This faith and finance podcast is underwritten in part by Praxis Investment Management. Since 1994, Praxis has offered investment products designed to meet the practical needs of everyday investors, while supporting positive change through impact strategies that go beyond screening. Guided by faith values, Praxis strives to make a positive impact on the world. Learn more at praxisinvests.com. Owning rental property is like ordering pizza with anchovies.
It's not for everybody. Hi, I'm Rob West. There's no question that a rental property can be a lucrative investment, but it's certainly not a passive investment like owning stock. Today, we'll explore the pros and cons of owning rental property, and then it's on to your calls at eight hundred five two five seven thousand. That's eight hundred five two five.
Five seven thousand. This is faith and finance: biblical wisdom for your financial decisions.
Okay, my analogy may have been a bit extreme. Not many folks like anchovies, and probably a whole lot more would like to own rental property someday. In fact, we've been getting a lot more calls about it recently. But my point is that owning a rental property is not for everyone. You have to know your limitations.
Do you have the right temperament to be a landlord? You have to be actively involved with the rental property, or pay someone else to do it. We'll get. But first, let's look at the pros of being a landlord. First, there's the income stream.
A rental property provides rental income. That's the whole point.
Now, if you're carrying a mortgage on the property, it will eat up your rental income, and it goes without saying that you don't want a negative cash flow. But having a positive cash flow is like having money in the bank, literally. Then there's the appreciation. Homes almost always increase in value when you sell a rental. Property, you'll probably make a nice profit, but keep in mind that it may be subject to capital gains taxes.
Next, there are tax breaks. The IRS allows you to deduct maintenance and improvement expenses and depreciation.
So, for example, you can deduct insurance, mortgage interest, and lawn maintenance. When deducting for depreciation, understand that it will reduce your cost basis, meaning you'll be liable for more capital gains taxes when you sell. Here's another pro. Let's say you buy a beach house to rent out on a seasonal basis. You can use the property yourself for 14 days a year, or 10 percent of the number of days you rent it out, and still deduct your expenses.
Oh, and one more. You may already own a rental property. By that, I mean you could rent out part of your house, such as a garage or basement. You'd get the rental income and be able to deduct a portion of your mortgage interest and other expenses.
So there are plenty of pros to buying a rental property, and that's why a lot of people do it. But what about the cons of owning a rental?
Well, first, there's often a huge upfront investment cost if you don't already own the property. Not many people can afford to do it, so there's probably a mortgage involved either when converting a principal residence to a rental or buying one to start out as a rental. That means you must charge enough rent to cover the mortgage. Plus additional expenses. Will you still be in the black?
Next, there's the lack of liquidity. Money in your checking account is considered highly liquid. Money tied up in a rental property is considered highly illiquid, meaning you can't get to it quickly or easily. You also have exposure to events you can't control. You must pay taxes, and you must have adequate insurance on the property, but you can't prevent increases in those costs.
Another example of that is the neighborhood may decline, making it more difficult to rent out your unit and negatively affect appreciation. You may have difficult tenants who are late with the rent or don't take proper care of your investment. Even if you have a security deposit, it doesn't take much to do more damage than a security deposit will cover. But even with considerate tenants, you still need to keep the property in good repair. There will be midnight calls about broken water pipes.
And toilets that won't flush. Will you grab a tool bag and head over, or will you hire a management company to do that for you? That will cost around ten percent of your rental income. The final con is actually having to be a landlord again, unless you pay someone else to do it. You have to find and vet prospective tenants.
Sometimes you have to be firm with folks when they're habitually late with rent or don't pay at all. Do you have the stomach to evict? Of course, you want to help a tenant who's having a temporary problem, but can you be firm when it's necessary? These are all things you must consider if you're contemplating being a landlord. It's a big decision, so don't make it alone.
Of course, bring God into the discussion in prayer. Ask Him to show you the path you should take. James one five reassures us: If any of you lacks wisdom, let him ask God, who gives gener. To all without reproach, and it will be given him. All right, your calls are next.
The number eight hundred five two five seven thousand. That's eight hundred five two five seven thousand. And by the way, you can call with your questions. We'd also love to hear your testimonies as well. How is God working in your financial life as you've applied His principles to your stewardship?
