Rental real estate is appealing for many investors. Whether you heard about rental real estate investing from the news, family or friends, it is imperative you have a system to decide whether the investment is right for you.
In this video, Kevin Gormley CFP, CPA® discusses the five most important steps you should consider when it comes to investing in rental real estate. No matter how ‘easy’ you may have heard owning rental property is, you could find yourself in real financial trouble without a good process to analyze the property, the local area, cash flow, and the tax implications of your rental property.
When it comes to owning a rental the first thing you will want to gauge is the value of the property you are interested in purchasing. Can you make money when you eventually sell the home? Most people believe they know the next hot area for housing in their community, but what if they’re wrong? It is imperative to have more than just a gut feeling when it comes to the value of the property you’re considering.
Cash flow is just as important as the future value of your home. We recommend making your own spreadsheet or use our Leading Edge Rental Property Workbook to help you visualize your expected revenue and expenses. It’s important to understand whether the property is currently profitable or not. Some people are okay with negative monthly cash flow because of the potential tax deduction. We never recommend losing money in rental real estate simply to have a tax deduction.
How will you purchase your rental property? If you are planning to finance your property, leverage can help you to make greater profits, but you could find yourself in trouble if interest rates change or the loan balloons. This was one of the main causes of the housing crisis in 2008 – real estate investors were using too much leverage.
We recommend that you understand how the rental income and potential capital gains from the property will be taxed. Know how you can use the tax code to your benefit. For example, the depreciation of your property can be one of the best tax advantages of owning real estate. This is especially important for high-income households whose largest expense is often taxes. Leading Edge has a dedicated tax team that can help you understand these important tax advantages – give us a call!
Bonus: One of the overlooked questions when entering the rental real estate business is “do I want to be a landlord?”. Being a landlord can require 24/7 on-call maintenance, legal paperwork, eviction, tenant communication, credit reports, marketing and more. A management company may be the best solution for you but be sure to include their fees in your anticipated expenses.
Leading Edge has experience in this area and can help you evaluate if rental real estate would be a good addition to your financial plan. Give us a call! 865-240-2292
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 05/21/19 and are subject to change at any time due to the changes in market or economic conditions.