What Is Property Rental?
Interested in investing in rental property? Property rental is an enterprise with one or more income-producing property items that are purchased and managed by an investor. These items can have one or more rooms that are rented out to tenants who are obliged to make regular monthly payments. Owning rental or leasing property as a business can be quite beneficial.
The property rental business does not differ from any other type of entrepreneurial activity. The most important issues are drafting a rental property business plan, getting financing, and setting a proper business goal.
You may rent or lease commercial and residential property, storage areas, farmland, or any other purchasable land. Not sure where to begin? Check out our Commercial Lease Agreements, Residential Lease Agreements, Land Lease Agreements, and Farm Lease Agreements to find out more.
If cash flow stays positive on a particular piece of land, a rental property can become a good investment. Renting out residential property may be considered passive income and you are able to combine it with your main job. Entrepreneurs owning several rental buildings can create rental property companies where they can hire a manager who will keep accounts, collect payments, and solve any issues that may come up with the lease.
How to Start a Rental Property Business?
As mentioned previously, rental property is a structure being leased or rented to a tenant for a certain period of time. Depending on the terms of the deal, the concepts of a residential lease and a residential rental are picked out. A residential rental is considered to be a short-term rental while a residential lease is a long-term contract. After your business plan, budget, potential profits, and risks are calculated, it's time to create your enterprise legally. The first thing is composing an agreement. The requirements for these agreements may vary depending on which state you reside.
- Personal details about the landlord and the tenant;
- A fixed time period of lease or rental: the beginning and ending dates of the lease;
- The rent amount per month, the security deposit, and other payment terms;
- A description of the property to be rented: square footage, number of bedrooms or bathrooms, type of build (wood or concrete), parking if available, and property type (condo, townhome, duplex, triplex or others).
The following sections are optional but may prove to be essential:
- Cleaning fee. This can protect you from any potential mess your tenant causes.
- Changes in the terms of the rental/lease. Both the lessee and the lessor must have a clear understanding of the lease term. If there may be any changes in the rental period, the procedure for making them must be prescribed in the contract.
- Abandonment. This clause protects the rights of the landlord since tenants may leave the premises in unsatisfactory condition.
- Occupants and pets. The landlord may have objections to the number of residents, children or animals. An addendum regarding pets must be negotiated and signed in advance.
- Condition of the rooms, garages, etc. Inventory and inspection. These measures are necessary to prevent potential claims in a timely manner.
- Notification of repair or building issues. If the apartment needs repair or replacement of expensive furniture and appliances, then most often these costs are either shared between the parties or are performed by the tenants, but then the landlord can temporarily reduce the rate. Repair and reconstruction in a rented apartment are not allowed without the consent of the owner.
- Utilities. The landlord may include the utilities cost in the rent, but make the payments himself to remove this concern from the tenants. The opposite situation is also possible: the owner reduces the rate, and the tenant pays all utilities.
- Termination. This point is essential in the contract as different circumstances may arise and you may need to stop renting;
- Sublease. The original tenant has no right to sublease the premises without notifying the lessor.
- Extra services provided with the rental or lease. And the signatures of both parties and the acceptance date.
How Much Profit Should You Make on a Rental Property?
There is no single answer about how profitable your rental property business should be.
It depends on many factors: the type of investment property, the location, and first of all on your rental property management, and strategy. These are two important steps you to have to calculate for a good start-up in a property rental business:
- Screen the real estate market in your area: demands of the potential tenants, offers, prices;
- Count the expenses that you will have to cover:
- Property taxes;
- Rental property insurance;
- Maintenance and repair costs;
- Homeowner association fees;
- Monthly mortgage payments if you are buying rental property.
Exclude them of your expected money flow. Normally, the expenses are between 35 and 55 percent of your rent (not including the mortgage payments). If you are buying a rental property, take into account that the monthly rent on the property should be equal or greater than 1 percent of the property purchase price. Often real estate investors set about 1.2 to 1.4 percent.
How to Calculate Depreciation on Rental Property?
Owning a rental property is not only about income and taxes. You can save money by taking depreciation of your rental property as the building(s) wears out over the years. Depreciation is a great tax advantage for rental property investors as it provides an annual tax deduction.
The Internal Revenue Service (IRS) allows you to depreciate the value of a rental structure over a period of 27.5 years for residential rental property and over 39 years for commercial rental property. To claim depreciation, you have to meet all the specific requirements:
- You must be the owner of the property;
- The building has to be used as a business;
- The property has a determinable useful life (1-year minimum);
- You can depreciate only structure, land and furniture cannot be depreciated.
A depreciation calculation is calculated like this: the value of the structure is divided by the number of years in lifespan. Rental property depreciation deduction is filed on Schedule E of the IRS Form 1040.
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