Tax Benefits of Owning Multiple Rental Properties

Create a lucrative rental business by investing in multiple properties that guarantee steady income and long-term financial growth. Beyond increasing your rental income and the potential for property appreciation, owning numerous properties can even reduce your tax obligations in the long run. If you know what you’re doing, you can leverage these tax deductions to maximize your profits and improve your financial health. Read this article to find out how housing multiple tenants can give you more tax breaks and the best structure to use for your business. Running numerous rental properties is known to have its own set of drawbacks, so we’re outlining the pros and cons below so you can make an informed decision. 

Is it Good to Own Multiple Rental Properties?

Pros

• Earn More Money

Double or even triple your income sources when you own multiple rental properties. One of the most obvious advantages of investing in real estate is that you earn more money, and the more properties you have, the more profit you enjoy. As a result, adding more houses to your portfolio could increase your financial stability.

• Diversify Your Risk

Lower the risk of real estate investment by spreading it amongst your properties. Buying multiple properties is an excellent way to reduce market setbacks that could affect one of your rentals. For instance, if you own a vacation rental, you might notice that your profits dip during the off-season. However, if you simultaneously run a long-term rental in another location, you can offset the losses on your vacation rental, and keep your cash flow consistent. 

• Multiply Your ROI

Enjoy the benefits of property appreciation twice, or even more, over when you own multiple properties. One of the top reasons investors buy into real estate is that it tends to stay on par, and oftentimes exceeds inflation rates. In other words, within a few years, one of your properties could be worth over 50% of our initial investment. And when you have more than one property, you get the chance to multiply your ROI and get to see your portfolio grow immensely in the long term. 

Cons

• Requires Larger Capital

Take the risk of collecting multiple loans to secure your rental investments. Despite all the money you stand to earn from having multiple rentals, purchasing a property often requires significant upfront capital, and if you’re planning more than one that means you have to account for multiple mortgage payments, property taxes, and insurance premiums. That’s why  Bay Property Management Group Philadelphia suggests balancing out daily expenses through deductions, that way you won’t get overwhelmed by your debts. 

• Needs More Management

Spend more time on marketing multiple vacancies and dealing with tenant issues. Many people refer to real estate as passive income, but that couldn’t be further from the truth. Contrary to popular belief, being a landlord requires advertising to fill up your rentals, scheduling routine maintenance, and settling tenant disputes. While you may be able to manage these responsibilities with a full-time job, the more properties you have, the more attention you need to pay to these rentals to ensure they run smoothly. 

• Legal and Regulatory Compliance

Stay on top of local policies for each of your properties to avoid running into legal trouble. Yes, diversifying your portfolio limits your risk, by protecting you from market instability that could affect one of your properties. On the flip side, it also means you have to stay updated on the local laws of each property for handling tenants and filing your taxes to avoid making costly mistakes. 

What is the Best Tax Structure for Rental Investments?

• Hold it in Your Name

Keep things nice and simple by holding your rental property investment in your name. In other words, you can opt for the path of sole proprietorship where you report your rental income and expenses under your returns. Ideally, this method is best suited for small-scale investors with an equally small portfolio. Besides, it also saves you the hassle of a formal registration, which comes with its own costs. On the other side, its simplicity exposes you to personal liability, meaning if a tenant gets injured on your property, you could be facing an expensive lawsuit. 

• Set up an LLC

Give yourself more liability coverage by setting up a Limited Liability Company (LLC). If you want more legal protection, you look into creating an LLC, which is essentially treating your rental investments as a separate entity from your personal assets. As a result, if a tenant trips because of a loose floorboard or needs to visit a doctor due to a mold infestation, you don’t stand to lose your car or home paying off the lawsuit. 

• Create a C-Corporation

Improve your liability protection and enjoy other business-related tax deductions by registering your rental business as a C-Corporation. C-corp for short, this option allows you to qualify for corporate-level taxes, which can be significantly lower than holding it in your name. For instance, when you own a rental property, you have to pay taxes on the income you earn from that business. However, you can pay lower taxes on the same income when you register as a C-corp because of the understanding that your earnings will go back into the business. Rental property investors should consider this option especially if they are a large-scale investor or looking to expand their real estate portfolio.  

Tax Benefits of Owning Multiple Rental Properties

• Deductible Mortgage Interest Rates

Get some breathing room to pay off your loans by deducting your mortgage interests from your taxable income. Although taxation laws vary by state, most states allow landlords to claim interest rates as part of their deductibles. After all, many investors often need to rely on funding from banks or private lenders. So when you deduct the interest you pay on the mortgage for each of your rental properties, it can lead to more savings. 

• Operating Expenses

It takes a lot of work to keep a house in good condition, including paying utilities, staying on top of repairs, scheduling maintenance for your HVAC system or roof, and dealing with pests when necessary. Most states allow landlords to deduct these operating expenses from their taxable income. Additionally, when you employ electricians to fix a socket, landscapers to plant new flowers, and property managers to help with maintenance, you can include their wages in your operating expenses. 

• Owner Expenses

Account for the personal expenses you incur to run your business and get the necessary tax breaks. Yes, running a rental property requires a lot of time, but you don’t have to sacrifice your money too. For example, if you manage your rental properties from a home office, you can legally deduct a portion of those expenses, such as your mortgage, utilities, and internet costs. When owners need to be present for an inspection or home viewing, it is suggested to keep track of the mileage since you may also reclaim the gas fare and other travel expenses. 

Conclusion

Enjoy the benefits of owning multiple rental properties when you know how to leverage your tax benefits. In other words, when you have a clear understanding of your local tax laws, and what you can legally deduct from your taxable income, you can enjoy more of your hard-earned profit. It would also be best to find what tax structure works that fits your business needs so you can properly leverage the right tax benefits. Managing multiple rental properties can be exhausting, and if you want to do it well you’ll most likely need to lean on an expert property management company that can help you lighten the load.