Duplex Chick

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Seasoned real estate investors know there are many advantages to owning income property; benefits like cash flow, principal pay down, and the tax deductions for loan interest and depreciation.

Most new investors are familiar with all of those terms except depreciation. So, what is it? Well, it’s an accounting term that basically says assets wear out or get used up over a period of time. Depreciation is a way to spread the purchase cost of something over the number of years it’s expected to last before it finally wears out.

Understandably, different kinds of things have different lifespans. A refrigerator, for example, has a shorter lifespan than oh, say, a garage. Therefore, it has a faster depreciation schedule. Land, on the other hand, never gets used up. I hate to be the bearer of bad news, but even if greenhouse gas gets the best of us, the land will still be here. We won’t.

Somewhere along the line, Congress, and the accountants, businesses, and I suppose, even the I.R.S. got together and decided that if you’re going to invest in America — through real estate, or a business, you should get a break on your taxes. Collectively, they came up with something called a depreciation schedule for four different categories. The categories are:

• Land – which, of course, never gets used up. No tax break here.
• Personal Property – in a rental, this would be things like the appliances. Personal property has a 5 year depreciation schedule.
• Building – For residential property, 27.5 years, for other types of property it’s 39 years.
• Land improvements – includes landscaping, driveways, the garage, the water line. This is spread over 15 years.

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This morning a friend asked my opinion of buying single family homes as rental properties. Believe it or not, I think it can be a great idea.

A lot of people don’t understand that investing in rental real estate can be tailored to your goals, risk tolerance and lifestyle.

There are several advantages of owning rental homes. First, leases for these properties typically require the tenant to pay all the utility bills, mow the lawn, and shovel the walk. The owner, or landlord, has fewer ongoing responsibilities. What’s more, in the event you want to sell the property and move on, there is a large pool of potential buyers in the marketplace. Some people believe this makes owning single family home rentals a more flexible investment.

The most significant disadvantage of single family home rentals is that when the house is vacant, your vacancy rate is 100%. If you can turn (repaint, recarpet, clean) the home quickly, this may not be an issue. However, if there is damage that requires more extensive repair, you may be vacant for some time; which will, of course, require you to dig into your own pocket to pay the bills.

One of the challenges I’ve personally found is if prospective tenants have children, they generally aren’t willing to move in after Labor Day. It’s, an important consideration if the home is family-friendly.

As with any property, it is absolutely essential to do an income property analysis before you write an offer. That is too complicated an excercise to try to explain here, but feel free to give me a call. I’d be happy to help.