blahblah454

I did a search on rental properties and was not able to find anything.

I am curious if any of you guys out there own houses for rental purposes, and how taxes and income and mortgages and all that fun stuff works.

Here is what I am thinking about:

My brother and his fiancée are moving to a city a few hours south of our home city. His lady is going to school at the university there, it is a five year course. They are having one hell of a time trying to find a place to rent and they suggested that I buy a place and rent it to them, after talking with my parents they think that this is a decent idea as well. It would be guaranteed renters for 5 years, assuming the relationship and schooling works out the entire time.

The houses there can be rented out for the same price as what they would in the city where we are from, but they cost 30% less to purchase. I would be buying one within walking distance to the university, so for future rentals I think this would be fairy easy to fill.

In about two years I will be looking to buy a house for myself in the city. Right now to avoid certain fees on the mortgage, a 20% down payment is required. This should be fairly easy on the first house, but the second house would be damn near impossible to come up with that kind of money in this short a time. So I don't know if I could take money out of the first place to use as a down payment for the second to avoid those fees.

Essentially I am wondering if you good folk know of any resources where I would be able to do some research on how taxes for rental properties work, and if the income is even taxed at all if it all goes towards the mortgage. Perhaps some good books or websites, or even personal experience.

I have always been interested in owning homes for rental purposes, and have wanted to find out more information. As what appears to be a common thread in my life these days, something I have been interested in doing but never get around to researching falls into my lap and I feel unprepared! That is where the collective knowledge of TFP comes in!

Rekna

I believe you have to report the rent as income (so it is taxed) however you also get to report the interest on the mortgage payment which takes away from your taxable income. Thus in the end you pay taxes only on the principal paid on the rental property and any rent that is in excess of the mortgage payment.

Cynthetiq

I'm sure there are good books to read up on such things, but better than that is a real life accountant. If you don't already have one, find one. While you think you can do better than an accountant using Turbo Tax or another online source, chances are a real life accountant can answer important questions that these systems cannot which can and will net you better refunds. The question to ask yourself isn't how much does the accountant cost, but how much more do you get back (legally of course) above what you pay for the accountant. In other words when I do the return myself I get X, and when I let the accountant do it it's X+Y-Z which is still more than X. The final nail for me is emulating what successful people with more money with me do, and I haven't met one that doesn't have an accountant.

The next thing to remember is that your investment will be tied to a family member. If you cannot stomach having to kick out your family member if they cannot afford to pay rent for whatever reason during that 5 year lifetime, this may not be the correct path for you to take. Remember you'll be on the hook for all the payments and if they can't pay, you still have to pay.

You may hedge your bets by finding a 2 family home and renting to two parties this may be something to allow you to spread more of the risk.

All income generated from the rental property is going to be taxable. A good accountant is going to depreciate the property on a schedule, and by that schedule you'll be "losing" money on paper, thus taking a deduction to offset the income. About that income, this is why an already rented property may be an easier purchase or qualify for a mortgage, and that is because that income will be included in your paperwork as income you'll be making as part of your mortgage qualifications.

Taking money out of the investment property to purchase your next property is risky because what if the 1st property doesn't gain enough equity when you are ready to by the 2nd property?

When I took the 1st property in 1999 and then refinanced it in 2008 to take out money to buy the 3rd. We were hoping to finance the entire 20% but because the 1st property didn't appraise as high as we had hoped we didn't get as much and had to use more savings to get to the 20%. It wasn't an ideal for us but it still worked out that we didn't miss the REO (bank owned) opportunity.

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spindles

I second the accountant bit. My advice is probably not as relevant as the mortgage on your principal place of residence in Oz is not tax deductible at all, while interest and any other expenses on investment properties are. Further, state taxes and charges differ from one state to another. The exact amounts/sizes of federal and state taxes and deductions is the bread and butter of accountants.

