We’re talking about a few things to consider before becoming a landlord. For some people, becoming a landlord is not your first choice. You might be looking at selling the property instead, but the property value just isn’t there. If you owe more than the property is worth or you’re being relocated out of the area and you don’t have time to sell the home, renting becomes a viable option.
Costs and Benefits
The cost of being a landlord is certainly important, but there are also a number of benefits such as cash flow. The tenant is paying down your mortgage while you build equity. You can also depreciate the property, which is a tax advantage. All the things you’re doing to the property and the management costs are also tax deductible. The benefits can often outweigh the challenges. If you have appreciation in the property, and in the current Minneapolis market values are certainly rising, that’s another benefit. So when you look at the overall benefits, you know they outweigh the costs.
Another thing to look at is Section 121 of the IRS code. It’s one of these things that a lot of Minneapolis landlords don’t consider before renting out their property. This is the capital gains exclusion. As a married couple, you can deduct up to $500,000 of gains, or as a single tax filer, up to $250,000. There are some requirements to taking this tax advantage, of course. You need to live in the property two out of five years in a period. That means if you rent your property longer than three years, you’ll void the opportunity to take advantage of this part of the tax code. But if you’ve lived there for two years and rented out for three, that qualifies. So consider your timeframe before you start. If you have no gains in the property, then this is a moot point.
Rental licensing is another consideration. In the twin cities, rental licensing has popped up in all municipalities. Fees vary from $50 to $1,000 if your rental property is in Minneapolis. There is an application process, and some cities will do an inspection to make sure your property is up to code. This is something that a professional management company can help you with.
We have met with thousands of owners over 30 years of doing property management. We have an audio and video clip of Frequently Asked Questions that we’d be happy to share if you’re becoming a landlord and you need answers. Please contact us at RP Management, and we’d be happy to help you.