Tax savings can help with negative cash flow

How much will tax savings help me with negative cash flow?

First, you need to understand that the government limits how much your rental property deductions can reduce your taxes on other income. As a general rule, individuals can shelter only US Dollars 12,500 of their other income through rental property tax deductions. Married persons can shelter up to US Dollars 25,000. In other words, losses on your rental property, including paper losses like depreciation, can save you US Dollars 4,125 per year in taxes if you are single and in the highest - 33% - tax bracket. Married persons can save US Dollars 8,250 per year in taxes, at the most. Your exact savings will depend on your tax bracket.

The real estate gurus do not tell you about the passive activity rules. They also do not tell you that if you calculate your budget too closely, so that every penny counts, you might suffer catastrophe if your property remains vacant for just a month or two. You have US Dollars 1,041 available each month for mortgage payments. Suppose you want to pay a higher price for a rental house, or have a smaller down payment. Suppose your mortgage payments are now US Dollars 1,341 per month. That additional US Dollars 300 per month will take away all your tax savings. If the house sits vacant for only one month while you try to find a tenant, you will lose money that year. Can you afford that?

Do I need any special type of lease for a rental residence?

Many states have specific laws protecting consumer tenants. Some passed a version of the Uniform Residential Landlord Tenant Act. Others have similar laws. Depending on the state, there are differing requirements regarding security deposits, required notices before entering the premises, and remedies when the rent is late or the lease is in default. Quite a few prohibit you from having a clause in your lease allowing the recovery of attorney's fees if the tenant defaults. A court can award you attorney's fees, but you are not allowed to put it in the contract.

Your best strategy is to hire a lawyer to draft a lease for you. Call the local courthouse and ask who files the most eviction lawsuits in your county or parish. That lawyer probably already has a good lease written for one of his or her larger clients. You may be able to get a discounted price for your own lease because most of the work is on the computer already. Always ask in advance how much the fee will be. An experienced landlord attorney can tell you that. A novice who needs to learn the subject on your nickel will be unable to give you an estimate.

What are some of the pros and cons of investing in rental houses?

Pros:

many choices of properties to buy
typically steady supply of renters
most repairs and maintenance are easy
management not complicated
easy to sell when desired

Cons:

usually short-term leases of one year
vacancies have high impact
can be difficult to place with management company
consumer protection statutes must be mastered

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