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Let's do that right now. We're going to dive in. We'll begin in Georgia today. Sherry, go right ahead. Hey Rob, I have an 85-year-old family member who is not living in his home anymore, and he's thinking about he wants to sell that home and split up the proceeds to his heirs while he's still alive.
Would that be a good idea, or should he just wait and let that be dealt with as an inheritance? Yeah, so this is not his primary residence now.
So the only downside to that would just simply be that he would have to pay any capital gains on the house.
So if you don't live in the home as your primary residence for two out of the five years prior to the sale, then you don't enjoy that capital gains exclusion of either two hundred fifty thousand or five hundred thousand, depending on whether you're single. Single or married, but if he he sells that home not being his primary residence and he has a significant gain in it, he would have to go ahead and recognize that gain. Most often, if that gain plus his income for the year is less than about six hundred thousand, he would pay fifteen percent on that gain.
Now we're not talking about the selling price, just the the difference between the selling price and what he originally paid for it, and a few other things that might adjust. It up so that's the only reason to just pause and consider that because that would go away if the heirs inherited it after his death. That would not be a factor. It is a factor now, but he may rather get that money into his heirs' hands because you know perhaps you and and your siblings, if that's who this is, could use that money now, and that would be a real blessing, and that might outweigh the tax implications. But the other factor that I didn't mention, Sherry, is what's called a Medicaid lookback, which you just need to be aware of.
So, you know, if you give, if he sells it and gives the proceeds to the kids, and then he needed Medicaid-funded long-term care, now he may have assets for that, and if so, great. But if he didn't, then transfers for less than fair market value, which this would be because it's a gift, during the five years prior to applying. For certain Medicaid benefits, may result in ineligibility.
Now, if this is not his primary residence and he doesn't plan to return to it anyway, that could be problematic for Medicaid, and it it not enjoy the same exemptions that your primary residence would. But let me stop there and just get your thoughts on all that. Right.
So, I wasn't sure about the capital gains if that would be owed at all. It's an older home, and he had lived in it for 35 years. It's in in need of a lot of repairs, so we're not talking a large amount that's going to be gotten for it anyway.
Okay. When did he move out of it? Just in the last couple years.
Okay. He moved in. He moved in with us a little over a year ago.
Okay, perfect. Yeah, so that should be fine then, because if he's lived there as his principal residence for two out of the prior five years from the sale, which it sounds like he would be able to qualify for that, correct? Yes.
Okay, then a quarter of a million dollars of that gain would be set aside or excluded anyway.
So now the taxes aren't an issue, and so the only thing would be a Medicaid lookback. Do you think he might need Medicaid if he needed some long-term care? Um. Yeah, probably.
Okay, so that would be the only consideration: is that Medicaid would look, they look at a five-year look back and say, "Okay, have you tried to offload assets?" You know, somewhere below fair market value to someone, including family, and if so, then that would disqualify him. If this was his primary residence that he planned to return to, it could be exempt from that, and he could get Medicaid right away. But you know, that you may just want to talk to an elder care attorney before you make that final decision, just so you don't inadvertently prevent him from accessing government assistance on Medicaid if he needed it.
Okay. Thank you so much. All right, you're welcome, Sherry. Lord bless you. Let's go to Ohio.
Hi, Nita. Go ahead. Hi, I am 65 years old. I have a Jackson fund that I've had about 10 years, so it has matured to the point where I need to take $2,100 a month out of it. I've been doing that since June.
I put 900 of that back into a pretty good growth fund. Investment to save some of it back, but I'm using that extra 1,100 to have fun with my kids and my grandkids. Help them pay for Christian school, sports, and my question was whether you know I kind of feel like I'm giving some of my kids' inheritance to them now by doing it this way. Yeah, should I be? Putting all 2,100 back in to grow and let it have it later in life.
They're still gonna have money there later.
So right now, I'm really enjoying this money. Yeah.
Well, you know, here's what one of my mentors, Ron Blue, says. He says, "Do your giving while you're living, so you're knowing where it's going." And I kind of love this idea. I mean, you're taking a part of it and redirecting it into continuing to build your long term savings and your net worth, which, as you said, will ultimately be given away to either heirs. Ministry, and you're taking a part of it and using it to to enjoy and remember. Money is a tool to accomplish God's purposes.
