Ambitious young couples might decide to invest in rental property as part of a strategy to secure their financial future. Tenants provide you with an added income stream, and you can deduct mortgage interest on the purchase as a business expense. Depreciation -- the loss of value from age -- gives you a regular tax deduction for years. You could rent out a house and invest in an apartment building, for example.
A successful rental that stays occupied gives you a steady cash flow without you having to put in a 40-hour week. If you turn over property management to a professional, you would sit back and collect the rent check every month, less the property manager's fees. With a building of three or four apartments, you can keep up your cash flow even if one unit is temporarily empty or you have to close an apartment for repairs.
A downside of ownership is that your expenses don't disappear when your apartment sits empty. If the rental market is down and you can't find a tenant for five months, that's five months of mortgage checks going out with no money coming in. Your property taxes and insurance are due even when your rental is unoccupied. You can deduct taxes, insurance and mortgage interest, however, which provides benefits at tax time.
When you spend money on your apartment -- advertising, management fees, maintenance, repairs -- you get to write off most of those expenses against your rental income. If you apartment loses money, you may be able to deduct up to $25,000 from your non-rental income. You can do this if you manage the property yourself, handling tasks such as advertising vacancies and vetting tenants. If you hire a manager, you can only deduct losses to the limit of your rental income. You can, however claim leftover losses on next year's taxes.
Managing an apartment yourself can take up much of your free time. Before signing a lease, it involves screening potential tenants' credit histories, criminal records and references from past landlords. After a tenant moves in, you have to handle complaints and either make repairs or hire someone who will. If the tenant damages the apartment, violates the lease or refuses to leave, you can end up sitting in small claims court. Hiring a management company frees up your time, but fees will eat into your profits. A pro of owning real estate is that the investment property can gain value over time through market appreciation.
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