As I’ve said before, I’m spending a considerable amount of time these days sorting through nearly three quarters of a century of paperwork left by my mother. Yesterday I spent several hours poring over materials relating to properties my parents owned.
My dad inherited two properties from his grandfathers. One was a two-flat and the other a single family home. My paternal grandmother lived in one flat of the two-flat until she died (well over a half century ago) and the other flat was rented. Thereafter both flats were rented.
We lived in the single family home when I was a kid. That’s why I spent my first decade or so in, shall we say, a rather gritty neighborhood. After that we lived in the house in one of the very nicest suburbs of St. Louis in which my mom lived ever since and which we’re preparing for sale now. They rented the old house out.
Eventually the two-flat was sold to Deaconess Hospital. They razed it to expand their parking lot. I’m not sure to whom the house was sold. I believe that happened after my dad’s death.
So, yesterday I went through decades bills, tax statements, and correspondence, mostly letters from tenants explaining why they were late in paying the rent.
The expenses were not nominal. My parents put in substantial improvements to both properties over the years. And the unending tales of woe from one of the tenants straddle the line between comical and tragic. If my parents netted a cent from renting either of the properties, I’d be very, very surprised. I’ll know for sure when I review the income tax returns from the relevant years.
If you’ve ever wondered why there isn’t more decent low-cost housing, wonder no longer. It’s very, very difficult to make money from the proposition. What the tenants are able to pay doesn’t support the upkeep of the property. If it does, the city, county, state, and federal governments tax it away. Further, the tenants are heedless of property that isn’t their own and feel little responsibility to keep it up. That’s the landlord’s problem, isn’t it?
You fail to consider one very important advantage of rental property, namely, that all the work you do on it is NOT taxed at earned-income tax rates that, with FICA, approach 60%. When you sell it, the gain is taxed at capital-gains rates, which now max out at 50%, and no FICA tax.
It is for that reason that I and several of my high-earning IT friends who are handy at construction (or only at hiring undocumented workers here in Austin) can do real well with rental property. Indeed, I have worked only an average of 18 weeks per year in my IT field for my entire career, while earning hundreds of thousands improving rental property. Even better is to improve your “principal residence” and wind up paying tax of ZERO when selling it after two years.
Error: I meant to say that the capital-gains tax maxes out at 15%, not 50% !!!