the loss of rental income. Then, if your property is destroyed by a fire and you can’t rent it, the insurer will pay you a percentage of your rental income for the number of months the house can’t be occupied. For example, if you collect $850 per month on a unit, this type of coverage would run about $60 a year.
Flannagan also suggests that landlords protect themselves in the event of a lawsuit by purchasing liability coverage of $500,000 — with an additional $1 million umbrella for extra protection. Depending on the number of properties owned and the limits you choose, premiums will come to $250. If you have three or more buildings, you can save about 25% by scheduling all your properties in a commercial package policy.
The scales start to even out when it comes to taxes. Such costs as mortgage interest, insurance premiums and certain renovations are 100% tax-deductible.
If you live in part of the property, deductions can be tricky. Let’s say you make improvements or repairs to the whole house, you can only deduct the portion of expenses that pertain to the rental units.
With your primary residence, you can exclude up to $250,000 of the capital gain from a sale ($500,000 if you are married). If you live in the rental property, once every two years you can exclude the tax on the portion of the house you live in. If you are an absentee landlord, there is no capital gain exclusion. The tax rate on capital gain on rental real estate is generally 20% on the portion that has been depreciated and 25% on the remainder.
FINDING AND KEEPING GOOD TENANTS
If you’ve done your homework when purchasing the property, the biggest wrinkle you will face is your tenants. A tenant from hell can wreck even the most carefully laid plan. Curtis White recalls one such experience. "We had a deadbeat tenant who didn’t pay the rent. It took months before we got her out. That is the worst thing that can happen."
To this day, White is more diligent in screening prospective tenants. To avoid experiences that make you pull out your hair, conduct a credit check and employment verification before allowing anyone to move in. He now calls the previous landlord for a reference and the bank to make sure funds for the security deposit are in place before handing over the keys.
You might consider using a tenant-screening service like Tenant Check of America (800-922-2214) or Rental Housing On Line. These organizations offer national databases and can often find out whether an applicant has a criminal record or has ever been evicted. Fees run under $25 per evaluation.
Once you have tenants in place, it’s a good idea to set up an incentive for timely rent checks such as discounts for early payments or penalties for late payments — if your state allows it. You should also set up a system