Buy Rental Properties
Bidding On An Investment Property...
You will probably not make money the first year of owning a rental property. More of your cash will go out than will come in. What makes rental property such an attractive investment is that your rental income will grow over time while your mortgage payment is fixed. Rental property will also give you a tax break. So, you will reap significant tax savings; increasing the real return on investment. For further information on this, check with your tax adviser.
When bidding on a rental property, approach it quite differently from the way you would bid on your residence. Let's examine how you do a potential income/cash flow analysis.
A three-bedroom townhouse in Santa Clara is being offered for an asking price of $400,000. Your investment strategy is to put 20 percent down and finance the remaining balance with a 30 year fixed loan at 7%. How much do you bid for the town-house? Let's assume that you want to make an intelligent, informed, and fundamental investment decision, you need to run the before-tax cash-flow calculations, then estimate the tax benefits from rental-property ownership.
Calculate and compare the before-tax annual and monthly cash-flow of the townhouse over the range of the bid prices and have a firm idea of how much you can afford to pay to "carry" the property. For example, you may be willing to pay up to $2,000/month to own the rental property. So, the maximum price you can bid will be a price that generates a negative monthly cash-flow of $2,000. Remember, a price lower than the maximum will generate lower negative cash-flow; which improves your investment position.
Fortunately, there are some favorable tax consequences of owing rental properties that improve the real return on your investment. There are three types of expenses: mortgage-interest expense, operating expense, and depreciation.
According to the IRS rules, if your adjusted gross income does not exceed $100,000 and you actively participate in the management of the property. The rental loss (up to $25,000) can be deducted from your other income. Households with adjusted gross incomes between $100,000 - $150,000 can deduct passive losses up to a phase-out portion of the $25,000 cap. For households whose adjusted gross income exceed $150,000, the taxable rental loss cannot be deducted in the current year. These households will be unable to reduce the total before tax cash flow. Property owners are permitted to carry forward their suspended rental losses. Each year, rental losses can be carried forward until the property is disposed of. This means you accumulate the losses rather than deducting each year's loss from your income.
The loss carry-forward delays the benefits of rental investing. The benefits are after the fact. As you accumulate more rental properties, the loss carry forward becomes more effective. As you sell properties, you will be experiencing tax savings that can help blunt the negative cash-flows of your other properties.