Preparing your Rental Property for Leasing
Getting your rental property ready requires more than just physically prepping the space. You need to have your finances secure, double-check your investment strategy, and make sure you’ve reduced your liabilities. You should also always be reading new information about rental real estate investment so you’re always taking advantage of as many tax breaks as possible.
Did you know, for example, that you can exclude rental income from your taxes?
Or that there’s a way to avoid paying depreciation recapture and capital gains tax?
Here’s what you need to know before you start renting to maximize your income.
1. Check Your Mortgage
Some loans have stipulations when it comes to renting. FHA loans, for example, need you to use your property as a primary residence for at least a year before you can rent it. So, if you’re buying a home just to use it as a rental property, let your lender know.
2. Have an Emergency Fund
You should have at least three months’ worth of operating expenses in savings. That means loan payments, bills, and maintenance. That’s in addition to budgeting for vacancies every year.
3. Consider a Property Management Company
Actually give the idea of a property management company some thought. Vague conceptions of what running your own investment property may fall short of what you’ll actually have to do. Just take a look at some of the services Mynd offers.
- Helping you scale your investment portfolio
- Ensuring speedy rental property turnover
- Encouraging qualified tenant renewals
- Performing seasonal maintenance
- Helping you make tax deductions
- Writing rental property listings
- Avoiding surprising liabilities
- Early lease terminations
- Minimizing vacancies
- Tenant screening
- Fire prevention
4. Perform Maintenance Between Tenants
Known as rental property turnover, this is the type of maintenance you should expect to perform between tenants.
- Check your appliances
- Upgrade appliances (consider doing this while you still have tenants because getting new appliances may encourage your tenants to renew their lease)
- Caulk the sinks and tubs
- Replace rusted fixtures
- Repaint the unit
- Inspect doorbells and doors
- Replace broken cabinetry and faucets
- Check the smoke and carbon dioxide detectors
- Replace the flooring if you need to. Avoid carpet because it costs too much time and money to clean
- Advertise after your apartment is in its best condition. Make sure the apartment looks like it’s advertised
- Study local zoning codes and make sure your property is compliant.
- If over a week passes between the lease signing and your tenant’s move-in, clean the apartment one last time
5. Consider a Partial Vacation Rental
There are two ways that you can exclude rental property income from your tax returns:
- If you use your rental property yourself.
- If you rent out a residential property.
The percentage of your rental income that you can exclude depends on the ratio between the number of days your property is rented relative to the number of days that your property is used as a residence. If you rent a residence for under 14 days a year, then you don’t have to report your rental income at all. Even if you make a large sum of money, like $100,000.
6. Consider a Live-In Flip
A live-in flip is when you live in your property while it’s being renovated. It takes advantage of Section 121 of the Internal Revenue Code, which lets taxpayers exclude upward of $250,000 (if single) or $500,000 (if married filing jointly) on the sale of any property they’ve owned and used as a primary/principal residence for 24 out of the last 60 month.
Those 24 months don’t have to be spent consecutively. So, you can renovate your property, lease it, and then sell it in whatever order you want.
The Section 121 Exclusion is sometimes paired with a 1031 Exchange, which is when you sell a property and use the profits to purchase new property of equal or greater value without having to pay capital gains taxes or depreciation recapture. Section 121 Exclusions allow you to forgo paying some of your deferred taxes.
7. Make Sure You Avoid Commingling Funds Illegally
Commingling funds means pooling money from multiple investors with personal and other people’s money. There are plenty of times when it’s legal, like when you crowdfund money or run a REIT, but there are also times when it’s illegal, like when you’re investing in real estate using a self-directed IRA or making personal purchases with business funds.
To avoid illegally commingling money, document every transaction and keep separate business and personal accounts.
8. Choose the Right Legal Entity
Consider forming a legal entity for your real estate investment business. There are many advantages to being an LLC, for example:
- Legal protections
- Tax benefits
9. Set up Online Rent Collection
There are many advantages to online rent collection. They can also be used as tenant portals, allowing you to manage communication and maintenance requests.
- Eliminate checks getting lost in the mail.
- Tenants can set up auto-bill pay.
- Make bookkeeping easier.
- Apply late payment fees.
- Allow tenants to pay their rent in installments throughout the month.
- Free tenants from having to worry about when you’re going to deposit their rent checks.
10. Write Explicit Lease Agreements
Using free rental agreement templates, you can get as specific as you want with your tenant expectations.
- Consider a smoke-free environment. Smoking is a fire hazard, can stain walls, can leave odors that are hard to remove, and can be a liability if second-hand smoke enters other tenant’s units.
- Stipulate which illicit activities are grounds for early lease termination. If you know someone is committing a crime on your property, then you’re liable for the damage they cause to others on your property and in your community.
- List out the consequences for late rent payment.
- Write out your pet policies. But, remember, you can’t prohibit or charge a fee for service animals or emotional support animals because they’re not pets; they’re working animals.
Go over your lease agreement, and your fire prevention rules, with your tenants. It may be the only time they read over those documents thoroughly.
11. Leave a Gift Basket
One way to encourage tenant renewals is to make tenants feel appreciated. Leaving a gift basket for them upon move-in is a great way to start. You can even fill it with some goods from local vendors to encourage your tenants to fall in love with their neighborhood. Gift cards on special occasions like birthdays and anniversaries are another great idea.
Bottom Line on Preparing Your Rental Property for Leasing
There’s a lot of prep that goes into getting your property ready to rent. When you manage property long enough, the physical cleanup gets easier.
You can even get a crew you know well enough that they can work with minimal oversight. That leaves you more time to focus on scaling your investment. Maybe a strategy like BRRR is right for you; buy, rehab rent, refinance, repeat.