Currently, the  economic downturn has placed many homeowners and potential homeowners in difficult financial situations.

Homeowners

Many are faced with mortgage payments they cannot afford whilst living in a property that has not fallen in value,  but plummeted in value!  It is unfortunate when this situation occurs and there is a lot of stress and worry in trying to deal with this difficult  situation whilst carrying on with “normal life”.

Unfortunately for some,  and fortunately for others, “one man’s problems becomes another man’s opportunity!”

Have to sell

You find that some homeowners are left with no choice than to sell their home or flat  at a low price just to get the burden of payment removed from their finances.

In some cases, properties are also being repossessed and sold at auction or at very low prices just to let the lender get the “bad debt”  of an unpaid mortgage off their books.

Opportunity presents itself

This is the opportunity that is presenting itself to property investors all over the world. The “credit crunch” has had a worldwide effect on property ownership and property values,  resulting in properties being sold at prices which make investment via property entrepreneur a viable proposal.

Potential homeowners

People in this category are people who are currently renting, and up until recently, were considering buying property and becoming property owners.

Banks have closed the doors!

Sadly, one of the major impacts of the economic downturn has been the complete reluctance by banks to lend money with out the security of a hefty deposit.

Many people do not have the deposit at present and cannot save towards the deposit because of the difficult job market and the uncertainty of regular employment.

Happy renting

Another reason is the fact that an increasing number of people across the world are now deciding that they are happy renting long term and have no wish to buy.

The reasons for this are many,  but include the fact that people are more inclined to consider “material” items,  combined with wanting to have a  greater amount of quality recreation time.

This overrides  the need or desire  to actually own a property outright (via the bank!)

Knock on effect

The number of properties available for renting on a worldwide scale is most definitely not increasing at the rate of people who are now coming into the rental market.

The resulting outcome

Less properties for rent + more people looking to rent = increased demand for rental properties.

I felt it was important to explain the above before putting numbers into this article … now we have the bare bones of why the property rental market is attractive,  let’s add some meat with figures and sums.

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Sharpen your pencils!

If you are in the fortunate position of having deposit monies available you are in the “driving seat” when it comes to buying property.

Let’s say you have $ 30,000 saved up in a bank account….this capital is giving you an interest rate return of 5%(for example ) .. This equates to $ 125.00 a month with no increase in capital.

2 can be better than 1!

In a previuous article   (Setting a Fair Rent)  I discussed property types, the fact that 2 can be better than 1,  and the advantage of buying 2 properties as oppossed to 1 property)

For ther purpose of this article I have assumed that you have seen 2 rental properties for sale for $70,000 each… you need to pay $ 140,000  .. you already have $ 30,000 as deposit …..

Bank lending information

The  bank is to lend $110,000 at an interest rate of 5.0% over a 20 year term on a Capital & Interest basis

( your monthly payment each month is split between a part capital payment plus the balance as interest to the  lender )

At the end of 20 years, because the mortgage is on a Capital & Interest basis, the loan is guaranteed to be repaid.

Now this is where it gets interesting.

Interest payment per month is $ 730 .00 …

Each property has an expected rental return of $600.00 a month.

This equals $1,200 for both properties.

Your mortgage is costing you $ 730.00 a month; therefore you have $ 470 left over each month.. that is fairly easy maths!

Now compare the $ 470.00  a month, with the $ 125 a month you were receiving from the bank… again the maths here is not difficult!

“Risks” that you have to consider.

If one property is empty with no tenant, your rental income is reduced to $ 600 a month, but your loan payment is still $ 730.00.  This means you have a “shortfall” of $130 to find each month from your own resources.

Once you fill your empty property, you will be back in profit.

Obviously, if both properties were empty,  you are faced with a loan payment of $ 730.00 to be paid from your own resources.

The “Plus” points of rental property ownership

• Increase in Value

The property you have bought as your rental property, possibly as part of your expanding rental portfolio will increase in value over the course of time.

This is a fact…. Historically when slumps occur,  prices have always recovered due to the unrelenting demand for property coupled with the decreasing supply of available property.

• Annual Rent Reviews

Each year,  as part of the signed Rental Contract,  you will have an  Annual Rent Reviews clause (See Article  Setting a Fair Rent)  which will allow your rent to maintain its buying power with increases in line with inflation, or what you decide is a Fair Rent.

Make Changes to the Monthly Interest Payment

The monthly interest payment of $ 730 a month on a Capital and Interest mortgage arrangement over a 20 year term could be reduced by a number of methods

1:  Extend the Term

Ask to have the term extended to perhaps 30 years

This would reduce your monthly payments to $ 595.00

The results of this are as follows:

• A surplus of $ 605 a month ( $1,200 – $595) when both properties are filled
• Reduction on the  call on your own resources when 1 or both properties are empty.

