Can You Profit from Real Estate?
Possible tax breaks and the potential for capital gain may tempt you to consider becoming a landlord, but be cautious: there are multiple responsibilities. Real estate investments may be less of the instant “winners” they once were. Whether the property you rent to others is a vacation cottage or the home you have lived in, to succeed as a landlord you need patience and perseverance.
Interest rates and purchase prices make it difficult to turn an immediate profit. In some cities you will have to wait for rents to rise and that could take some time. Values for existing properties are expected to increase gradually over the next several years. Since property prices are currently low, now may be the best time to buy.
The Formula for Success
Before you leap into the role of landlord, be sure you can afford to tie up your money for as long as it will take for the investment to become profitable. The new restrictions on deducting losses virtually require that the property you buy produces a positive cash flow. That is, its rents must exceed your maintenance and financing costs. If it does not do so immediately or at most within a year, the property will merely take more cash out of you.
Here are some timely tips:
1. Use great caution in screening prospective tenants. Check each applicant’s references.
2. Do a credit check. Call employers to confirm job tenure and income.
3. Ask the applicant’s present landlord if he or she would continue renting to the applicant.
4. Get a security deposit as well as first and last month’s rent.
5. Inspect the premises often, looking for small problems that could cause big troubles later on.
If you are using traditional mortgage financing you will be required to maintain the appropriate amount of property and liability insurance so the lender’s interest is protected. But what about protecting your heirs’ interests?
It is important to make certain that any mortgage can be paid off in the event of your death. Using permanent life insurance to do the job will also create a cash pool which can be used in the future to either pay off the balance of any mortgage or complete costly renovations.
I would be happy to analyze your current mortgage obligations and make recommendations about how to implement the best protection plan possible.