Monday, June 18, 2007

Buying a rental property

Well, first things first. Just as things settled down with our rentals (the one that was unrented got rented and renovated right away) we discovered that a our contractor had a nice two bedroom, one bath that he wanted to sell in the worst way. Apparently the rental market had soured him on the whole landlord deal. At the same time, our son's new income is driving him to find some way to create some tax write-offs. So we decided to do the deal with him for our son's benefit.

It's weird though to approach the purchase of a property from this perspective. We want to make the best deal but it's possible that the best deal might not provide the best tax write-off. Since what can be written off is operating expenses,the interest on the loan, the points, the depreciation on the house over the life of the loan (not the property), any repairs and additions to the house, the property management fees, insurance costs, non-recurring closing costs, and the property taxes, we find ourselves doing a rather delicate balancing act.

Normally, we would be looking for the best interest rate in the most stable loan, say 6.75% plus one point for 30 years but our son's age and relatively thin employment history will probably push us into 7.5 or higher territory. Which in this case, on this deal, is good. It means there will be more interest to write off. Also, if a house is in fair shape when we buy it we would usually make the minimum touchup repairs in order to get it quickly back on the market. But in this case, we are actually going to do some major overhauling because it will improve the long term value of the property and write off, write off, write off is our game plan. The same is true of personal property items like a washer and dryer or refrigerator. In the past we might have supplied these, this time we definitely will. Of course, I should explain that it really helps that our son's new job has provided him with plenty of cash to fund the improvements.

Meanwhile, the other aspects of buying a rental seem to be taking a back seat to our driving purpose. Several times my partner, T, has asked me what I think about the deal but when I start talking about the kind of renters we might find and the area that the property is located in, and if there will be cash flow, she has just smiled and then said, "but yeah think of the tax write-offs." "Yeah," I answer.

Some related posts:
To Rent or Sell
Putting the Real in Real Estate

Rent or Sell, part 2

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