Should You Be A Landlord?

Show Notes

Owning rental property is like ordering a pizza with anchovies. It’s not for everybody.

There’s no question that renting a property can be a lucrative investment, but it’s certainly not a passive investment like owning stock.

Owning rental property is attractive for many, but it’s not a perfect fit for everyone. Just like not everyone enjoys anchovies, not everyone has the temperament or resources to be a landlord. Before diving into property management, it’s essential to understand the benefits and challenges of it. Let's explore these aspects to help you decide if being a landlord is right for you.

The Pros of Owning Rental Property

The primary allure of owning rental property is the potential for rental income. If managed well, a rental property can provide a steady cash flow. However, if you have a mortgage on the property, it’s crucial that your rental income covers your mortgage payments and other expenses to avoid a negative cash flow.

Real estate typically appreciates over time, meaning your rental property will likely increase in value. This can result in a substantial profit when you decide to sell. However, it’s important to remember that capital gains taxes may apply to this profit.

The IRS offers several tax deductions for rental property owners. You can deduct expenses such as insurance, mortgage interest, and maintenance costs. Additionally, you can claim depreciation, though this will lower your cost basis and may increase capital gains taxes when you sell the property.

If you own a rental property in a desirable location, like a beach house, you can use it for personal vacations up to 14 days a year (or 10% of the days you rent it out) and still deduct your expenses.

You don’t necessarily need to own a separate rental property. Renting out a portion of your own home, like a garage or basement, allows you to earn rental income and deduct a portion of your mortgage interest and other related expenses.

The Cons of Being a Landlord

If you don’t already own a property, buying one to rent can require a significant upfront investment. This often means taking on a mortgage, which you’ll need to cover through rental income. Ensuring that your rental income exceeds your expenses is crucial.

Unlike money in a checking account, which is highly liquid, funds tied up in real estate are not easily accessible. Selling a property takes time and may not always be an option when you need quick cash.

Owning property means dealing with ongoing expenses like taxes and insurance, which can increase over time. Additionally, external factors, such as a decline in the neighborhood, can make it harder to rent out your property or affect its value.

Tenants can be unpredictable. Some may pay rent late or cause damage to the property beyond what a security deposit covers. Even with good tenants, there’s always the need to keep the property in good repair, which can involve unexpected maintenance calls at inconvenient times.

Managing a rental property requires time, effort, and a firm hand. Being a landlord can be challenging, from finding and vetting tenants to handling late payments or evictions. If these responsibilities sound overwhelming to you, consider hiring a property management company, which typically takes about 10% of your rental income.

Seeking Wisdom in Your Decision

Deciding whether to become a landlord is a significant decision that requires careful consideration. It’s important not to make this decision alone. Involve God in your decision-making process. 

James 1:5 encourages us: 

Seek His guidance in prayer as you contemplate this big step, and trust that He will lead you on the right path.

On Today’s Program, Rob Answers Listener Questions:

• I received an email from AT&T about a data breach that exposed my personal information. They offered free credit monitoring, but I'm concerned the email may not be genuine. How can I determine if the email is legitimate?
• I have a question about the guaranteed rates, whether it's high-interest savings or short-term CDs versus a mortgage rate that I locked in back in 2021, which is around 2%. With no additional debt, how do you feel about the balance of making more on my savings versus paying down my low-interest mortgage?
• Right now, during open enrollment at my work, they offer two insurance plan options—a standard PPO plan and a high-deductible HSA-eligible one. Interestingly, they are paying the full premium for both plans, so I have no difference in the premium cost. Which plan would be best for me to enroll in: the standard PPO or the high-deductible HSA plan?
• My mother-in-law passed away at the end of December, and upon her death, the house transferred into my husband's and his sister's names. The house was recently sold for $180,000, but $100,000 needed to go to pay her bills associated with the house, like the home equity and mortgage. The remaining money, around $40,000, was split between the two siblings. Is that $40,000 we each received considered a capital gain, or what would that be classified as?

Resources Mentioned:

• AT&T Data Breach Information
• Rich Toward God: A Study on the Parable of the Rich Fool
• Find a Certified Kingdom Advisor (CKA) or Certified Christian Financial Counselor (CertCFC)
• FaithFi App