Here’s why all Realtors should look into owning rental properties.
There are many reasons to own rental properties as a real estate professional, but today I’ll focus on some of the main ones to take into consideration.
First of all, when you own a rental property that produces a positive cash flow, you start each January 1 knowing you have an income stream. All of us are in the sales business here in real estate, and we know that we’re only as good as our pipeline. If you have a great pipeline and database, then you can count on some great transactions. However, starting each January 1, we eat what we kill. In other words, we have to get out there, prove our value, and complete transactions. When you build your real estate rental portfolio, you can rely on a certain amount of passive income each year. Through the magic of inflation and appreciation, that income should rise over time.
Another huge advantage is that you can write off losses associated with real estate. Let’s say you decide to purchase a fantastic property that you think will appreciate really well over the next five to 10 years, but right now doesn’t produce a great cash flow (or maybe even a negative one). Not only can you write off any losses associated with that property, but you can also invest in that property. If, for example, you find out at the end of the year that you’re going to have a great year income-wise and owe a lot on taxes, you can offset some of that income and make improvements to one of your properties. So imagine one of your properties has a bad boiler and you want to replace it with a new one that costs $15,000. That $15,000 will come off of the income made by that property and help you offset the income you’re making in other areas.
Another tax-related reason to own rental properties is the depreciation of real estate properties. You’ll need to speak with an accountant about this because it involves exploring cost segregation. This is a term that was typically used in commercial real estate that allows you to frontload the depreciation of a property. Instead of having the usual 27- or 28-year depreciation schedule, you’ll frontload that and have just a five-year depreciation schedule.
How will that help you this year? Let’s say you’re on track to net $250,000 and decide to buy a house for $350,000 that’s a rental property. If you put this purchase through a cost segregation study (which you’ll have to hire a professional for), you might get a $250,000 tax write-off. You just went from owing $50,000 or $60,000 in taxes to absolutely nothing.
When you sell that property at a later date, you’ll want to take advantage of the 1031 exchange—otherwise, you’ll pay a huge tax bill upon sale. In the meantime, think about what you could do with an extra $50,000 or $60,000 that’s 100% IRS-compliant. You may be able to take that money and use it to buy another property the next year, and the year after that, and so on and so on. If you buy one property per year for the next 10 years and decide to retire in 20, you suddenly have a hefty retirement package.
In real estate, we don’t get pensions, but we do have the ability to invest in the product we’re helping other consumers buy, sell, or invest in. Thus, we should always be looking for opportunities we can take advantage of for ourselves to help our families and set us up for retirement.
As always, if you have questions about this or any real estate topic or are curious about what it’s like working on a real estate team, don’t hesitate to reach out to me. I’d love to hear from you.