One of the best ways to build real wealth in real estate is to own rental property. As with many good investment options, however, there are many good reasons to own rental income and also some solid reasons to avoid it.
Many of the cons of owning rental property can be alleviated by hiring the management of your investments out to a good property management company.
The following will show you how hiring a good property management company can eliminate the cons and maximize the pros for your real estate wealth building plan.
With this strategy, you can finally minimize the roadblocks to your success and maximize your gains, accelerating your real estate wealth without accelerating your blood pressure!
Pros of the Rental Business for Real Estate Wealth
Pay off debt with cheaper dollars. When you get a loan property and pay it off over the next 15 or 20 years, you are lacking in the price of your debt today, hoping that you can increase rents tomorrow through inflation. That means that you will be paying off today’s debt with future, cheaper dollars. Over time, this would increase the spread of profit you make an all investment properties as inflation increases in rents increase.
Expenses are deductible. Expenses that include maintaining the rental property, mortgage interest, and insurance are all tax-deductible.
New tax deduction. There’s been a new tax deduction for rental property owners. Under the 20 17 Tax Cuts and Jobs Act, if you operate, limited liability company (LLC), S Corporation, or partnership, you can deduct an amount equal to 20% of rental income annually. The only stipulation is that your total taxable income for the year cannot exceed $157,500 for singles or $315,000 for married couples filing jointly – counting all sources of income.
Depreciation. You get to take annual tax deductions for wear and tear of your rental property against other income you receive for the year. Which means that even if you achieve a net positive cash flow from the rental income minus your expenses, for tax purposes you can still have a net loss. We should consult with a tax professional who can share more about the US tax code with you.
This is how the wealthy have sheltered their wealth for decades in America.
What Most Investors Think
it’s these advantages of owning rental property that move many real estate investors into the business. However, once many get knee-deep into the daily work of being a landlord, they discover the not-so-glamorous aspects of being in this business.
We’ll get to that in a moment, but first, the most common misconception of many real estate investors is that hiring a management company means less money in their pockets.
This is an over simplification of what it costs to manage real estate, which means this is 100% inaccurate!
Here is the equation that landlords come up with when faced with the decision to hire a property manager…
- Option 1 (No Property Manager): Rent – Mortgage = More Profit
- Option 2 (w/ Property Manager): Rent – Mortgage – Management Fee = Less Profit
Before you are convinced that these are the right equations, consider the following questions.
Do you know what the market rent for your home is right now?
If you are below market rent for your home then you might not attract the right kind of tenant to your property, and thus lose money in potential rent and by having a low quality tenant that causes damage to your home, doesn’t pay their rent on time, etc.
On the other side of that coin, you can easily overprice rent your property and fail to get a new tenant in a timely manner which costs you money.
- Have you worked with contractor(s) in the area that will charge you a fair price, every time?
Finding Dick contractors to take care of all of your needs is a challenging test. You will need to have great people on hand for roofing needs, electrical needs, plumbing needs, painting, fixes, tree trimming and a lot more.
- Are you knowledgeable in the Fair Housing Laws in Maryland?
- What action do you take if your tenant does not pay rent, and is your action legal?
- What happens if your tenant does pay rent but violates some other term of the lease?
- Do you have a lease that is valid?
- What happens if you violate your duty as a Landlord?
If you don’t know the answer to some of these questions, it can, and will cost you money.
If you violate even one law or mismanage an issue with a tenant who is not paying rent on time in any way, you can end up paying your entire year’s net profit in legal fees, if not more. If you have multiple properties then this increases your exposure to potential legal issues with tenants.
Let’s rewrite the previous equations…
- Option 1 (No Property Manager): Rent – Mortgage – Marketing – Lost Rent – Realtor Commissions – Lawsuit – Overcharged Legal Fees = LESS PROFIT
- Option 2 (w/ Property Manager): Rent – Mortgage – Management Fee = MORE PROFIT!!!
A good property management company will bridge the gap between your desire to simply build a successful and profitable portfolio of rental properties and your lack of expertise in landlord and desire to spend the time and energy handling all the maintenance of landlord.
The way you can accelerate your real estate wealth plan is by hiring a good property management company to be your partner in business. You would be so surprised at how affordable it is to work with a property management company.
You owe it to yourself to get an accurate picture of what all property management company can do to help simplify your life, help you build wealth faster and take the professionalism of your real estate management operations to the peak.
Learn more about what Utz Property Management can do to help grow your real estate wealth, and take advantage of our profitable portfolio strategy session today.