Thursday, November 26, 2009

Extra Money via Rental Properties

Here is another good way to make extra money, save your taxes, potentially help out others, and an area in which I have personal experience.  Rental property.  Now is certainly an ideal time to find inexpensive properties, though many of them may require repair and rehab prior to renting.

In our little 'barony', we own 3 properties: our primary residence, a townhouse, and our former single-family property.

Circumstances justified and sometimes compelled us to rent these units:

- Our grown daughters and their small children needed a place to live

- We had enough savings to cover at least six months in rent in a case of vacancy

- We felt that in the long-run (and we're only in our 40's), our properties would increase in value - despite the real estate disaster of 2008-09 - and provide an additional stream of income in retirement.  This could result from either rental income, sale of the property and subsequent investing, or a reverse mortgage.

- Real estate is good for portfolio diversification.  The stock and bond markets have demonstrated volatility over the past 18 months, and while real estate has declined, at least one owns a tangible, physical asset. (1)

- Our rental properties are within 10 minutes of our primary house, allowing us to keep a vigilant eye on them.

- If we wished, we could form a "property management company" allowing us to gain increased tax advantages from business write-offs. (2)

Taking on the responsibility of landlord is neither taken lightly nor without research and planning.  One must conduct thorough research on the marketplace to determine the rental need and property values.  If money is expected soley from rent, one must not incur a mortgage that exceeds rental income.  Also to consider are property taxes, fire and disaster insurance, and the cost of utilities, if those are offered.  One must also vett potential tenants, running credit reports, and asking for references.  Certain communitys - our townhouse is one - require association fees as well.  Those must be calculated in the overall monthly budget.

I won't lie - there are negative sides to the rental/landlord tenant aspect too.  We had a tenant in 2009 that lost her job and was unable to pay rent for a few months.  Despite our efforts to work with her, she could not or would not pay and her lease was not renewed.  Our next step to collect back rent will involve taking her to small claims court if the back rent is not settled. 

A second example of the down sides are a need to be immediately available if serious issues arise.  We had that experience this past summer when our second property had a fire started by a faulty bathroom exhaust fan.  Even though we were already in bed, we obviously needed to respond immediately.  Fortunately, no injuries resulted, and insurance picked up the majority of the cleanup and repair cost. 

In the end, we manage to do better than break even on the properties while providing our daughters with a residence we know is safe and secure.  Further, in the long run, the property value will increase and we have assets to sell in worst case scenarios.


1) We are not financial planners nor claim to be.  We strongly recommend consulting with a financial planner to discuss whether real estate is a good (or desirable) option for you.

2) We are not accounting or tax professionals nor claim to be.  Individuals considering forming a business, property management or otherwise, should consult with a qualifed tax professional for details.

- AJ

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