So that means we should give it away. That means we should use it to provide. That also means we should use it to enjoy. And I can't think of a better thing than for you to help your kids get a Christian education. For you to you know take them on trips and do fun things and spoil them from time to time.
I mean that sounds fabulous to me. From a pure financial Planning standpoint, you're going to get this twenty one hundred for the rest of your life. Is that right? Yeah, yeah, and and that fund is still growing. I mean, it's not going down.
Yeah, yeah, that's great. And what other assets do you have right now? My house, my car, and about eight hundred thousand in investments.
Okay, and are you living off of the eight hundred thousand, or is that just growing? No, I have my pension. I have Social Security, and I still work part time.
So I get with this two thousand. I have about an eight thousand dollars month income, and and that's without touching any of the eight hundred K. Yeah.
Oh wow, yeah, I mean that's incredible, Nita.
So I think even where you're at is to consider just what is your financial finish line. I mean, I would even question, and I'm not saying you just kind of spend frivolously by any means. I mean, you're a steward of God's resources. We need to be faithful in managing that. Mean that means we start with our values and our priorities.
Whereas God leading me, how how can I be the best? Manager of of these resources, and I don't think that means just continuing to increase your lifestyle. And I'm not hearing that from you, but I do think there's an opportunity when we get to this season of life where you know you have plenty of resources coming in.
Now you may not be able to work forever, but between your pension and the twenty one hundred a month and Social Security, you're probably you know you're probably in a situation where you could essentially say.
Okay, I can draw a financial finish line at X, and then beyond that, you know, I'm able to accelerate my giving. Perhaps, you know, you take the full twenty one hundred and use it in the same way you are now to to bless your family and and help offset, you know, additional expenses for Christian school. But I think at the very least, just continue on exactly what you're doing. I love it, but I would even say perhaps with the counsel of an advisor, you might even be Able to look at this again and just say, you know, is there a finish line that allows me to do even more?
So long as it's aligned with your values and priorities. Does that make sense? Yeah, exactly. And in the meantime, God hasn't brought me my blue Corvette yet, so I guess that's not in the plan. That was the most important thing in life since I was twelve years old.
I love it. I love it. Thanks for your call. God bless you. We'll be right back.
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Available at praxisinvest. dot com. Great to have you with us today on Faith and Finance. We're taking your calls and questions today eight hundred five two five seven thousand. Let's go to Pennsylvania, Sean.
How can I help you?
Well, I have about twenty thousand dollars, roughly, in unsecured debt, and my wife and I make. More than enough when it comes to our income to be able to cover like the regular amount, but the high interest is getting it the way we are struggling to make it by most of the time. And we looked into it's called Freedom Debt Relief, and we actually kind of went through the process and talked with them. But it's like a debt settlement type of thing where they Do an account, and you put stuff into the account, and then they try to negotiate things for you. And I was trying to find out what your thoughts were on that.
If it was a good idea, if the risks potentially would outweigh how it would help. I mean, I looked into a loan, a personal loan, but because of my credit score at the moment, it's below six. I am not able to get myself set up in a good spot with that either. Gotcha.
Okay, yeah, Sean. I'm glad you called. This is not my preferred approach. In fact, I would strongly encourage you not to pursue this route. And it's not because of this particular company.
I don't really know anything about Freedom Debt Relief. It's just their approach.
So debt settlement is different than the approach we recommend, which is debt management. With debt settlement, just as you said, they're going to encourage you to stop making payments. The accounts are going to become delinquent. Go into collections. All the while, you're putting money into an account, and then they're going to try to negotiate with your creditors to accept less than the full balance using the nest egg you're slowly building up as you make payments to that that account.
Essentially, that's going to significantly damage your credit. You know the the debt settlement industry is really difficult to navigate because there's a lot of them that are unscrupulous. Again, I don't know about this one in particular. But there's also a biblical principle involved: the wicked borrows and does not pay back. And you know that doesn't mean someone who's genuinely unable to repay a debt is wicked, but it does remind us that our financial obligations matter.
And when we're able, we should try to repay what we owe. And so, where do we go from here?
Well, my preferred approach is something called debt management. How is it different?
Well, the debt is going to stay right where it is with the existing creditor. Every creditor, every credit card company, has what's called A credit counseling department, but you can only access that department through a nonprofit credit counseling agency. And so, our preferred vendor in this area is Christian Credit Counselors. They've worked with thousands of our listeners, and essentially, when you contact Christian Credit Counselors, they would evaluate the creditors that you're with. They would let you know what those new interest rates are going to be.
