Building Wealth with Rentals
Holding on to that property could provide a retirement windfall
Many potential sellers in the last few years have had to face the question of whether to sell or rent out their house or condo. This has been a particularly difficult situation coming on the heels of record property values of the late 2000s. The prospect of selling the property for less than it was purchased is forcing many potential sellers to opt for renting their properties. This is what I call becoming a landlord by chance, not by choice.
The good news is that holding real property for rental can be a lucrative investment strategy. There are multiple advantages to the owner of a rental including additional tax deductions, long-term appreciation and supplemental income in retirement. This approach does require patience, as the value of your asset will grow over time. And, if the finances work out in your particular case, you can grow your wealth without contributing any more money out of pocket.
Did you know that all expenses related to the property are considered deductible from the rental income collected? These include repairs, maintenance, HOA fees, redecorating expenses, management fees, mortgage interest and bills from legal and tax professionals. At the end of the month (or year) will your income exceed your expenses?
Per current IRS guidelines, owners of rental real estate are permitted to deduct depreciation expense as part of the calculation to determine the taxable income earned on the rental. While it is true this expense will need to be recaptured upon selling the asset, the impact on your overall taxable income can be significant. For instance, the annual depreciation expense on a $350,000 property can yield a reduction in your taxable income of over $12,000.
There are few financial opportunities available to the average American that permit a modest investment of the owner’s capital in a relatively low-risk environment in return for owning an asset worth tens of times the initial investment. Of course you don’t really ”own” the property until the mortgage is paid off and therein is the opportunity. A tenant or multiple tenants over time can bring your cost of ownership to zero while you continue to pay your mortgage. There will be repairs and replacements of equipment, but your property and rents will appreciate over time. Eventually you will be the owner of an asset that is worth much more than your initial cash contribution.
How does this make you rich? Imagine if your mortgage is projected to be paid off when you turn 55, 60 or 65 years old. Will you sell the property at that time or continue to be a landlord? Suddenly, you will be collecting – and keeping – the majority of the monthly rent income at the same period in your life you want to have additional income. Will you continue to work full time at that age, or will you be able to live off of the income generated from your investments? What if you had purchased multiple properties over time? How much income would they collectively generate each month for you?
In 2033, when the rents collected from your rental properties are helping you to enjoy a standard of living above your peers, having decided to hold onto that condo or house 20 years prior will look in hindsight to have been a good idea.
For more information about real estate investment presented by the author of this article, register for CAGLCC’s annual ”g.life: One Day in DC, All Things LGBT” on Saturday, Nov. 9, and attend g.life U, the event’s speaker series. Visit caglcc.org/g-life/home.
Scott Bloom is the owner and property manager of D.C.-based Columbia Property Management. He has been a CAGLCC member since 2010 and is certified as an LGBT Business Enterprise by the National Gay and Lesbian Chamber of Commerce (NGLCC).
The Chamber Means Business. For more information visit caglcc.org.
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