Buying property with the intention of renting it out to tenants can be a lucrative investment. This is especially true these days, when more people choose to rent now than any time since 1965. And if you find the right tenants, renting property can be a fairly passive income. But making money as a landlord isn’t as simple as just buying a house and moving someone into it. There are certain things you need to know in each state in order to turn a profit while staying out of court.
Each state has its own tenant laws
There are laws that govern the US and then there are laws that also apply to each state. For example, it is illegal to choose not to rent to someone based on race, sex, or gender, religion, national origin, or familial status. This law applies to every state in the US. However, other things, such as landlord obligations tend to vary slightly from state to state. For instance, in certain states, landlords are required to return a renter’s deposit within one month of the last day of the lease. Other states may require immediate return, 14 days, or other variations in policy. And you can get records as to whether or not your tenant will actually pay bills by getting a rental background check free.
Rental property has income tax obligations
Owning rental properties is a business and any income earned will have to be reported to the IRS. Rental income is primarily just rent you receive from your tenants, but it should also include their security deposits in some cases. If you plan to return the deposits, you don’t have to include them. But if they are taken as payment for the last month’s rent at the end of the lease, then they are considered advance rent and should be reported. Among the other things you are required to report as income are early lease cancellation fees. Also, if your tenants pay for any repairs or required improvements out of their own pockets, this is considered rental income.
On the flip side of this is the fact that there are a lot of deductions landlords can take to lower their tax responsibilities. You can deduct the cost of repairs and maintenance, such as painting supplies, building materials, and labor expenses. You can also deduct taxes, interest, advertising, and any utilities you pay for. And if you pay for credit reports, you can deduct the cost of those.
Mortgage requirements are different
Getting a mortgage for rental properties is a little different from getting a mortgage for a primary residence. Be sure to do your research; for instance, mortgage loans in Louisiana suburbs may differ from loans in inner-city Chicago. For one thing mortgage insurance doesn’t cover these, so you will more than likely be required to make at least a 20 percent down payment. The good news is, though, that some of the closing costs and insurance premiums may be tax deductible, so you will still get a break. And if you are trying to make money with your investment, you’ll need all the breaks you can get. In fact, many borrowers opt for smaller banks or credit unions for mortgage loans.This is because these types of institutions tend to be a little more flexible on their terms, especially for people with less than perfect credit.
Becoming a landlord is a great way to diversify your income portfolio, but it’s not something to take on lightly. Do your research and educate yourself on average rent for each type of property in your area. Find out all the local codes and laws. And shop around to find the best mortgage and insurance rates.