A friend of a friend locally has a set of units in western Sydney. Unfortunately for him, the value of these has dropped since he purchased and he now has quite a few units where the rent doesn't cover his mortgage payments on those units.

I'm also wary of renting something to a family member. If the shit hits the fan (for whatever reason), it is you who is holding the deed on the property. You need to ask yourself, would you be looking for an investment property if your brother didn't need somewhere to live? Assuming he would pay reduced rent, is it the best investment you could choose?

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dlish

my line of thoughts goes along with with spindles has said, probably because we both hail from the same place. Taxes and laws differ from place to place, so see your accountant.

I think the idea of renting t your brother is a noble one, but if you were going to rent this place out to your brother, you are probably going to rent it out at a cheaper weekly rate. This is something you need to consider vs renting to a total stranger at market rates that you could evict if they couldnt make repayments. To avoid misunderstandings, is make sure you have a written contract with your brother. This may seem like it isunnecessary, but it saves heartache for both of you down the track.

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Cynthetiq

I'd like to add that you should consider a couple of things as well.

If something goes bad like the AC, heater, or any of the things that can go wrong with the house, you'll be responsible. This means you'll have to also have a reserve of funds to be able to pay for repairs.

I just had to replace the HVAC system for the 5 bedroom house. It would have cost me over $3,000. When I bought the property I got a home warranty for a few hundred dollars and my total cost for the replacement ONE of the units was $500, $350 for the crane to life it over the wall, and $150 to dispose of the old unit. On the other property, the washing machine gave out after almost 10 years, and it was $150 to buy a refurbished unit.

Now, my properties aren't anywhere near me. I did that on purpose because I don't want to visit them and mess with them at all. I have done that earlier in my life managing my parents rental property when I was a young man. I didn't like going every month to collect the rent and oversee repairs.

I hired a property manager who takes 10% of the collected rent. If there is no renter, the manager does not get paid. The manager handles and fields all the calls from the tenants and is authorized to spend up to $200 without consulting me for any emergency repairs. I make just enough money from the rent to cover the mortgage and make a small profit each year, which goes to a savings account for any future repairs.

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blahblah454

Thanks for the advice! This is still something I am interested in, but not something to seriously look at for a few more years I think.

Cynthetiq

I thought the same thing. I'm in Vegas again this weekend, and I found out I can buy a 3 bedroom single family residence for less than $60,000 and it can rent for about $800. Mortgage with 20% down will be about $400/mo. I'm going to come back and seriously look for another rental property, maybe even 2 at this price.

I'm not sure why you're waiting, but there are bargains all over the place you just have to look.

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Baraka_Guru

Fuck, why do I live here again...?

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blahblah454

Holy sweet Jesus!!!

Maybe I do just need to go on a road trip through the states and look at some places, that is freaking pocket change compared to places in Canada.

Baraka_Guru

I didn't say too much about it because Cyn knows this all too well, being that he's in Manhattan.


...but still. My one-bedroom apartment rents for nearly $500 more per month than that house.

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blahblah454

Yea Canada has its shining stars. My girlfriend just bought a 1 bedroom condo for $250,000.

Houses are significantly more.

canuckguy

If your the least bit handy I think owning more property is a good idea. If you can do repairs yourself then go for it. If not then unless you have cash on hand it can get expensive.

My best friend who is not educated but very hard working bought a dump of a house just as I entered university. He worked at subway and slowly fixed the house up on his own. He flipped the house and bought another dump, turned that into rentals, bought another dump....etc.

Now he owns 15 or so income properties and pays a property management company to run the units. He is spending time traveling right now and enjoying his success. He is going to purchase more houses and flip over time but right now he living the dream.

Uneducated but a smart smart man. If I was the least bit handy I would be doing the same. What movie quote is it that says the best investment is land because god ain't making anymore of it. Seems to ring true for some of my friends and family who do this rental or flipping of properties.

Plus we are a university town so tons of renters.