Residential Rental Property

Residential Rental Property

Residential rental property refers to homes that are purchased by an investor and inhabited by tenants on a lease or other type of rental agreement. The term residential rental property distinguishes this class of rental real estate investment from commercial properties where the tenant will generally be a corporate entity rather than a person or family, as well as hotels and motels where a tenant does not live in the property long term. To sell a struggling rental property you need to find a buyer to find value in the investment that you no longer see or simply is not there. There are also considerable headaches that come with acting as a landlord, although engaging a property management company can help, and that cost eats further into the profit margin of the investment. Residential rental property may be contrasted with commercial rental property, which is instead leased out to businesses in properties zoned explicitly for profit generation. Owning a residential rental property can come with tax advantages that other, more indirect real estate investments like a real estate investment trust (REIT) do not confer to the holder.

Residential rental property is property used as dwellings for rental occupants.

What Is Residential Rental Property?

Residential rental property refers to homes that are purchased by an investor and inhabited by tenants on a lease or other type of rental agreement. Residential property is property zoned specifically for living or dwelling for individuals or households; it may include standalone single-family dwellings to large, multi-unit apartment buildings.

Residential rental property may be contrasted with commercial rental property, which is instead leased out to businesses in properties zoned explicitly for profit generation.

Residential rental property is property used as dwellings for rental occupants.
By law, property must derive 80% of its income from residential purposes to qualify as residential for tax purposes.
Residential rental property can be a popular investment because people are very familiar with the idea of renting property to live in.

How Residential Rental Property Works

Residential real estate can be single-family homes, condominium units, apartments, townhouses, duplexes, and so on. The term residential rental property distinguishes this class of rental real estate investment from commercial properties where the tenant will generally be a corporate entity rather than a person or family, as well as hotels and motels where a tenant does not live in the property long term.

Residential rental property can be an attractive investment. Unlike stocks, futures, and other financial investments, many people have firsthand experience with both the rental market as tenants and the residential real estate market as homeowners. This familiarity with the process and the investment makes residential rental properties less intimidating than other investments. On top of the familiarity factor, residential rental properties can offer monthly cash flow, long-term appreciation, leverage using borrowed money, and the aforementioned tax advantages on the income the investment produces.

Owning a residential rental property can come with tax advantages that other, more indirect real estate investments like a real estate investment trust (REIT) do not confer to the holder. Of course, direct ownership of residential rental property also comes with the responsibility to act as a landlord or engage a property management company along with the risks involved from vacant units to tenant disputes.

The Risks of Residential Rental Property

Of course, there are some corresponding downsides to residential rental property. The key one is that residential rental property is not a very liquid investment. Cash flow and appreciation are great, but if a property stops delivering one or both due to mismanagement or market conditions, actually cutting losses and getting out of it can be difficult. To sell a struggling rental property you need to find a buyer to find value in the investment that you no longer see or simply is not there.

There are also considerable headaches that come with acting as a landlord, although engaging a property management company can help, and that cost eats further into the profit margin of the investment. Finally, there is the risk created by changing tax codes. The tax treatment of residential rental property can change, erasing some of the attractiveness of the investment.

Tax Treatment of Residential Rental Property

In the United States, the IRS considers residential real estate to be a property that derives more than 80% of its revenue from dwelling units. Residential rental property uses the 27.5-year modified accelerated cost recovery system (MACRS) schedule for depreciation. Income from residential property is treated as passive income, so there are rules around how losses are treated based on the active participation of the owner. The IRS Publication 527 Residential Rental Property provides an overview of the tax rules and is updated when rules or provisions change.

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Related terms:

Absentee Landlord

An absentee landlord, most often found in commercial real estate ownership, rents the property but is not located on or near the property.  read more

Absentee Owner

An absentee owner is an individual who owns a building, apartment, shop, or another piece of real estate but does not live within the property's local area. read more

Appreciation

Appreciation is the increase in the value of an asset over time. Check out an easy way to calculate the appreciation rate for assets and investments. read more

What Is Commercial Property?

Commercial property is buildings and land that are intended for profit-generating activities rather than regular residential purposes.  read more

Income Property Mortgage

Income property mortgages are loans for residential or commercial rental property.  read more

Income Property

An income property is bought or developed to earn income through renting, leasing, or price appreciation. read more

Investment Real Estate

Investment real estate is property owned to generate income or is otherwise used for investment purposes instead of as a primary residence. read more

IRS Publication 527

IRS Publication 527 is a document providing tax information to those who rent out their residential properties for part or all of the year. read more

Landlord

A landlord is a person or entity who owns real estate for rent or lease to a tenant. Learn how landlords make money and what they can and cannot do. read more

Lease

A lease is a legal document outlining the terms under which one party agrees to rent property from another party. read more