How to Avoid Losing Money on an Investment Property

On the surface, investing in rental properties seems like a great idea while mortgage rates are still low and buyers have savings to cover the cost of down payments. Rental property ownership generates equity, tax breaks and passive income. All too often, however, property owners assume their investments create income on their own. On the contrary, it takes time and money to start reaping the benefits of residential real estate ownership.

Use the following tips to help run successful investment properties and avoid monetary losses.

Price it Right

Landlords may have the upper hand in competitive metro regions where leasing is popular, but there are still plenty of other affordable apartments for rent. Before settling on a budget, figure out how much rent is required to cover the cost of the mortgage. If affording the mortgage means charging astronomical rent, the property is a risky purchase. Factor in location, unit size and amenities to determine potential rental fees. Smart rental property investors carefully consider comparable properties in the area and all additional amenities to determine realistic rents, which indicate whether the investment can be cash-flow positive.

Hire Professionals

Property owners usually write off gardening, maintenance, homeowners association fees and structural repair costs annually. Since large-scale remodeling projects occur less frequently, investment property owners can write-off a portion of the costs each following year until another remodel needs to take place. Investors should divide the total cost of the project by the lifespan of the remodel. For instance, owners who spend $50,000 on new kitchens in their properties can write off $10,000 per year, assuming they’ll be updated every five years.

The property purchase is a tax deduction, too. Unfortunately, owners must calculate the cost of the building alone since land cannot be depreciated. Hire an appraiser or an insurance agent to estimate the actual cost of the structure for tax purposes. Divide the building value estimate by 27.5 years, which is the IRS allowance for residential real estate with determinable useful life. Finally, multiply depreciation expenses by marginal tax rates to determine yearly savings.

Taxes are tricky and it’s better to hire licensed professionals who are well-versed in real estate than to miss out on potential savings. Only tax gurus should attempt to complete a 1040 return alone.

Choose Tenants Wisely

Landlords become eager to fill open units when their buildings are ready and approved for residency. However, it’s worse to let financially irresponsible or unqualified prospects sign leases than to have vacant units. Make sure to go through the full leasing process, from background checks to reference screenings.

Even if owners and managers evict bad tenants, it takes time to schedule court dates. Then, leaseholders have time to pay off their debts before being officially banned from the building. Plus, it might take months to find and secure new residents after evictions. The process can take six months, during which time the mortgage still needs to be paid.

Irresponsible tenants can also cause expensive repairs, theft-related replacements and dissatisfaction from other tenants. Owners might lose quality occupants over numerous noise complaints and general disruptive behavior from their unreliable neighbors. Approve only dependable residents to protect finances, assets and existing contracts.

Maintain Units

Secure good tenants in long term leases by upgrading apartments regularly. Moving is a hassle and leaseholders who recognize good deals are likely to stay with their current property managers long-term. Make sure common areas are kept clean, especially in pet-friendly buildings. Well-kept gyms, pools and courtyards are great marketing features and amenities to retain quality tenants.

These may seem like obvious pointers for responsible property managers and owners, but they are the best practices to capitalize on investments. The economy, location, property structure and good management ultimately determines success rates, so keep market trends and red flags in mind before financing investment properties.

About the Author

This post has been written for FIRE Finance by Jennifer Riner of Zillow.

Image Source(s): iStockPhoto