Extra Money from Rental Properties


Here is another way to earn extra money from home while saving on your taxes, potentially helping others, and an area in which I have experience:  Rental property.  Now is a great time to find inexpensive properties, though many of them may need repair and rehab.  The U.S. housing market may still be in the tank, but if possible, turn it into an advantage for yourself.  Buy now, while prices and interest rates are at very low levels.

In our little ‘barony’, we own 3 properties:  Our primary residence, a townhouse, and our former single-family property.

Circumstances justified and sometimes compelled us to rent these units:

– Our grown daughters and their small children needed a place to live

– We had enough savings to cover at least six months in rent in a case of vacancy

– We felt that in the long-run (and we’re only in our 40’s), our properties would increase in value – despite the real estate disaster of 2008-09 – and offer an extra stream of income in retirement.  This could result from either rental income, sale of the property and subsequent investing, or a reverse mortgage.

– Real estate is good for portfolio diversification.  The stock and bond markets remain volatile, and while real estate has declined, at least one owns a tangible, physical asset. (1)

– Our rental properties are within 10 minutes of our primary house, allowing us to keep a vigilant eye and fast response, if needed.

– If desired, we could form a “property management company” allowing us to gain increased tax advantages from business write-offs. (2)

Taking on landlord status is not easy and requires due diligence.  One must conduct thorough marketplace research to find the rental niche and property values.  If money is expected solely from rent, one must not incur a mortgage note that exceeds rental income.  Also to consider are property taxes, fire and disaster insurance, and the cost of utilities, if offered.  One must also screen potential tenants, run credit reports, and ask for references.  Certain communities – our townhouse is one – charge association fees as well.  Those must be calculated in the overall monthly budget.

I won’t lie: There are negative sides to the rental/landlord tenant aspect too.  Our tenant in 2009 that lost her job and was unable to pay rent for a few months.  Despite our efforts to work with her, she could not or would not pay and her lease was not renewed.  Our next step to collect back rent will involve taking her to small claims court or getting a lawyer.

A second down side is the problem of immediate response if serious issues arise.  We experienced that last summer when our second property had a fire started by a faulty bathroom exhaust fan.  Even though we were already in bed, we obviously needed to be available.  Fortunately, no injuries resulted, and insurance picked up most of the cleanup and repair cost.

In the end, we manage to do better than break even on the properties while providing our daughters with a residence we know is safe and secure.  Further, in the long run, the property value will increase and we have assets to sell in worst case scenarios.

I have a few acquaintances that run their own property management businesses.  They double as real estate agents, allowing them to get the best deals available on the market.  One friend rents over 100 homes.  This is truly a job that will challenge a person physically, emotionally, and financially, with  potentially enormous financial reward.  Literally a “work at home” position!

Disclaimer:

1) We are not financial planners nor claim to be.  We strongly recommend consulting with a certified financial planner to discuss whether real estate is a good (or appropriate) option for you.

2) We are not accounting or tax professionals nor claim to be.  Individuals considering forming a business, property management or otherwise, should consult with a qualified tax professional for details and advice.