By Michael Hathaway, CFP®, CFA®, AIF®
When it comes to investing, many investors have been attracted to owning rental properties. While it may provide a steady stream of income, owning rental property is not always “passive income.” There are many things to consider when taking on the role of a landlord. For example, buildings must be maintained, grounds must be monitored, fixtures and plumbing must be repaired, and insurance and taxes must be paid. The amount of time, effort, and money invested into a rental property can sometimes outweigh the financial benefits.
For some owners, there may come a time when they wonder if it continues to make financial sense to keep the rental property. If you are debating whether to sell or hold on to a property, consider the following factors before making any decisions.
How your rental property is treated and maintained over time will determine how much work and maintenance expenses must 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 clean up after themselves, notify you immediately of needed repairs, and keep up the overall premises, 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 could 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 has the amount of work and maintenance required from you been easy and light? Or have you been prone to finding renters who turn out to be destructive, and disappointing in the end, and is your wallet proof of this?
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. Many expenses 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 mortgage payments, property insurance, HOA fees, any maintenance or repair expenses, management company fees, and anything else that was spent on your property that month. This will help clarify whether this investment is generating a satisfactory return on investment. Repeat this for the last 12 months to get an estimated monthly average over a full-year cycle. 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 payments, your property tax insurance, any HOA fees, 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, it helps to consider how much you’re saving on taxes in addition to your monthly rental income after expenses. However, if you cannot utilize many of the tax benefits, or the numbers do not add up, then keeping your rental property may not make sense for you financially.
Booming Housing Market
Because of the unique circumstances surrounding the COVID-19 pandemic, now may be a great time 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 few years could be something worth considering.
Is it Worth It?
Your time, energy, and money are precious and finite 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 is causing you stress or headaches, it may be time to consider other investment options.
Remember that you do not need to make this decision on your own. To help you feel secure in your choice, we at Epsilon Financial Group would be more than happy to walk you through the different financial options regarding your rental property. Email me at Mike@wealthmatters.com or call (707) 428-5500 to get started with a no-obligation get-acquainted meeting.
Michael Hathaway is a fiduciary financial advisor at Epsilon Financial Group, Inc., an independent, fee-only wealth management firm. Mike has worked in the finance industry for more than 20 years and brings a wealth of knowledge and experience in sophisticated financial planning to help his clients make sound financial decisions. He is known for caring deeply for his clients’ well-being, being compassionate, and thinking creatively to help clients attain their financial goals. He prioritizes building long-term relationships and takes the time to listen, understand, and explain so that his clients feel confident in their financial plan. Mike is a CERTIFIED FINANCIAL PLANNERTM, Chartered Financial Analyst® (CFA®), and Accredited Investment Fiduciary® (AIF®) professional; he has a bachelor’s degree in cybernetics from UCLA and an MBA in finance and accounting from the University of Virginia. When he’s not working at Epsilon, you can find Mike enjoying anything related to exercise and fitness. He especially loves activities in the great outdoors, such as mountain biking, camping, hiking, and snowshoeing. In the fall of 2016, Mike successfully climbed to the top of Mount Whitney in a single day, the highest peak in the continental United States. To learn more about Mike, connect with him on LinkedIn.