2:  Bring down the Mortgage Balance

Whenever possible throw in a lump sum to bring down the mortgage balance .. this may come from other savings you have or a maturing savings / insurance policy.

Wherever the extra capital comes from,  it will certainly open up a number of “bonuses” for you

• Your monthly mortgage payment required will decrease as the capital owed has decreased
• You keep paying the same amount each month to your mortgage,  and as less is required to pay the monthly mortgage payment,  the “extra”  is used as a capital payment  overpayment.
• This has the effect of bringing the capital owed down more quickly,  and therefore reducing the term of the mortgage.

3:  Change the loan from Capital & Interest to Interest only.

Many property entrepreneurs rely on the value of the property increasing over the course of time and are happy to arrange an Interest only mortgage.

The term of the mortgage is irrelevant as it is only interest that you are paying.

When you come to sell the property,  the expectation is that you will have waited long enough, before selling,  to be able to enjoy higher re-sale values, and as a consequence, a healthy surplus between the mortgage loan you are repaying,  and the increased value of the property.

If prices have not increased,  hopefully, you will have the option of waiting until they do rise.

Obviously,  if values are low when you have to sell,  you may make a loss on your investment.

What will the effects be on the $ 110,00 mortgage loan?

By switching to an Interest only mortgage with no monthly payments to reduce the capital, your interest only payment on a loan of $ 110,00 at 5%  interest would change to $ 550.00 a month.

You do not have the loan amount reducing, but you have more “extra” income available each month when both properties are full,  as this works out to be a surplus each month of $650.00.

This also means that if one property is empty you still have sufficient rent from the other property to pay the mortgage payment each month without having to dip into your own resources.

What do you do with the surplus each month?

The surplus each month can be put to any number of uses,  and you can even set aside a portion each month to allow you to accumulate capital,  and after, say, 12 months ( assuming the mortgage company will not penalize you),  you could throw the capital saved,  into the mortgage.

What effect would a capital reduction have?

The effect of a capital reduction on an Interest only mortgage would mean that the Interest payment required is reduced because the capital owed is reduced.

You now have a choice

• You either reduce your payments to cover the new,lower monthly interest rate charge, or, you keep paying the same amount each month to your mortgage.

• As less is required to pay the monthly mortgage payment, the “extra” is used as a capital payment overpayment.

• This has the effect of bringing the capital owed down more quickly.

Always remember to check the small print!

It is important to point out here that mortgage companies set their own criteria for adjusting mortgages, paying back lump sums to a mortgage and changing mortgages from Capital and Interest mortgages to Interest only mortgages.

Be careful when considering adjusting your mortgage with your existing lender,  or moving to a more attractive interest rate with another lender.

Check what, if any, early redemption penalties apply  to your loan.

In addition, always check what fees the lender is going to charge, and always insist on receiving a written quote before proceeding.

Interest Only.. it can be taxing .. in the best possible way!

Depending on which country you have your property and depending on the taxation arrangements,  it is sometimes possible to offset up to  100% of the interest payments as a legitimate expense against tax,  as no capital payments are being made

Worldwide demand for rental property

The rate of home ownership varies from country to country across the world,  and as a consequence the demand for rental property varies from country to country.

I have written a couple of articles which focus on the best places to buy property,  due to high rental demand, “Where is a good place for Real Estate Rental Opportunities?” and “Hurry and Catch a Ride for Rental Property Purchase Areas!”

Future articles are in the pipeline with details on new rental “hotspots” and updates on areas already visited.

The fact that I have access to different areas in the world where rental properties are in huge demand and rental income returns are excellent,  is good news for all types of property entrepreneurswho wish to start, or grow their property rental business on a global scale.

Details

Soon I will be releasing details of areas throughout the world for my readers.

This will assist you in your search for popular rental areas,  and help you  decide if you want to invest in any of those areas with the knowledge available from my (”Men/Women on the Ground”)  correspondents who are already in place and familiar with the local property rental markets they are dealing in.

Watch out for my “Men/Women on the Ground” articles to help you locate attractive property rental areas combined with attractive purchase prices.

I will be releasing details of these areas for my readers in the near future.

What better way is there to find a property bargain than to have your own “Men/ Women on the ground” who are hunting out the best property deals for you?

Be sure that you are ready to read my future “Men / Women on the Ground” articles.

Over the course of the years that you own and rent out your rental property, you will undoubtedly be faced with wear and tear of the property.

If your sole aim from the property is to achieve the maximum rental income for the least expense, the chances are that you will ignore basic maintenance tasks and wait for major problems to occur before having to pay out cash for repair work to be carried out.

The above type of approach is okay, but it certainly stores up a lot of problems which can combine and have detrimental knock-on effects further down the line in the guise of not the best tenants,  plus, unnecessary tax payments to the IRS!

Let me explain

The property fabric has a value which is your “Equity“ when you come to sell.

In order to enhance the equity in the property you want to have the lowest possible mortgage loan (or even better no loan!) against the property.

