How Rental Property Can Help Your Retirement Account
Property purchases that turn into income properties are some of the most well-known and lucrative ways to retire. Indeed, the very thought puts stars in some people’s eyes thinking about it. However, putting theory into action is a very different story.
Rental property can help your retirement account in several ways. For example, those with very little wealth to their name can buy a house and rent it out. From there, they can use the rental income to pay the mortgage on the house. That is one of the easiest and risk-free ways to put the property under your belt. The equity on the property can guarantee needed loans in the future. If, after renting your house for a time, you wish to move back into the home, you are free to do so. The property belongs to you, along with all the responsibilities and benefits attached to it.
There are a few possible pitfalls and risks to owning properties, but most of these can be offset by hiring an excellent property management company. The first pitfall is this. Once you find a property with rental potential, you need to buy it. That often means money up front. The properties that command higher rent prices often cost more for obvious reasons. These properties are often in low crime rate areas, higher income demographics, and in general, nicer parts of towns. That does not mean that these places are the only places you should be looking. Some of the most lucrative properties can be found in the lower to middle-class neighborhoods.
Another potential pitfall might be the maintenance and upkeep. As an owner, you handle repairs. However, much of these costs can be offset by a couple of things. One, by hiring a lawyer to manage your written rental contracts, you can make the tenant responsible for things like irresponsible behavior. Two, hire a property manager. This property manager acts as a go-between for you and your tenants. Other duties include maintenance requests, rent collection, and filling tenant vacancies. Property managers usually get paid a percentage of the total rent, so if you are not making money from the property, neither are they. This arrangement puts tenant vacancy higher on their priority list. That is good news for you and good news for your retirement portfolio.
The most obvious perk about holding a rental property in your name is the money. That is the whole point, right? Some of the advantages ought to make a rental income property high on your list when building your portfolio. The first advantage is the whole reason it should be in your portfolio—it generates an income every month.
The next advantage includes your tax breaks. While taxes can be something you handle yourself, it is also something that Certified Public Accountants often manage on your behalf. The simplest way to explain taxes is to compare it to Income Tax. As an employee, you make money, get taxed, and then spend the money that is left over. As a business, you make money, spend the money on tax-deductible exceptions, and then are taxed on the profit. Rental property income falls under this “business” definition.
Rental property includes a slew of tax deductions ~ number one being the interest rate. In this case, “interest rate” is an umbrella term used to cover mortgage interest payments used to both acquire and improve the property and credit card interest used for good and/or services in the rental activity. An excellent example might be a housewarming gift for new tenants—go to your local dollar store and fill a small basket with a sponge, dish soap, and a small hand towel.
Another excellent tax break are the repairs. Every penny of repairs for your rental property becomes a tax deduction. Several other deductions exist. The premiums for almost any type of insurance—flood, theft, or fire—is a business expense and can, therefore, be deducted come tax time. The fees paid to your property management company become a tax deduction. If you need a home office to help with your own finances or to help your property management company, everything—chair, desk, computer, internet connection, printer, and even square footage of your home—becomes a tax deduction.
Some people might argue that local travel, like gas mileage, is also a tax-deductible business expense. It is not being included in the list because anywhere that needs attention, like a trip to the hardware store for a tenant, should be performed by the property management company. The whole idea is for you to create a turnkey, passive, residual income from your rental property portfolio.