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Landlord/Tenant Course Navigation

Create a Budget

Tenants - Tenants' financial obligations are minimal compared to the landlord's obligations and responsibilities. The tenant only needs to make sure he can afford the monthly rent, and the initial move in costs. Unless there is a sudden event such as job loss or illness, the tenant's financial obligations are 100% predictable. 

Landlords - Managing income properties requires tight financial controls. An apartment building can quickly drain capital and turn positive cash flow into a negative flood if repairs and vacancies happen too frequently. Once you know a property's history, it will help if you establish an annual budget for income and expenses. For example, once you know the age of appliances, systems, and structural components you will be able to gauge when maintenance, upgrades, and repairs should be done.

Once you've established a budget and time table, it will become a set of goals to achieve each period. By creating estimates you can manage both income and costs making minor adjustments as you go. In theory, your budget should lead to increased profits and foreseeable expenses.

Setting Rents

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Rent should be high enough to cover expenses - and make a profit - but low enough to attract tenants. There may be special features to consider when setting rents. For example, a property with surveillance cameras may command a higher rent than an unsecured building. A location that is "convenient to everything" may allow you to charge more than a property out in the country. Even the quality of your tenants can affect the rental amount. "Location, location, location" is built on a theory that real estate seekers desire a combination of convenience, status and appearance. An attractive, safe neighborhood is more desirable to live in than a rundown area; therefore tenants expect to pay higher rent.


Simply offering the most attractive, updated, convenient property doesn't guarantee that you can charge a price that is significantly higher than your competitors. Most tenants seek rental units that match what they need, and may sacrifice top-notch amenities for a lower rent price. Beware of charging a payment that is too high compared to neighboring properties. However, it is better to err on the side of rent that is too high than too low. There are often unforeseen costs that pop up, and there is nothing worse than being stuck in a long term rental and not charging enough rent for it. This is called an alligator. Find the best price point for your rents, and stick with it if you can. The goal is to keep your properties rented at a profit.

When should you raise the rent?

Increasing the rent is never easy; raise it too much and you risk losing tenants, increase it only slightly and you are locked in for the lease period (potentially losing money if expenses increase). If your property has rents that are below average, consider raising the rents to meet or slightly exceed the market. Tenants will probably be unhappy but unlikely to move if there are few less expensive options around. Stay updated on prevailing rates to make sure you are in line with competitors. When units become available, take steps to improve it (such as interior painting) then charge a bit more than comparable units. The improvement may be seen as justification for a slightly higher rental charge.

You may need to raise your price as expenses increase. An income property can quickly become a financial burden if expenses are too high. It may be less painful to raise the rate in smaller increments over time than a large increase at one time. Most residential tenants will expect an increase if they occupy a unit for several years.

How to increase rental income

Increasing income can mean one of two things: increasing the cash flow or reducing the expenses. Increasing the cash flow can be accomplished by setting higher rent payments. Reducing expenses can be accomplished by reducing the vacancy rate. One of the easiest ways to do this is by setting the duration of your lease or rental agreement to a longer period. Every month that your rental is vacant costs you money, so your goal is to have as few vacancies as possible.

It's important to understand your tenant's motivations when setting or raising rents. In residential properties, social climbers want amenities and attractive accommodations, while low income tenants are looking for the lowest price available. An effective landlord will cater to his most likely prospects.

Taxes

Property owners who self-manage face two primary tax obligations – property taxes and income taxes – and they can claim a number of deductions. Consult with a tax professional or thoroughly research your own situation before relying on the following list. We are not tax professionals or attorneys. These are some guidelines that may or may not affect you.

1. Interest expenses – the largest single deduction is almost always the interest paid on financing charges. This includes mortgage interest, and can include business-related credit card interest.

2. Depreciation – owner/ landlords can recover some of the purchase cost by claiming depreciation expenses that are spread out over the useful life of the property. The current useful life of a residential rental property is 27.5 years. This changes occasionally, so check with your tax advisor to make sure. Once a depreciation schedule is set, you continue to take that amount as a deduction year after yer.

3. Repairs – The cost of reasonable and necessary repairs can be deducted. This may include updates. There is a difference between repairs and improvements. Repairs are usually minor and need to be done more often. An improvement lasts longer (like a new roof), and is added to the value of the property and is depreciated over time not deducted in a single year.

4. Travel – property owners can deduct expenses associated with visiting the property and activities that are directly related to rental responsibilities. If you are an out of town owner you can deduct travel expenses to check on your property once a year.

5. Home office – if you are managing properties from home, you can deduct costs associated with the business and a portion of your home expenses. The IRS has specific rules for home office deductions. For example, it must be a dedicated space. You may not deduct a home office if you also use that space for personal use.

6. Employees / Contractors – expenses associated with hiring and managing others related to the property can be deducted.

7. Losses from casualty or theft – you can deduct all or a portion of losses to the property due to casualty (damages from a sudden event) or theft. This does not include personal property of your tenants.

8. Insurance – you can deduct insurance premiums paid in relation to rental activities. This may include fire, theft and flood insurance, liability insurance, and workers' compensation for employees.

9. Legal and professional services – fees paid to consultants is deductible as it relates to rental activities.

It is best to consult a tax professional to clearly understand all the tax requirements, benefits and consequences involved in owning residential rental property.In Florida there is no state income tax. Anything tax related we have suggested here relates only to federal income tax. If you are an out of state owner/ landlord, your state income taxes may also be affected by your rental property ownership.

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