Many people believe running rental properties can’t be considered a business because property owners don’t need to pay self-employment taxes. However, rental properties provide a passive source of income – in fact, many individuals have left their 9-to-5 jobs to focus on just their rental properties. While owning only one property does not make you a rental business owner, running multiple rental properties as a portfolio can.
According to Alvary v. the United States, you can be considered a business when you run rentals consistently and for profit. Simply put, if you put considerable time into your rental, it constitutes a business. Additionally, the IRS states that you run a rental property as a business if you satisfy certain factors, such as the number of properties rented, the owner’s (or agent’s) level of involvement, the type of property rented, and whether or not the owner has filed all of their information returns.
It’s worth mentioning that landlords don’t need to run their rentals themselves. They can still be considered running a business even if they hire a third-party service such as a property management company.
In this article, we tackle why you should consider running your rental as a business. We also share a few tips on how to build a business running single-family rentals.
What are the benefits of running a rental as a business?
We’ve broken down a few of the benefits of running a rental property as a business below:
#1 Real estate appreciates
Running a rental as a business means you’ll be holding onto your property for a long time. Throughout that time, your property will appreciate – on average, the value of real estate increases by about 14.5 percent year over year. As a result, you can consistently increase your rental rate and sell your property for a profit. Do note, however, that not all markets will see this kind of growth – appreciation will depend on where you buy, which is why it’s best to partner with a property management company.
#2 Rental properties can reduce your loan payments
If you buy in the right market, you’ll be able to make enough money to not worry about your mortgage. You can use your rental income to “offset” the costs of your loan. It’ll be as if you paid nothing to buy your property!
#3 Running a rental reduces your yearly taxes
One of the reasons why people invest in real estate is to take advantage of the many tax deductions it comes with. As a real estate investor, you can deduct most of your expenses including your travel expenses, property management fees, maintenance costs, and more from your yearly tax return. The deductions can add up and make up for the amount of money you spent to run your rental! Check our tax tips for landlords to learn more about reducing tax.
#4 Real estate provides a consistent cash flow
Compared to other types of businesses that are dependent on sales, real estate is more stable. Stocks and bonds may be affected by market fluctuations, but real estate stays its course. Additionally, even if the real estate market takes a downturn, it will always bounce back. As long as you buy a profitable property in a good location, you can count on receiving a consistent cash flow.
#5 You can move into your rental property
Should you decide to relocate, you can always move into your investment property. You can use your rental property as your business now and turn it into your own residence down the road. Of course, you’ll have to wait for your tenant’s contract to end, otherwise, you’ll be in blatant violation of the law.
Tips on running a rental as a business
Now that you know the benefits of running a rental as a business, let’s take a look at some tips on how to run it the right way:
#1 Get networking
Beginners should consider being part of a real estate investor club. These are communities of real estate experts who’ve been in the business for years, and who can be your “gurus” as you navigate your way around the investing world. They don’t see you as competition, but as someone to whom they can lend a helping hand. By doing so, you’ll be able to gain insight into the local real estate market and make sure you put your money into the best properties.
They know who’s who in the business, and can connect you to the best vendors, real estate agents, property managers, and more, saving you valuable time and money. Plus, if they sell their properties, you’ll probably know about it before the rest of the real estate industry. They also host plenty of meet-ups every year, so you can grow your network even more.
#2 Choose a niche
What rental do you want to run? Do you see yourself managing a single-family home or a multi-family home? Choosing a niche can be helpful as it allows you to put your time, money, and attention into one property type at a time. By doing so, you’ll be able to become well-versed in that market, and in turn, succeed in that market. Once you become an expert in that market, you can expand and buy properties in other markets.
First-timers should buy residential properties because they’re more manageable. Residences don’t need as much attention as commercial properties, so they’re a great way to get started in the industry. Start with a simple property to help you learn the ropes.
#3 Run it like a real business
Even if you own only one rental property, you should already follow standard business practices. For one, business expenses should be kept in a separate bank account so you can keep better track of your finances. You should also use property management software such as tenant portals to streamline your operations. That way, your tenants can conveniently pay their rent, submit repair tickets, and more. This is one way to make your rental business stand out from other rental businesses – and trust us, the competition will be crazy.
#4 Hire a property manager
You don’t need to run the show on your own. You can partner with a professional property management firm to help you get the ground running. Property managers will have more experience than you, and they’ll be willing to share their expertise as you get used to running your rental business. With them by your side, you’ll be able to understand your market better, and in turn, make money faster. They can also free up your time so you can focus on other aspects of your rental business.
Run your rental as a business with Luxury Property Care
Running a rental as a business can be challenging, but with the help of Luxury Property Care, you can ensure that it sees success. Our experts have been in the business for years, providing all-around property management services to South Florida investors. When you partner with us, you’ll get unparalleled guidance in running your rental businesses. We’ll also help you prepare a property management plan from day one, so your business will grow in no time. Dial (561) 944 – 2992 or complete our contact form to get started.
