Real Estate

Landlords grow rich in their sleep without working, risking, or economizing." ~ John Stuart Mill

When I was young, my father always encouraged me to invest in real estate.  He had two approaches:  buildings to rent; and land to hold for appreciation.  He especially liked the tax benefits.  Back then, real estate paper passive losses, due to depreciation, could be used to offset all other income, including wages, without limitation.   So the typical strategy was to cash flow neutral before taxes, and be cash flow positive after claiming depreciation deduction.   In addition, gains from the depreciated basis were taxed at long term capital gains rates, if the property was held more than one year.

Based on my recollection, my dad on average made some profit on rental properties, mainly through depreciation deductions and having renters pay the mortgage.  His best investment in rental property was through a partnership with other real estate investors.  His second best was his personal home.   He made significant profits on buying investment land and reselling years later, but these involved some luck in picking a good location for future development.

Other than co-owning one rental property with my father, I didn't invest in real estate other than owning a home.

Nowadays, owning investment real estate is no longer as lucrative.  First, the tax code has changed, eliminating the deduction of passive losses (due to depreciation) for most landlords who are above an income threshold.  Also, depreciation recapture is now taxed at ordinary income tax rates, with a cap of 25%. 

As for buying investment land, the best opportunities are often long ago purchased, with remaining plots requiring long wait times, perhaps a lifetime, for significant profit since growth has slowed.

In addition, rental real estate does involve work, or the hiring of a property management company.  There is also more risk nowadays, as the coronavirus pandemic as caused some renters to not pay rent, or in the case of Airbnb property owners, cancel reservations.

I became an accidental real estate investor when my parents passed away, inheriting some investment land and a 1/3 interesting in a commercial rental property.  Fortunately, the rental property's mortgage is paid off and is positive cash flow before taxes.   We also pay a property manager to do the work.   The investment land is in a good location, and the property taxes are low since it is vacant land.   So the cost of keeping the property is very low.

Even with these favorable conditions, my goal is to sell my interest in both properties and not pass the properties to my heirs.  Even though the properties are doing well as investments, they have a lot of complexities that require action from an owner, which I believe my heirs would have not interest in doing. 

For me, if I own real estate after selling these properties, it will be only through publicly traded REITs (real estate investment trusts).   REITs offer many of the benefits of owning real estate, but remove all the work, risks and headaches of actually owning property. 

For more on Crossing Generations, check back every  Thursday for a new segment.

This is not financial, investment nor real estate advice. Please consult a professional advisor.

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