There’s a buzz phrase that goes around with all the Realtors in the springtime, and that is: “now is a good time to sell”. As professional investors and property managers, in our experience, it is never a good time to sell. In fact, holding real estate as part of your total investment portfolio is one of the best investments you can make! Today, we’re talking about why rental properties make such great investments.
In our opinion, rental homes should be held in perpetuity and handed off from generation to generation. It’s the best way to leverage all the tax laws and the capital gains issues, and it provides an opportunity to live off rental income with an appreciating asset all the while depreciating it on your taxes and getting huge benefits. There are always compelling reasons to hold onto a rental.
People will point out that the market has gone up, so it might be a good idea to sell and lock in gains now to avoid selling during any potential downside in the housing market. Last year, the housing market went up seven percent. This means that the average $200,000 house provided a $15,000 return with a 7.5 annual appreciation rate. But, if you’re invested in this home and you have a $150,000 mortgage and $50,000 of equity and the market goes up 7.5 percent, you get your $15,000 return on the $200,000 investment. And if you divide it by the $50,000, which is your invested capital, you’re making a 30 percent return before taxes. You can leverage the tax laws for the depreciation, and make even more from the tax benefits, and that’s phenomenal. You won’t get an investment return even close to that in the stock market or through mutual funds or by keeping money in a bank account. There is no better investment than rental real estate. Most of the millionaires in our country got there through real estate. There are all of these additional benefits, including the leverage you can use to turn an investment into a substantial return when you retire.
So when you’re deciding to sell or rent, our vote is that you’d be crazy to sell. Realtors will tell you to sell. They don’t always care to be involved in the rental market because it’s a more difficult way to make a living. It’s more of a process and requires a lot of structure. It’s a long term commitment, and goes beyond selling and earning a commission. Lots of experience is required, and property managers have to understand leasing, tenant screening, legal issues, and maintenance. These are the things a good property manager can do for you. It allows you the opportunity to hold onto an investment and benefit from it in the long term. Realtors aren’t so enamored with the industry because there’s a small amount of money to be made on a monthly basis instead of a big commission check. But that shouldn’t influence the base recommendation of whether a rental property is good for you. Only you and your CPA and your tax attorney can make those determinations. Don’t let your property manager or your Realtor sway you one way or the other. Look at both sides and make a decision on the best plan. Our experience with long term rental properties is that the investors who hold onto those assets for decades can genuinely reap the rewards. It’s very compelling.
If you have any questions or need help with rental properties and Kansas City property management, please contact us at 33rd Company Kansas City.