Tax Benefits
The Internal Revenue Service allows you to deduct many expenses connected with rental property in the categories of:
This means that you can deduct your insurance, interest on your mortgage, maintenance costs, and physical wear-and-tear on your property.
Depreciation may produce a nominal loss, which in turn you may deduct against other income. In other words, you may achieve net positive cash flow from the rental income minus expenses and still have a net loss for tax purposes. But be aware that depreciation also reduces the cost basis of a property for calculating capital gains when you sell your property.
In addition, the 2017 Tax Cuts and Jobs Act offers a number of tax benefits for landlords. If you own a flow-through entity (also known as a pass-through business) and operate it as a sole proprietorship, limited liability company, partnership, or S corporation, you now may deduct an amount equal to 20% of your net rental income—as long as your total taxable annual income from all sources after deductions is less than $157,500 for singles or $315,000 for married couples who file jointly.
Seasonal Rentals
If you rent your property seasonally, you may use it yourself for 14 days per year—or 10% of the number of days that you rent to others at a fair market price—and still be able to deduct your expenses.
1031 Exchange
In a 1031 exchange, you can sell a rental property and invest in another of “like kind” without paying capital gains taxes.
Passive Income Source
Perhaps the biggest benefit to owning rental property is that it’s a passive income source. This means that it is recurring income that requires relatively little effort to maintain. It can be an attractive option for people looking to make some money on the side, or even as additional financial security during retirement. Additionally, rental income may be taxed differently than employment income.
Of course, you’ll want to work out all the cash flows before investing in a rental property. In order to better ensure that being a landlord is more likely to be profitable for you, you’ll need to factor in all your expenses. Once you have an idea of your cash flow, you’ll want to assess whether the numbers suggest you’re likely to be able to make a consistent income on the property before purchasing.
Before you apply for a rental property loan, consider these three income property ratios to help ensure your intended purchase has solid, positive cash flow:
Cap Rate
The capitalization rate – cap rate for short – compares the property’s net operating income (NOI) to the property purchase price:
Although the NOI doesn’t include the mortgage payment, cap rate is a good way to screen out properties that may not cash flow. That’s because the lower the cap rate is without the loan payment, the greater the odds cash flow will be negative.
Rent Ratio
Rent ratio – also known as the “1% Rule” – compares the gross monthly rent to the total cost of the property (including acquisition and financing fees, and rehab expenses):
A rental property with a very low rent ratio is a red flag that the investment will have negative cash flow. As a rule of thumb, the higher the rent ratio the better. Real estate investors who use the rent ratio usually look for a minimum ratio of between 1% and 2%.
Cash-on-Cash Return
Cash-on-cash return compares the amount of cash received to the amount of cash invested:
The cash-on-cash return calculation is a good way to analyze how different financing options affect cash flow, because the cash received includes the mortgage payment expense.
* Loans only apply to non-owner occupied properties. Rates, terms and conditions offered only to qualified borrowers, may vary upon loan product, deal structure, property state or other applicable considerations, and are subject to change at any time without notice, shall only constitute a general, non-binding expression of interest on the part of Apex Capital USA Solutions Corp, do not create any legally binding commitment or obligation on the part of Apex Capital USA Solutions Corp, and are expressly subject to Apex Capital USA Solutions Corp credit, legal and investment approval process. Closing times are in business days and commence upon receipt of appraisal payment and satisfaction of borrower conditions. Closing times may be delayed due to appraiser property access limitations or availability in certain markets. Rates are as of 01/15/2019.