We think so! Owning a rental property can be a great way to diversify your assets. With the volatility of the stock market, not everyone may want to invest all of their money into stocks. Having a rental property is also an amazing avenue for tax write offs. I’ll start off by saying that I am not an accountant and advise that you should run all potential investments by both your lawyer and your accountant for the best legal and financial advice. Ok, now that that is out of the way, we have found that we can write off quite a few things by owning a rental property. For instance, we can write off our travel to check on our rental property. We can also write off the repairs made on our rental. We can also depreciate the property which lowers our overall tax burden. Keep in mind that when you do sell that property, they'll be some more taxes to pay including depreciation recapture and capitol gains taxes. This is also somethng you'll want to discuss with your accountant or tax attorney.
So let’s look at some numbers. One of our properties is in The Villages, FL. This popular retirement community offers affordable homes and is in an area that holds it’s value above the national average. My dad moved to The Villages in 2010 and we started visiting him while on family vacations. We quickly saw how much fun and what a unique place The Villages is. When the timing was right for us, we bought our property. The house was completely outdated and other than changing out the refrigerator and a sofa, we left it as it was for the first “season”. The popular rental season in The Villages is January- March when the snow birds want to come down and escape the cold weather. Our first season we rented the house for $3500 per month for 4 months. When the pandemic hit and our renters left, we moved in and spent the next 18 months of the pandemic enjoying all The Villages has to offer and making repairs to the house.
In mid 2021, we decided to revisit our business model and began preparations to once again rent out this property. With the changes in the market, we felt the property warranted a higher rental rate and so for Jan- March, 2022 we charged $4500 per month. Starting in April, we switched our advertising to an Airbnb and our best conservative estimates is that we will generate approximately $3000 per month for the rest of the year. This is a total income of $40,500 This brings our monthly average income to $3375 per month.
We have found that the type of person that rents our house in the Spring/ Summer/ Fall is usually a family member visiting a loved one who lives in The Villages. We also get retirees or people who are almost retired that want to come and see what all of the hype is about in The Villages. What this demographic means for us is that our rental in The Villages is well maintained by our renters.
Our monthly expenses on this type of rental property are fairly straight forward. I won’t include the cleaning fee because we charge that extra and it is more or less a “wash”.
Electric averages $104
Villages amenities fee $169.18
Water $44.90
Sewer $45.81
Trash $22.96
Internet $69.00
Lawn maintenance $60.00
Insurance $200
Golf Cart Insurance $8.00
Property Tax $233
Total Monthly Expenses $956.85
We also have to pay a local “hotel tax” on our short term rental of 7% so this averages at $236.25 per month. When we are doing a monthly rental, we have to go online and file that tax ourselves and it comes out of the $4500 per month that I am charging. This is a big headache but we feel it’s worth the effort. When I am using Airbnb for my rental needs, they collect and pay that tax for me as a fee above and beyond my fee for renting the property. One more expense to keep in mind is our straight up income tax that we pay at the end of every year. The amount of this tax will vary depending on your income level and should be discussed with your accountant. Keep in mind that if you’re using this as a rental, you can deduct a good portion of your monthly expenses so this will lower the total amount of income tax you owe to Uncle Sam.
We also choose to manage all of our rentals ourselves. This can also be a headache but we feel that the extra savings are worth it for us. We know plenty of people who hire managers and are very happy with the cost/ benefit ratio they get from not having to worry about the day to day issues that may come up.
So where does that leave us at the end of the day? It really depends on if you own your rental outright or if you are making mortgage payments. If you’re making payments, the rental basically pays for itself and you are left with some extra money for repairs. If you own it outright, you get to take home a good chunk of change that you can use to help supplement your own personal expenses or maybe even invest that money into the stock market! Either way, we feel that owning rental property is a win! BUT let’s not forget what we feel is the real reason to hold a rental property. Hopefully your rental property will be an APPRECIATING ASSET. While someone else is paying your expenses, you have an investment that will (hopefully) one day reap rewards when you sell that property.
If you're interested in reading more about rental properties and tax strategies, I would suggest Mark Kohler's books What Your CPA Isn't Telling You and 8 Steps To Start and Grow Your Business.
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