Barron’s – July 27, 2020

The coronavirus pandemic has complicated a decision that for many people is a key component in their pursuit of financial independence or early retirement: whether to buy or rent out.

Rental properties, in particular, can generate steady income for years to come and are a common strategy for FIRE pursuants.

But record unemployment has left many people unable to pay their rent, showing the prospect of steady rental income for landlords is all but certain.

At the same time, outbreaks concentrated in big cities and widespread stay-at-home orders are motivating some people to buy property where they want to be, rather than close to their workplace. And record-low mortgage rates have added their own dynamic.

There’s no single path that fits every investor, but these questions can help determine whether to purchase a home or rental property.

How’s your cash flow?

When people purchase their first rental property, they may expect to make money right away, says Emilie R. Goldman, a certified financial planner and founder of Tamarind Financial Planning in San Mateo, Calif., who specializes in FIRE planning.

In reality, owning and maintaining a desirable rental requires a healthy cash flow, as it may be awhile before it becomes profitable. “Usually when you first get into real estate, it’s negative cash flow,” the advisor says. “You have your down payment, you have all your expenses—and you have ongoing expenses.”

Is owning a home important to you?

Most investors fall into one of two categories: They either consider home ownership a top goal in life—or they don’t.

For some, Goldman says, the pandemic might sway their thinking—perhaps they never cared about owning their own place before, but now they want to move somewhere rural to lessen their exposure to dense urban environments. “That decision is completely personal,” she says.

The pandemic aside, there are other financial considerations to keep in mind. For instance, owning rental property allows investors to leverage their investment dollars. Landlords can write off mortgage interest as well as insurance and maintenance expenses, which homeowners can’t deduct. While homeowners who itemize can still write off mortgage interest on principal payments up to $750,000, there are some less obvious—but significant—benefits of homeownership, including lower risk of being forced to move and fixed housing costs.

Do you have time, skills, or capital to contribute?

Another important factor the pandemic doesn’t change: Investors have to view owning rental properties as a business, rather than merely an investment, says Goldman. Having or developing skills to contribute to the business, plus flexibility in your schedule, can make owning rentals much more lucrative. For example, if you’re handy with repairs, experienced with interior painting or renovation, good at marketing your properties and screening tenants, or able to perform lawn care yourself, you can improve your margins. “The ability to cut down on overhead is where I see people growing their equity and income,” Goldman says.

If you’d prefer to have zero involvement with maintaining your properties or working with renters, you’ll need to hire a property manager and account for that ongoing cost. While the pandemic continues, it’s worth asking yourself whether you feel comfortable showing properties and doing on-site maintenance when you may increase your risk of exposure.

What’s your end game?

The pandemic has changed operations for many businesses, rental properties included. It’s important to think about the precautions necessary now, but equally important is your vision for the future.

At the start, investors may not know whether they want a rental property to be a side hustle or eventually their main income-generator, or when they’d like to sell. Goldman says potential landlords need to ask themselves what the purpose of their property will be and determine the time frame over which they will hold it.

She also recommends thinking about an exit strategy: Will you leave properties behind for your heirs? Or will you sell after several decades and live off the profits?

A world-wide health crisis makes real-estate investment more complicated in some ways. But in general, the fundamentals still apply.

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