By Kevin Boutwell, CFP®
Although many people like to think of owning a rental property as “passive income,” there really isn’t anything passive about it. Buildings must be maintained, grounds must be monitored, fixtures and plumbing must be repaired, and insurance and taxes must be paid. The amount of effort and money put into a rental property can sometimes outweigh the financial benefits.
If you are debating whether or not to keep your rental property, before making any decisions, consider the following factors.
How your rental property is treated and maintained over time will determine how much work and maintenance expenses need to go into it. This is largely determined by the people who occupy your home day in and day out. If your renters are inclined to cleaning up after themselves and keeping up your rental property, then the amount of property maintenance will remain minimal. However, if you have renters who do not clean up after themselves or are at risk of causing major damage, then that will cost you a lot of time and money.
Look back at your last several renters and see if you can detect any patterns. Do you tend to attract reliable renters and the amount of work and maintenance for you has been a breeze? Or are you prone to finding renters who turn out to be disappointing in the end, and your wallet is proof of it?
What Is Your Real Return on Investment (ROI)?
Just because your renters cut you a check every month does not mean that every dollar you get goes straight into your bank account. There are expenses that come with property ownership, and it’s important to take them all into account so you can figure out what your true ROI is. Take your monthly rental income and subtract any maintenance or repair expenses, management company fees, and anything else that was spent on your property that month. The result is your true ROI for the month. Repeat this for the last 6 months to get an estimated monthly average. Once you have these numbers, you can determine whether or not you are making money, and if that amount is satisfactory for the amount of responsibility and time you put into it.
Do the Tax Benefits Still Make Sense?
As a rental property owner, you have access to a set of unique tax benefits provided by the Internal Revenue Service (IRS). For instance, you have the opportunity to deduct your mortgage interest rate payments, your property tax, advertising expenses to recruit tenants, and repair and maintenance expenses. There is even a special category called “depreciation” where rental property owners can deduct the estimated annual “wear and tear” of their property. (1) In order to determine whether or not you should keep your rental property, calculate how much you save on taxes in addition to your monthly rental income after expenses. For instance, if you are in a higher tax bracket, then your rental property has the power to lower how much you’ll pay in taxes. However, if you cannot utilize many of the tax benefits and the numbers do not add up, then keeping your rental property may not make sense financially.
Booming Housing Market
Because of the unique circumstances surrounding the COVID-19 pandemic, now is a better time than ever to sell a home. Supply chain issues have made it difficult for homes to get built in the last two years, which has curbed the construction of new homes. A limited supply of homes means there is fierce competition between buyers. This imbalance between supply and demand has caused home values in the U.S. to skyrocket by nearly 20% in 2021. (2) We are currently in a seller’s market, which means selling your property to cash in on the unprecedented appreciation of the last year could be something worth considering.
Is it Worth It?
Your time and money are precious resources that should always be put to good use. If you find that your rental property is giving you a desired boost in income without impeding on your well-being, definitely consider keeping the property. However, if your property isn’t yielding the results you would like and it’s causing you headaches, it may be time to consider other options.
Remember that you don’t need to make this decision on your own. To help you feel secure in your choice, we at Veracity Capital would be more than happy to walk you through the different financial options regarding your rental property. Reach out to me at 678.888.4952 or firstname.lastname@example.org to get started with a no-obligation get-acquainted meeting.
Kevin Boutwell is a wealth advisor and partner at Veracity Capital. With almost a decade of experience in the financial industry, Kevin has acquired expertise in managing equity compensation. He focuses his services on corporate executives who have complicated compensation packages and resulting tax headaches. He believes that proper financial planning drives the best investment decisions, and his customized process and strategies help his clients achieve better outcomes. Kevin prioritizes building long-term relationships and offers the perfect mix of analytical, problem-solving, and a personal touch so his clients can focus on what’s important while knowing their finances are taken care of.
Kevin is a highly decorated veteran former U.S. Navy pilot. He got his start in the financial industry at Goldman Sachs and is a CERTIFIED FINANCIAL PLANNER™ practitioner. Kevin earned his Bachelor of Science in Mechanical Engineering from the Georgia Institute of Technology and an MBA from Indiana University’s Kelley School of Business. Out of the office, you can find Kevin staying busy with his family, including his young triplet sons. He stays involved with several non-profit veteran organizations and participates in the Georgia Tech mentoring program. When he has a spare moment, he enjoys staying active with CrossFit and an occasional round of golf. To learn more about Kevin, connect with him on LinkedIn.
Advisory services offered through Veracity Capital, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.