The first few years of landlording are generally the hardest. Some landlords say it takes five to seven years for a rental property to create a healthy cash flow. You may do better than that if you put in extra hard work. Or if you started when the economy was weak, perhaps it will improve and rental rates will go up. Landlording can be a risky business, but generally it's much more stable than the stock market. Just be patient.

Getting Started with a Duplex

If you purchase a fixer-upper at a good price and charge enough for rent, you'll have some help in paying the mortgage. But if the previous owner neglected to keep up the property, you also may have out-of-pocket expenses for maintenance.

If there's nothing critical that needs to be repaired, to keep expenses down and profits up, for the first few years concentrate on doing low-cost and no-cost improvements that will make the building and unit more desirable. Delay expensive repairs if you can. (Chapter 6 can help you decide which repairs are emergencies and which are okay to hold off on.)

Keep in mind that finding the perfect tenant takes time. You have to get the apartment ready for a tenant, advertise, and check into the backgrounds of those who look promising. During that downtime, the apartment is sitting vacant and you won't be getting any rent until someone moves in.

Generally, it takes more than one rental unit for a landlord to produce income. But remember that you're getting help with the mortgage on your home and building equity in a dwelling that you can later use to purchase a single-family home or more rental units. And don't overlook the tax advantages and, possibly, tax credits you get when you own and improve rental property. They'll help reduce your taxable income.

Renting Out Part of Your Home

If you are an empty nester with more space than you need but don't want to sell your home and would like to add to your retirement funds, converting your home into a two-unit building makes sense. You'll be in a better position to get income from your property, however, if you don't go overboard on expenditures and don't take out a huge high-interest loan.

Be careful as you plan the details of your renovation. Installing the best appliances and fixtures isn't necessary and it can have a negative impact on your income if you do put them in. Remember that if you tear out walls and ceilings, you pay for demolition as well as reconstruction. If you begin to tinker with the plumbing and electrical systems, you run the risk of creating new and costlier problems, especially in older homes. All of this can raise construction costs.

The other factor to consider in converting your home into a two-unit is how you will finance the project. Will you take out a home-improvement loan, borrow on the equity in your house, or use personal savings? How much you borrow and how quickly you replace it will affect income, too.

Tax Breaks

But there's more than one way to make money. As a landlord you'll have tax benefits that a homeowner doesn't get, especially once the mortgage is paid off. Capital improvements on rental property, such as putting on a new roof or rebuilding the front entrance, raise the value of your property. In addition, as a landlord you have tax breaks on your tax returns; take every one that you can. And find out if your property is eligible for tax credits for such things as eliminating hazardous lead paint, substantially rehabbing a property in a historical district or Renaissance zone, or making your property energy efficient.

Depreciate the cost of capital improvements (see Chapter 9). Deduct your expenses — the cost of running your business and repairing your property for such things as normal wear and tear. Keep track of mileage when you go for supplies. Record all your expenses, and at tax time, report them. Take all the deductions allowed; it will reduce your taxable income.