Tax Question for Landlords or Accountants?

Question

I'm interested in buying a investment property. Most of the buildings that I'm looking at has property taxes over $5k. Do landlords normally "add" that into the monthly rent?

My thinking is that I should guestimate my total costs for the property and divide it by each rental unit. Am I correct in this assumption?

Answer 1

Normally, you cannot add extras to the rent because the rent should be set at what people are willing to pay for a similar apartment elsewhere in the neighborhood. Sometimes, you can charge separately for garage space, or extra storage space, or add to the rent if the tenant has a pet, or smokes.

Landlords usually can't add special assessments to apartments the way condo associations can. Tenants pay what their lease states. If the rent goes too high when it's time to renew, your tenants will just move somewhere else. And no one else will move in.

Some landlord's agree to add to a tenant's rent if they have done damage to the apartment, or if the landlord needs to recover some other costs, like re-painting or carpet replacement, from a particular tenant.

Before you buy, you should add up all your expenses. They should not be guesses. They should be the actual amounts. If you are planning to hire a management company, include that as an expense. When you look at property taxes, you need to figure what the taxes will be after you buy the building. The current taxes are important, but the property could be re-assessed after your purchase and a higher tax bill could result.

Remember you will also need insurance, and a "reserve fund" bank account, dedicated to the building, to cover maintenance in emergencies.

Then add up the rents from the current leases, and add all other expected income. Double check any figures, or list of rents given to you by the realtor or current owner.

You must subtract a vacancy rate from your income because you should not expect your building will be fully rented the entire year. (In some areas, a 20% vacancy rate is common.)

If the rents at the building are lower than the current market rent, you need to find out why. Location, location, and location of your propery is very important. So is overall condition. If the rents are low, you need to ask why the leases haven't been updated. Is the plumbing bad? Does the roof leak? Is the foundation cracked? Are there long time tenants, or relatives, in the apartments who have been benefiting from discounted rent because the landlord doesn't have the heart to raise it.

The tax consequences of owning income producing property can be substantial. You are allowed depreciation on the building, and assets inside. There are deductions, and credits to offset some of your maintenance costs, especially if you make improvements to the property, or replace old heating, air conditioning, and appliances with energy efficient units.

A landlord is a type of business owner. Do as much research as you can before buying. Good luck with your purchase.

Answer 2

Before you even start, you need to research the local market and see what similar propeties are renting for. Then you crunch the numbers -- probable rents and costs -- and see if it is even worth going there in the first place. If the required rents are going to be too low to assure a positive cash flow you'll need to determine if you can afford to "feed the alligator" first, and figure out how long that might go on for, i.e. how long it will take rents to rise to a positive cash flow situation.

Answer 3

You're sort of correct. Add up your total costs, PLUS something for profit, then divide by the number of rental units.