How to determine if your rental real estate is profitable
If you’re an owner of rental real estate, then you know more than most that this is the type of investment can be just as costly as it can be profitable. The secret is knowing when to quit if the property becomes a seemingly never-ending financial burden. Here are some points to keep in mind as you do your analysis.
Do you want to be a landlord? If you’re not outsourcing landlord duties, this can be the only question that matters as owners become busier with daily life. It may be time to sell when managing property is no longer be enjoyable.
Is the rental cash flowing? Itemizing your expenses, less the mortgage payment, will help answer this question. You can also refer to your Schedule E of the tax return but take out depreciation as this isn’t from real cash flow. If you’re running a positive every year then this is generally considered profit. If negative, then the next step will be to decide if the annual shortage is sustainable.
What is the anticipated gain or loss? Is your rental property in a growing neighborhood? Check demographics on Zillow.com and decide for yourself if there’s future potential for your abode. (Palm Springs home prices are expected to grow by 6.5% over the next year, according to Zillow. Link) Waiting for a capital gain is the big gamble and shouldn't be the sole reason for keeping the property as you could be waiting a lot longer than originally thought.
Are your taxes benefiting? Review the Schedule E of your tax return and check out line 26 (total net rental income). If you’re running a loss and if your income is under $100,000 then you may be able to deduct $25,000 of those losses against your other income. Otherwise, rental losses are generally carried forward into future years and recaptured when you sell. Ask your tax advisor to run the numbers.
What’s the rate of return on your investment? If you’re running a profit then you can run a return on investment calculation: ROI = Net Profit / Total Investment * 100. In case you were wondering, here are some securities currently reporting the following yields for which you can compare:
U.S. 5 year treasury = 2.95%
Brazil 10 year bond = 9.64%
Johnson & Johnson stock = 2.81%
At Eureka Wealth Management, I do the analysis on your rental and help you decide if it’s worth keeping. Selling an unprofitable property and investing it elsewhere can also give you greater diversification and a lot less maintenance. Call me for a free first consultation at (760) 537-0791 or visit eurekawealthmanagement.com.