Deciding If We Should Become Landlords: Part 2

 The Pros:

In “Deciding If We Should Become Landlords: Part 1”, we examined whether or not we could conceivably become landlords and assessed the marketability of our property. After careful self-analysis, we concluded that our property does indeed have the potential to become a rental property.

However, neither of us know much about the current rental market, and have only a vague idea of what our property would be worth if we were to turn it into a rental. For this very reason, we decided that we should follow-up with what we deduced by seeking an opinion from a professional. We also know that it’s a frivolous waste of time, like me trying to figure out what Mr. FE’s toys are supposed to do, and there is no point in philosophizing without the assessment of an expert.

Thankfully, we made the right decision and it was determined by our knowledgeable realtor that our property would absolutely fit the bill as a rental. Even better, we were told that our property would most likely be in high demand given the present condition, and our close proximity to a major commuter highway. This was really great news!

single-magenta-flower
An early spring bloom.

But what about the numbers…

We were told that our property would most likely fetch a rent somewhere between $2800 to $3200 per month for the area where we live. Unfortunately, we were expecting this to be a little higher. The reason why the rent came in lower than our own estimation is because we are competing with a new wave of home buyers. It turns out that Boston, MA has experienced significant inflation on rents recently, and renters are now fleeing the city and making their way to the suburbs. You would think this would help us, but given the still low-interest rates most of these people are opting to buy instead of rent.

The good news is that this passive income of $2800 to $3200 estimated per month should more than cover our $1913 mortgage/HOA payments, and does yield a profit (before taxes, insurance, expenses, etc.) of 46 to 67 percent. Not bad considering that we have 13 1/2 years left on our mortgage.

We also need to take into account the tax deductions for placing the property in service, managing it, and maintaining it. Here is a quick snapshot of some of the items we will be able to deduct if we decide to become landlords:

  • Advertising
  • Interest
  • HOA dues
  • Insurance
  • Bookkeeping
  • Depreciation
  • Cleaning and maintenance
  • General repairs
  • Utilities
  • Property taxes

When we take the monetary equation out of the picture, we see other benefits of becoming landlords as well. Some of these include, but are not limited to:

  • The freedom to move to our dream location. We have been discussing the possibility of moving to Lake Winnipesaukee in NH. Our desire is to live close to the lake and have direct access to the water. Plus, we like the idea of being surrounded by mountains. Having passive rental income would make this move far more affordable, especially after the mortgage is paid off.
  • The freedom for us to enjoy slow travel. We have on our bucket list an aspiration to travel the world and visit places in Europe, Asia, and the Pacific Islands. The rental property would allow us to travel freely and stay as long as we choose.
  • The freedom to run our own schedules. We have been looking forward to breaking free from our 9 to 5 schedules for quite some time know. It would be a huge benefit to be able to retire early, have this passive income, and not worry about being feeling constrained by our current daily regime.

As is currently stands, becoming landlords could fit our desired lifestyle. We should be able to find tenants with ease based on our property location and condition. The estimated monthly income (before taxes, insurance, expenses, etc.) should more than cover our mortgage/HOA payments, and we do see a chance to make a small profit. We are also taking into account the passive income this rental could provide us when we are fully retired.

There is a lot to consider and in our next post we will be addressing the cons of turning our property into a rental. There is so much for us to look at, and thus far, this exercise has been a worthwhile one for both of us.

Are you currently a landlord? If so, have the tax deductions helped you? If not, are you interesting in becoming a landlord? 

 

 

 

 

 

 

 

 

 

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21 thoughts on “Deciding If We Should Become Landlords: Part 2

  1. good luck. I just put one of my units up for rent. Also in the Boston area and we got two showings in less than a day and it is not cheap. I say you go for it and see what you can get. Great area and always in demand. I wish you luck.

    Liked by 1 person

  2. Being landlords has definitely NOT helped our tax situation. Because we’re in a pretty high bracket while working, that high tax rate applies to our rental property, and in our case makes it a net loss. (We had planned for that to some extent, but it makes us even more antsy to quit and get into a low bracket!) Since we don’t do quarterly tax payments, because our main employers withhold taxes for us, our rental has contributed to having to shell out big bucks at tax time. Depreciation definitely helps on the rental, and I’m excited for the future years when we’re in a low bracket, the rental is paid off, and yet we’ll still get to deduct depreciation — that will be sweet!

    Liked by 1 person

    1. This is exactly what we are worried about and will have to run some preliminary numbers to see where we stand. We do live in a state with some of the highest taxes in the nation, so we will have to do a little digging into whether or not we would see a true benefit from the deductions. If we do decide to become landlords, we know we will be lucky if we turn any profit at all in the beginning given the fact that we are still paying the mortgage and working full time. Should be interesting! Thank you so much for sharing this with us! 🙂

      Liked by 1 person

  3. We rented out out first property (went on to buy another where we live now) and it has worked out great for us. I can’t comment on the taxes since we live in Australia but there is benefit in having lived in the house you are renting because you know it well and know what things, if anything are due for repairs or maintenance.

    Liked by 1 person

  4. Taxes paid on the property goes against the rental income, they aren’t going to help reduce your tax liability unless the rental is losing money.

    I don’t have any income property at the moment but I have looked into it. You want to crunch some numbers to make sure the investment is worth your while. It should meet or exceed the average long term rate of return of an alternate investment tool. I would look at the S & P 500 index fund.

    To get the rate of return you take:
    1 years rent

    Less:
    Taxes
    Mortgage Interest
    Repairs and Maintenance (1%-2% of property value)
    Insurance
    Property management (or “pay” yourself a fair wage for time spent on this investment)

    The remainder is your income for the property. Take the income and divide by the total value of the property and that’s your rate of return. I would say that you should conservatively look to get at least 4% at minimum. Otherwise you are better of looking at other investments at least from a financial standpoint.

    Liked by 1 person

    1. Having read your conclusion in part 3, I wanted to come back to part 2 and say that I completely agree with Vic here. I love the IDEA of becoming a landlord but, if you haven’t already, check out this article from Pad Adventure: http://www.padadventure.com/meth-heads-and-strippers-need-not-apply/

      It is insanely hilarious…I’m talking tears and stomach cramping hilarious…but it perfectly sums up my fears of being a landlord.

      For the record, congrats on doing the research and math to come to the decision that renting is not for you right now. 🙂

      Liked by 2 people

  5. Something I would like to add: if you decide to, at some point, reconsider becoming a landlord, you should check out The Frugal Vagabond (http://frugalvagabond.com/) because he has some excellent articles about doing so from afar. I continue to love the idea of the passive revenue stream and definitely intend to consider it further as our financial situation continues to improve over the next decade and once we have the type of cash necessary to put down on rental investments. Very intriguing stuff!

    Liked by 1 person

    1. Thank you for the suggestion, we will definitely check out those articles! We will also need to find a source of passive income, and given my recent unemployment, wish we had done this research sooner. It would be nice to have a source of passive income as a backup to our investments as well.

      Yes! I agree, very interesting stuff indeed! 🙂

      Liked by 1 person

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