Keep Your Rental House In Financial Order As A New Landlord

Keep Your Rental House In Financial Order As A New Landlord


We recognize that for some folks investment property can be an effective component of a healthy Financial Life Plan. Making the decision to own rental property is one we recommend doing some soul searching about. We’ve seen record low interest rates and it feels like everyone we know is making big property moves. Whether it’s the realization that working from home is here to stay or the desire to move closer to family, there are many factors and pressures that make the decision more complicated than a whim.

In our profession, we witness many trends.  Last year big goals were made to own a tiny house on a big piece of land.  This year the vision for many Financial Life Plans has us “pivoting” (2020 overused word of the year alert!) toward couples’  interest in buying a new house and renting out the old one.  Many are tapping into the home equity of their primary home to make the investment.

We’ve developed a checklist of some questions to ask yourself as you contemplate the decision to become a landlord:


Financial Considerations For New Landlords


[]  What do you plan to charge per month to rent the house? What are comparable rental properties in your area charging per month?

[] What is the estimated profit after your mortgage and bills are paid on the rental each month? Is there enough to feel like it is worth the added work and responsibility?

[] Will you use a rental management company to help you with leasing and finding a renter?

[] Will you be responsible for maintenance or will you hire this out? Are you handy? Do you enjoy maintenance projects?

[] How do you feel about the potential of your day or weekend being interrupted by a broken garbage disposal that needs immediate attention at the rental? Does this jive with your personality type?

[] Do you have a separate bank account dedicated to the rental and its cash-flow? It may serve to streamline your tax preparation to pay bills, accept rent, make home depot trips, clean, landscape, and pay your leasing company, etc. from one dedicated account.

[] Do you have enough emergency savings to replace an air conditioner or water heater in less than 24 hours? What about something bigger like a water-main break that needs to be repaired asap?

[] Have you created a Profit & Loss Statement (P&L) to help you track rental expenses vs. income? A Profit & Loss Statement for the rental will be required each year for your taxes. The objective is to be as close to “break even” as possible. Free excel template here.

[] Have you taken the time to understand Depreciation & how it affects your Cost Basis and why this matters?  Major improvement (depreciate) vs. general expenses (P&L). Depreciation is a tax benefit in current the year but a possible liability in the future.

[] Have you created a spreadsheet to document your cost basis? This property is now looked at differently in the eyes of the IRS. Be prepared for the tax implications and benefits of owning a rental, especially in year 1.  Lay a good foundation for future tax years and an eventual sale.

[] How will you mitigate the increased liability risk of owning a rental?  Will you own it in an LLC? Do you have an umbrella liability insurance policy?

[] Did you change your insurance policy to let them know it’s a rental and are coverages sufficient?

[] Have you inspected the property for potential safety hazards and mitigated them? (Especially stairs and fire risks.)

[] Is the property up to code? (Especially electrical and gas.)

[] Have you been proactive in making your property a safe and secure one?

[] Have you put together a rental home maintenance schedule.

[] Have you developed a relationship with a handyman/woman if you aren’t one yourself?

[] Will the mortgage on your rental AND your primary residence be paid off completely by the time you hope to retire?  Typically, more successful Financial Life Plans don’t include mortgage payments in retirement.

We can almost guarantee there are additions to be made to this checklist of considerations.  Don’t get us wrong, investment property is supportive of a healthy Financial Life Plan in many situations.

The idea is to break-even or profit some now to enjoy the capital appreciation and annuity-like stream of income in your retirement years. 

Our recommendation is to take some time to really consider what factors are included in this big financial decision. This is a conversation that is appropriate to discuss with your Financial Advisors as an important component of your Financial Life Plan.

Moloney Securities Co., Inc. is a Registered Broker-Dealer and Member FINRA & SIPC

Investment Advisory Services offered through Moloney Securities Asset Management, LLC, Registered Investment Adviser
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Post by Amy Duncan

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