As Jason Hartman says, investing in rental real estate is one of the most secure ways to create an independent income stream in retirement – or at any stage of life. Yet a number of misconceptions about owning rental properties continue to keep potential investors from taking that first step toward real estate entrepreneurship:
It takes a lot of money. Certainly rental real estate investing takes money. And an advantage often goes to the investor able to pay cash for a property, particularly in auction sales. But the key is to use other people’s money – OPM, as it’s called. A number of private lenders and financial institutions are willing to lend for investing.
Under the terms of some Fannie Mae loans, a borrower with good credit can get financing for up to four properties at once. Down payments on many distressed and foreclosed properties are often as low as 10 percent of purchase price. Although it’s wise to diversify by purchasing as many properties as you can, it’s possible to get started with a single family home for a relatively small upfront investment.
I’ll always be doing repairs. The myth of the overworked landlord who has to tackle a plumbing job in the middle of the night persists. But even though you own the property, you don’t have to be the one to do all the hands-on repair and upkeep. The hands-on owner who manages the property rather than turning it over to a property management company is eligible for a variety of tax breaks, including fees paid to contractors and repair people. Travel to and from the property also counts as a tax-deductible expense.
I’ll spend all my time dealing with bad tenants. Bad tenants do exist, and dealing with late or missing rent payments, damage or neglect to the property and even the ultimate inconvenience of evictions can plague any property owner. But careful screening of potential tenants within the requirements of the Fair Housing Act can eliminate many of these problems. And being a good owner who maintains the property and addresses problems promptly can help to attract the kind of tenants who won’t pose problems later on.
I don’t have the time. Although rental property income is considered passive, there are tasks an owner is required to do. And managing your investments constitutes a business which is eligible for tax deductions for home offices, management expenses and other expenditures associated with handling your investments. But outsourcing is tax-deductible, too, and you can turn over many tasks related to your properties to a variety of professionals.
Some deductions do depend on demonstrating that you’ve been actively involved in tasks related to managing your properties for a certain number of hours per year, though, so it can be a good idea to consider your investing activities as a business – with you as boss. However, you don’t have to worry about the self-employment tax.
There aren’t any quality properties available. The housing crisis appears to be easing, and home prices are rising. But good deals in many markets are still available, and a number of “delayed foreclosures” – foreclosure cases only now reaching the courts—are entering the market. Also, if no appropriate properties are available in your immediate area, consider exploring other markets. As Jason Hartman advises, diversifying your holdings in different markets offers protection against market collapses and other issues. Rental property ownership involves work and responsibility – but don’t let the myths stop you from taking the first step.
The Jason Hartman Team
