- Business
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- Property Rental
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 in.
A standard Lease Agreement or Rental Agreement often contains the following:
- 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 in your Lease or Rental Agreement:
- 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.
- 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. Specify if the original tenant has a right to sublease the premises (with or without notifying the lessor).
A Rental Application or a Cosigner Agreement may be attached to a contract if needed. Additional documents that may be useful for a potential property owner or lessee include:
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 circumstances: the type of investment property, the location, and first of all on your rental property management, and strategy. These are two important factors you have to calculate for a good start-up in a property rental business:
- Screen the real estate market in your area. Analyze the demands of the potential tenants, existing offers, and prices.
- Count the expenses that you will have to cover:
- Property taxes;
- Rental property insurance;
- Maintenance and repair costs;
- Homeowner association fees;
- Advertisement;
- Monthly mortgage payments if you are buying rental property.
Exclude them from 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 to 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 IRS Form 1040.
Related Articles and Topics:
Documents
Form TAR-2101 "Commercial Lease - Texas Association of Realtors" - Texas
This form is used by Texas landlords and tenants to outline the details of the commercial property rental. It can only be filled out and signed by members of the Texas Association of Realtors (TAR).
"Key Receipt Template"
This form verifies that the tenant has received keys to a property they rent and guarantees to return them to the landlord or property manager by a certain date or when the Lease Agreement expires and the rental period is over.
"Tenant Background Check Form"
This form helps property managers make sure there are no hidden surprises with potential applicants.
"Cosigner Agreement Template"
This document outlines the services offered to each party of the agreement to protect the landlord in case any issues with the potential tenant arise.
"Rental Application Form" - Alabama
This form can be used in the state of Alabama to make a living rental agreement.
"Rental Application Form" - Alaska
This Rental Application is a document potential tenants fill out before renting a residential property in the state of Alaska to provide this property's owner with their personal information.
"Rental Application Form" - Arizona
This Rental Application is a document that contains information regarding rental applicants in the state of Arizona.
"Rental Application Form" - Arkansas
An Arkansas Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - California
You may use this California Rental Application as a document that states information about a potential tenant for a landlord or property manager to verify.
"Rental Application Form" - Colorado
Use this Colorado Rental Application as a legal document which is requested by property managers or landlords and completed by potential renters.
"Rental Application Form" - Connecticut
Use this Connecticut Rental Application as a document potential tenants fill out before renting a residential property to provide a property owner with their personal information.
"Rental Application Form" - Delaware
Landlords may use the details in this Delaware Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
"Rental Application Form" - Florida
A Florida Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - Georgia (United States)
A Georgia Rental Application is a document that states information about a potential tenant for a landlord or property manager to verify.
"Rental Application Form" - Hawaii
This is a form, known as a Hawaii Rental Application, that is used by landlords or property managers to collect necessary information from prospective tenants.
"Rental Application Form" - Idaho
An Idaho Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - Illinois
An Illinois Rental Application form is used to gather information about prospective tenants who are interested in applying for a property rental.
"Rental Application Form" - Indiana
Use this Indiana Rental Application form as a document used by rental agents and landlords to collect information from prospective tenants applying for renting an apartment.
"Rental Application Form" - Iowa
This is a form, known as an Iowa Rental Application, that is used by landlords or property managers to collect necessary information from prospective tenants.
"Rental Application Form" - Kansas
A Kansas Rental Application Form is a form that is used by landlords or property managers to collect necessary information from prospective tenants.
"Rental Application Form" - Kentucky
Use this Kentucky Rental Application as a legal document which is requested by property managers or landlords and completed by potential renters.
"Rental Application Form" - Louisiana
This Rental Application is a document potential tenants fill out before renting a residential property in the state of Louisiana to provide this property's owner with their personal information.
"Rental Application Form" - Maine
Landlords may use the details in this Maine Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
"Rental Application Form" - Maryland
A Maryland Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - Massachusetts
Use this Massachusetts Rental Application as a legal document which is requested by property managers or landlords and completed by potential renters.
"Rental Application Form" - Michigan
This Rental Application is a document potential tenants fill out before renting a residential property in the state of Michigan to provide this property's owner with their personal information.
"Rental Application Form" - Minnesota
Landlords may use the details in this Minnesota Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
"Rental Application Form" - Mississippi
A Mississippi Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - Missouri
Use this Missouri Rental Application as a legal document which is requested by property managers or landlords and completed by potential renters.
"Rental Application Form" - Montana
This Rental Application is a document potential tenants fill out before renting a residential property in the state of Montana to provide this property's owner with their personal information.
"Rental Application Form" - Nebraska
Landlords may use the details in this Nebraska Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
"Rental Application Form" - Nevada
A Nevada Rental Application is a document completed by individuals who apply for a rental need to verify their legitimacy.
"Rental Application Form" - New Hampshire
Use this New Hampshire Rental Application as a legal document which is requested by property managers or landlords and completed by potential renters.
"Rental Application Form" - New Jersey
This Rental Application is a document potential tenants fill out before renting a residential property in the state of New Jersey to provide this property's owner with their personal information.
"Rental Application Form" - New Mexico
Use this New Mexico Rental Application form as a document used by rental agents and landlords to collect information from prospective tenants applying for renting an apartment.
"Rental Application Form" - New York
A New York Rental Application is a document completed by individuals who apply for a rental to verify their legitimacy.
"Rental Application Form" - North Carolina
Landlords may use the details in this North Carolina Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
"Rental Application Form" - North Dakota
This is a form, known as a North Dakota Rental Application, that is used by landlords or property managers to collect necessary information from prospective tenants.
"Rental Application Form" - Ohio
Use this Ohio Rental Application as a document potential tenants fill out before renting a residential property to provide a property owner with their personal information.
"Rental Application Form" - Oklahoma
Landlords may use the details in this Oklahoma Rental Application to find out if an applicant is a safe and responsible tenant who will not cause any problems, damage the property, or fail to pay the rent.
