4 Things to Know About Owning a Rental Property
Owning a rental property can be a good investment, but here are things you should know about these unique spaces before buying.
Have you ever considered owning a rental property? Having an extra home or apartment to rent out can be a great way to earn some extra income, but these properties are different from traditional homeownership.
Before taking the leap and purchasing one of these unique estates, here are some things you need to know:
Take advantage of seasonality
Do you have a summer home up north or a winter property somewhere in warmer weather? As the seasons change, you can increase your rent to match the demand for tourists and other visitors looking for a change of scenery. This is likely easier for vacation rentals, when you can rent your property by the week or month.
If you're renting out more stable housing, like apartments, seasonality may not matter much. However, you may still want to consider how utilities will be paid.
Vacationers, in particular, may pay more for your rental property during certain seasons.
Know if you can cover vacancy costs
According to Kiplinger, the standard vacancy rate of rental properties is anywhere from 5-8%. That means the space is expected to sit empty for at least some time during the year, and you will have to ensure you can cover expenses while it is.
Even when the property is empty, you still need to make sure bills are being paid and the home is secure. Keep some of these extra costs in mind and have a nest egg so you can cover them even if your property is vacant.
Acknowledge the increased risk
Within your own home, you're responsible for upkeep, and you're likely very careful to make sure you don't break appliances or cause any damage. However, when you rent out a property, you are trusting tenants or visitors to treat the space with respect.
While the payoff of having an extra source of income from a rental property is a major benefit, there are also risks associated with this investment. One bad tenant or guest can wreak havoc on the property and require you to conduct repairs. Be sure to fully vet renters and have the proper insurance in place before allowing them to stay at your property.
Utilize tax deductions
While rental income is taxable, other expenses may be tax-deductible. The Balance explained that operating expenses, in particular, are a cost that you can claim for a tax reduction . Essentially, this might help offset the tax you pay on your rental property income so you can better manage your finances.
Speaking of expenses, it's also essential to think of the big picture when it comes to your rental. The Balance gives another good rule for estimating costs: You should assume that your rental expenses will amount to 50% of the property's gross annual income. Between recurring expenses and unplanned costs, it's important to be realistic about how much savings you need to keep your property running.
Owning a rental property is a big decision. If you have questions about how to finance* and manage expenses, contact your local Vectra Bank Representative today.
*Credit approval required. Terms and conditions apply. See banker for details. Equal Housing Lender. NMLS #467014