Well chosen, well managed rental properties can become shining stars in an investor portfolio. The keys to success include doing your homework and making sure all the numbers work.

Real Estate Investment Considerations:

1. Taxes Incentives
Some investors can use deductions from rental properties to offset wage income and/or reduce taxes by showing rental income offset by appropriate expenses and deductions.

Actual financing, managing, and/or operating costs incurred can be deducted (e.g., mortgage interest, real estate taxes, insurance, maintenance, repairs, property management fees, travel, advertising and/or utilities). Additionally, depreciation, improvements, and/or other deductions-deferrals-exemptions may be deducted per tax code eligibilities.

2. Cash Flow
Positive cash flow is when revenues exceed total expenses paid (e.g., mortgage, taxes, insurance, maintenance and other carrying costs) and can be considered from either “pre” or “after” tax. A pretax positive cash flow gets treated as current income. A negative pretax flow can result in a positive after-tax cash flow, generally resulting from depreciation deductions. Other offsets to income and/or shelters are provided given certain eligibility tests are met.

Untimely payments and/or property damage are not desirable tenant qualities - conduct thorough credit, employment, and landlord checks/references - a strong lease and security deposit will also help keep all involved on the right track.

3. Leverage - OPM
OPM is “Other Peoples Money” and refers to when you borrow money to increase equity by preserving cash and borrowing to cover a major chunk of the purchase price - equity is the difference between market value today and outstanding mortgage owed.

For instance, consider the profit-to-investment ratio (total profit divided by total investment costs) - assume that a dollar invested returns $1.50, thus a 50% return - not bad right, but now consider if you had invested the same dollar with a seventy cent mortgage (i.e., you put down a 30 cent down payment) - you would have approximately 167% return (i.e., 50 cent total profit divided by 30 cents invested - note this example assumes no carrying costs but you can get the picture).

4. Equity Growth
Each mortgage payment you make is a payment of principal to yourself - you build as your mortgage principal shrinks.

5. What Makes a Good Property Good

• Fits comfortably with surroundings, typical not unusual, in a well maintained neighborhood
• Ready access to public transportation and/or highways
• With a style that appeals to most amount of renters in that price range
• Low maintenance or repairs, unless objective is fixer-upper
• One where carrying costs can be absorbed during temporary vacancies
• Undervalued with motivated sellers

6. A Checklist Reminder:

• Run the numbers
• Benchmark last rent increases and tax assessments
• Confirm insurance and utility fees
• Check with experts (accountants, attorneys, Realtors)
• Buyer Beware - inspect, inspect, inspect