely up to you. I advise that you stay out of the rental business if you have prejudges against certain classes of people. No insurance coverage is going to be able to protect you for human rights violations. Remember any one can bring a lawsuit against you for any reason, which can cost thousands of dollars to defend against.
You have talked to your accountant months ago; he has suggested a way to keep records. You need to keep accurate records. Record every time you drive to the property, the mileage and keep receipts of everything that you spend on the property. Rental income is offset by expenses, depreciation and interest expenses. Your accountant will also explain that once your property is fully depreciated that a 1031 exchange could be the ticket for you.
An attorney can be of help here also. Do you want to own the rental as an individual or a corporation? What are the risks if you are sued? What happens if the house burns down, or if a guest of the renter gets hurt? How open are you to risk? If you need a guest speaker on this topic, contact me, as I have stories from personal experience. Your insurance agent will also be helpful.
In a nutshell, a tenant pays you rent and with those rent payments you can pay off the mortgage you have taken out on your new rental house. The interest payments, expenses and depreciation offset the income. The rental income is considered taxable. You need an accountant because the IRS has a way of changing the laws of what you can and cannot deduct. If you do not keep up with the laws, the IRS can come back to you; they like to wait about three years so they can get you for the tax you should have paid, plus interest and a 20 percent penalty. In fact, the penalty and interest can be higher than the actual tax owed.
The great thing about rental property is that down the road, if all goes well, you have an investment that tenants have paid off, and you now have rent payments that are helping you live during the wonderful retirement years. It’s important to note, however, that all that I’ve said is based on my own personal experiences. Every person’s situation is different, and that is why I suggest you seek out professionals, insurance agents, home inspectors, attorneys, accountants, and Realtors every time.
Next week: Some basics before you list your home for sale!
Edmonds resident Carl Brecht has been licensed to sell real estate since 1977 and currently works at Coldwell Banker Bain in Edmonds. With a background in both residential and commercial sales, Carl has worked throughout the U.S. and in Germany, has owned his own brokerage and has spent two years in law school, studying property and contract law. He can be reached at [email protected] or at 425-368-8246.