Should You Convert Your Condo Into a Rental Property?Land Deveopment Training
October 11, 2012 — 1,155 views
Should You Convert Your Condo Into a Rental Property?
With the soft real estate market in many areas dragging on, many developers and property managers are looking into other ways to make money off of their condo investments. Because waiting for the right buyer isn’t working out, many people are looking into renting out their condo. If you’re thinking about this, ask yourself these questions first.
• What is the rental market value of your property or properties? You’ll need to research this on your own, since the soft housing market has meant many people are renting without formally registering their property, keeping the rent numbers off the books of appraisers. Be realistic. If you own units that need a lot of maintenance work, they will not rent for as much as well-maintained units. Unlike single family homes, larger condos may not command a higher rent, since the market is different.
• Can you cover your costs with rent? Assume a 90% occupancy rate when running this calculation, and make sure you include your projected maintenance costs. If you’re running a deficit of thirty percent of more, sell the condo. If you’re at less than thirty percent, look for ways to reduce your carrying costs. Refinance the property, shop around for new insurance, and think about extending your projected maintenance schedule. If you are still running in the red, compare the costs to your loss if you sell. Remember, also, that your carrying costs could decrease over time as you pay off more of the mortgage and refinance.
• Are you prepared to deal with maintenance issues? Most property management companies are ready, but some developers who do the math realize it makes more sense to sell the property, book the loss, and move on to the next project. Regular maintenance of a property essentially involves a lot of little jobs. If your company doesn’t have the staffing to deal with it, is may be time to move on.
• Are the tax advantages worth it? You can claim a lot of costs with rental units that can reduce your overall tax bill. Many developers and contractors keep rental properties on the books in order to reduce their federal and state tax bills by claiming everything from maintenance to depreciation. If you’re taking a small loss on the property by renting it out, the tax implications could put you back in the black. Talk to your accountant to find out if this is a good idea for your business.