Is it OK to Break Even on My Rental Property?

Question

I would really like some feedback on this blog topic. I'm not sure everyone will agree with it, so I welcome your thoughts.

Account Closed · Answer

I think it depends on your investing goals.  Some people want/need cash now.  Others are in the 39% tax bracket and don't are trying to limit their immediate tax burden.  If you are in a low tax bracket, your goals should likely be about immediate cash flow.

If you are looking for long term money, then I think it's ok.  I believe it's better to make a tiny bit of money than $0.  I always joke that I only need to make a $1 a month on a rental property her in Seattle to be happy...mostly because I know the tenants are paying down my mortgage and in 30 years I'll own a building free and clear.  In reality, I like to make at least $50 a door per month.  My goal is to have my rental properties show a 'tax return loss'.  Meaning with all of the deductions, depreciation and amortization - my rental properties show a loss on my tax return.  Given my tax situation, I can't use additional passive loss on my ordinary income.  This means I'm building up a large passive loss carryover for the future (i.e. when my tax situation changes or a sell a property).

Granted I do have some properties that clear several hundred a month per door; but my lower performing properties help offset those to ensure I can maintain a tax passive loss.

Another strategy to keep in mind is 'equity stripping' (you do need to be careful with this).  When my properties start making too much money; it's time for a cash our refi.  Why?  When you get too much equity in a property, it can become a lawsuit target.   So, I take some equity out of properties that get 'too fat' and buy more properties.  This does two things; helps minimize my liability expose (in conjunction with LLC structures); and also grows my portfolio.

Obviously, if I didn't have a full time job with good income, my strategy would be different.  But I don't need additional income now...I"m building up my portfolio for later.  So to answer your question; in principle I believe it's OK to own a rental property that 'breaks even'; as long as it lines up with your goals and needs.  I'm sure there are many people that will disagree with me on this point; however, anytime somebody says you have to do it a certain way or your wrong -  they are usually wrong or misinformed.

Ian Hoover · Answer

I like to look at my real estate investing like stocks, I like to have a good variety and be diverse. Some of my money is in Blue chip A stock where it doesn't make me a ton of cash but it is a very safe investment which should appreciate nice overtime, I have some B/C stocks that have upside potential and cash flow nice and I have some penny stocks that cash flow hand over fist but will probably not ever sell for much more than I bought it however every once in a while that penny stock will get some forced appreciation from something happening nearby (IE Lawrenceville in our area) where that $30k home is now worth $300k. I think you should have a good mix in your portfolio and it isn't always a bad thing to break even because you are still getting rent paying your mortgage down and tax benefits.

Taylor Hazard · Answer

Great question, its something that everybody needs to consider and will depend largely on your own investment goals but also location.

The points raised in the blog post are all valid. Tax advantages, appreciation and loan pay down are all contributing factors to the overall ROI. If I was buying an investment property with the goal of paying for my Son's college tuition in 18 years than I might give more weight to these factors. With the long view in mind you can stomach vacancy issues etc. along the way knowing your planned exit will be measured in one lump sum some years down the road.

the other crucial element is location. If your targeting a market like Seattle, Austin, Pittsburgh, Denver etc. you can safely count on long term positive appreciation; appreciation (or appreciation at the level to make break-even appealing) is hard to find and not a given in most markets.

If, however, your goal is to work towards "financial freedom" then the blog post and above is not a relevant strategy and cash flow is king. My guess is that most folks on this forum are going to champion the cash flow model over appreciation.

Is it OK to Break Even on My Rental Property?

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