And to your point, instead of the twenty-two, twenty-five, thirty percent, it's going to drop significantly, somewhere generally between zero and ten percent. And you're going to make one monthly payment to Christian Credit Counselors. They're going to keep you current because the payments are going to continue. It's going to happen immediately. We're not waiting to see if we can negotiate them with the creditor.
This is a a program that's already in place. They'll just slide you in. They know exactly what to do, and your account stays current, so your your credit report is not damaged. You're going to pay this in full. You're just going to do it with a lot less interest because they're going to drop the interest rate.
So this is the way I would go. You know, this is this is by far the better approach. And the website is faithfi dot com slash ccc, which stands for Christian Credit Counselors. Faithfi dot com slash CCC. Does that make sense?
Yes, it does.
Now, do they work with loans and credit cards and everything, or is it mainly just for the credit cards? It's mainly the credit cards, but they can, in some cases, work with other debts. Keep in mind the other thing that's going to be a downside with this debt settlement company, and maybe this one's different, but a lot of times the settlement fee can be fifteen to twenty five percent of the enrolled debt.
Now they'll tell you, "Well, wait a minute, we're going to get you significant discounts on the settlement," and so that's really not that big of a deal. And yet, on twenty five thousand dollars, you're talking about somewhere between. Potentially four and six thousand dollars in fees, but you are right. Most of the you know what they work with is unsecured credit cards. But I would show them everything, and it's possible they can roll in other personal loans as well.
Okay, all right. All right.
Well, I appreciate you. Yes, sir. Great.
Well, you got this. You and your wife are doing the right thing. I'm glad you're getting on top of this. I'm glad you got some good income coming in. You're going to feel a lot better once this is out from under you, and then you'll be able to build that emergency fund and get headed in the right direction.
Maybe even starting to invest for the future. Thanks for your call today, Sean. And if I can help further, don't hesitate to reach out. Miami, Florida is where we'll finish today. Alex, go ahead.
I wanted to know when would you consider it a good investment for you to upgrade or remodel your house, your home. If you have to take roughly twenty five percent, it would cost twenty five percent of your your investment, your retirement investment, to do that. Would you invest that money in your home? Yeah, it would increase the value for home. Sure.
Well, I think there's two considerations there. The first is it's less about the percentage, and it's well, it's it's more about the starting value, right?
So if you had over accumulated and you've got more than you think you'll need to sustain you for the rest of your life, then it's not a big deal to take 25% of that and put it toward improvements. If you don't feel like you've saved enough, putting 25% into your home. Even though it's going to improve the value, you typically, depending on what the renovation is, you're only going to get back somewhere between you know forty and eighty percent of what you put into it, typically. And so, you know, you're going to lose money on that equation, and you know, it can't generate an income because it's your primary residence. Whereas that money still in your retirement accounts, invested, not only has the ability to appreciate instead of depreciate.
By putting it into your house because you don't get the full value back out, but it can't earn an income like it can when it's in stocks and bonds, dividends or or interest. And so, I think for that reason, it really comes down to how much do you have in the way of assets and how well prepared are you? Because if you're right on the edge, I would say no, it's probably not the season to just you know take twenty five percent put in the house. You'd probably be a little more judicious about how much you pull out. And win, just to make sure you keep this money growing for you, earning income, and helping you to cover your lifestyle expenses alongside Social Security or whatever else you have.
Does that make sense? It definitely does. Thank you very much.
Okay, God bless you, Alex. I would say, just in closing, perhaps put together that retirement budget. Maybe you've already got it. I would look at what guaranteed income sources you have—Social Security, whatever else—and whatever is left, you have to solve for with your assets through a withdrawal rate. And if you have to take more than four percent to solve that, then you're probably not quite there in terms of what you at least need on paper to be able to fund your lifestyle.
If you're well beyond that, and you don't need to take anything every month, or you're taking less than four percent, you probably got a little bit of cushion there. Maybe you can put that into the house. I hope that helps. God bless you. Big thanks to my team today, Josh, to here at Taylor and Omar.
We'll see you tomorrow. Faith in finance is provided by Faith by and listeners like you.