That is quite obvious; however, the value of the property can be greatly influenced by the condition of the property.

A well maintained property will command a better value than a poorly maintained property.

A well maintained property will attract tenants who are more than likely going to help you look after the property and as a consequence reduce your overall expenses in keeping the property in good condition.

Before you start to worry about the cost of repairs to keep the property in a good condition you can take heart from the fact that you will be eligible for tax relief on the costs incurred in keeping your property in good condition.

Tenant-Paid Expenses

If your tenant pays for an expense on your behalf, this is considered income… for example; he pays for an emergency repair to the washing machine.

• Make a claim

Now, you can claim the repair bill for the washing machine as a rental expense.

Services from the Tenant

If agreeable, you may agree to forgo rent from the tenant in lieu of his time to,  for example, paint and / or paper the rental property.

Let’s say the rent was $650 a month, and you agreed to waive this rent for 1 month as his costs for carrying out the work.

• Make a claim

You have to include this $650 as income,  even although you did not physically receive the money, however,  like all good stories there is a happy ending here!…  because you can deduct the$ 650 as a legitimate expense!

Improvements are not always the best treatment!

Be aware of how the IRS view repairs to a rental property as opposed to Improvements / Renovations.

What is considered a repair?

Repairs include

• Painting,
• Fixing a broken toilet
• Replacing a faulty light switch
• Depreciation
• Insurance
• Taxes
• Lawn care
• Tax return preparation fee
• Losses from causalities (hurricane, earthquake, flood, etc.) or thefts

Repair and taxes

A repair keeps your rental property in good condition and is a deductible expense in the year that you pay for it.

What is considered an Improvement Renovation?

Improvements can include a new roof, patio or garage.

Improvements / Renovations and taxes

Improvements add value to your property and are not deductible when you pay for them. .. read that again … Improvements add value to your property and are not deductible when you pay for them!

The cost of recovering the improvement / renovation costs have to be depreciated over the lifespan of the property.

Do not Repair .. do not pass go .. do not collect $ 200.00!

If you leave repairs undone, and the problem starts to become worse and worse, you may find that the repair suddenly is classed as an Improvement or Renovation by the IRS

As stated earlier, Improvements are not deductible when they are paid for … you have to depreciate the cost of improvements over the property’s lifetime.

Recap on Repairs vs Improvements / Renovations

So, with Repairs you get immediate tax relief if claimed for in time…. This can make your IRS bill so much better to read!

Whereas your Improvements / Renovations don’t qualify for immediate tax relief and your IRS bill will look worse!

The IRS does give you a certain degree of flexibility with regard to the items you can class as either repairs or improvements.

Whatever you are claiming for, you have to be able substantiate your claim by producing receipts.

It is also important to remember that money spent on Improvements / Renovations could be set against your taxable liability when you come to sell the property.

Keep good records and always keep receipts.

There are other areas to consider with regard to taxes, and these include

• Security deposits
• Mortgage expenses
• Travel expenses
• If you own a rental condominium or cooperative, each has some special rules.
• Are you a passive real estate investor?
• Are you a real estate professional?

Do your calculations and consult with a qualified tax adviser to make sure you are doing the right thing and paying the least taxes!

As I said in my previous article “ In order to fill your rental property, advertising is the main ingredient which will allow you to secure tenants for your investment property.”

Advertising does work.

Whatever advertising you try it will work to some degree.

We all know that large advertising campaigns can be spread out over a long period and cost a lot of money, further to that,  you may have to wait for some time to get a return on your advertising budget.

My advice here is “ Ignore what I said above!”

Control your own campaign

Use the internet for your campaign without spending large sums of money, and even without spending ANY money!

Create an advertising  campaign that will run and run for as long as you want, or for as long as you need it (i.e. until your rental properties are full)

The systems I use are low to no cost and give me the exposure I need to keep my website on the front pages of Google and Yahoo.

The whole campaign is mutually beneficial and almost becomes self sufficient with link backs giving search engines what they are looking for,  plus the all important keywords to further enhance the process of getting onto front pages of search engines

What effect does this exposure have?

You turn your exposure into a prospect Goldmine!… with the following result :

• It gives you enquirers from places normal advertising does not reach.
• It gives you many potential tenants to consider and lets you weed out the ones you don’t want,
• You now have a list of “hot prospects” which is so important when one of your properties is about to be vacated!

Before your property becomes empty you should be contacting your list of waiting tenants and asking them 3 “yes” questions..

1. Are you still looking?
2. Do you still qualify for being my tenant?
3. When can you move in?

Your cost

The cost to you is time……. That is all!

Even then, going through a list and making phone calls to people who want to rent will not take long to produce the tenant who says “yes” 3 times.

Before you get fired into an advertising campaign…. my next article will deal with a few areas to consider when you start out with your first rental property, and your role as a property landlord.

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