Rental Property 101


Nicolas Deboeuf, CFP®

Financial Planner

Worth Advisors

If you are looking to achieve financial freedom, there’s a good chance that you have considered buying an investment property. After all, owning an income-producing asset that appreciates over time seems like a good vehicle to build wealth and a fun way to learn valuable skills.

While this is true, it is far too common to hear people say that things did not go as planned. In this article I provide a short overview of things to keep in mind when considering getting into real estate.

An investment property is not for everyone.

You will need time and a solid financial foundation to get started. Whether it is looking for contractors, tracking expenses, filing taxes, dealing with tenants or unexpected repairs, your investment property will keep you busy too often at a time that is not convenient. Hiring a property management company can save you some time but will come at a cost.

In addition to finding time, you will also need a strong financial foundation. Replacing a central air conditioner, fixing a leaking roof, could cost you thousands of dollars. Not being able to make mortgage payments because your tenant does not pay the rent could have dire consequences. We recommend having at least 12 months’ worth of living expenses in liquid assets, after making the down payment.

You will also want to have a good credit score (720+) to secure a low interest loan. A $300,000, 30-year term loan with a 4% interest rate will cost you $215,607 in interest over the term of the loan. In comparison, that same loan with a 6% interest rate will cost you $347,515 in interest, 61% more (1).

Looking for your first property.

Just like any investment, there are good and bad apples. We recommend focusing on finding a place that meets the following criteria:

  • Located in a currently growing area
  • Low maintenance
  • Good overall condition
  • Attractive household amenities
  • Low gross rent multiplier relative to other properties (see below)

A large backyard, a high-end kitchen or a pool can be attractive, but remember that you are not looking for your dream home. The end goal is to make a profit, stick to the numbers and do not let your emotions cloud your real estate judgment.

The cash flow vs. capital appreciation dilemma.

Understanding how your investment will make you money is key. 

The main way a rental property can make money is through cash flow. It is the difference between the rent collected and all operating expenses. That form of income is very important because it is liquid, meaning it is readily available, can be reinvested or used to cover upcoming expenses. 

Another way to make money is through capital appreciation, a rise in your investment’s market price.    While home prices have skyrocketed in recent years, they have historically appreciated at a rate of 5.3% per year over the past 20 years (2)

First-time investors and investors with a relatively low cash reserve should stick with properties that offer positive cash flow at the end of the month, rather than speculate on high projected appreciation properties. 

Crunching the numbers

The Gross Rate Multiplier (GRM) functions as the ratio of the property’s market value over its annual gross rental income. While you should not rely solely on that ratio, it is a quick and simple way to compare and screen properties. A lower value is best. 

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The Net Operating Income (NOI) is a calculation used to analyze the profitability of income-generating investment. The formula is straightforward, subtract all operating expenses from gross operating income.


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Do not forget about taxes.

You are responsible for reporting rental income to the IRS, even if it is paid in cash. A tax specialist can help you reduce your income tax liability by taking the appropriate deductions, such as interest, property taxes, depreciation, travel expenses, advertising, utilities for instance, etc. Tracking your expenses will be key.

You will also be responsible to report capital gains at the disposition of the property. Failing to do so could lead to large tax penalties from the IRS. Once again, your tax specialist will be able to give you options to minimize or defer capital gains tax. A 1031 exchange for instance, will let you swap your investment property for another “like-kind” property without recognizing a gain. 

Playing the Long Game.

Finally, you will have to play the long game. Sellers must pay their own closing costs and those costs can add up to 8% –10% (3) of your home’s final sales price. You will incur closing costs at the time you decide to sell the property. If your home sells for $300,000, then, you can expect to pay from $24,000 – $30,000 in closing costs.

We highly recommend discussing this with your advisor prior to making any financial decisions. 


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Paradigm Shift

H. GREG GOODLETT- Chief Investment Officer

When will inflation peak ? How long will the Federal Reserve continue to raise interest rates? Will we incur a recession, and if so, how severe will the downturn be? Anyone who is 100% confident in their ability to forecast where the markets are headed during this period of the economic cycle is, in technical terms, non compos mentis. We are coming out of a global pandemic and experiencing the Federal Reserve increasing interest rates due to inflation for the first time since 1974. 

What we do know is that against a backdrop of sky-high inflation, rising rates, and growing recession concerns, the S & P 500 Index had its worst start to the year since 1962 finishing down 20.6%. The tech-heavy NASDAQ performed more dismally (-29.5%), with the Dow Jones Industrial Average off (-15%).

Every market correction is different. During the late 1900s corrections were brought on by oil shocks and monetary tightening, while the largest corrections since 1990 have been brought on by the retrenchment in the private sector after build ups of excessive leverage. The current market correction has been driven by The Federal Reserve raising interest rates, as markets have priced in further tightening this year while simultaneously worrying that such front-loaded increases will ultimately drive the economy into recession and the need for a policy reversal. The market is unlikely to get a clear signal from the Fed that rate increases will be ending until more obvious signs of slowing growth and easing inflationary pressures become clear. Chairman Jay Powell said the Fed is “acutely focused on returning inflation to our 2% objective.” But the gap between that target and the most recent 8.5% jump in CPI has injected uncertainty and volatility into both equity and fixed income markets. Today’s narrative is that the Federal Reserve needs to cure inflation only through monetary policy. This is a common misunderstanding because today’s inflation is also being driven by a supply shock as well as an increase in demand. Supply and demand must work together which will require fiscal policy in coordination with monetary policy. 

Markets are transitioning away from a decade with ample liquidity amid easing rates. While volatility and declines are unsettling and emotionally draining, they do reset the market environment and provide opportunities for future, longer lasting gains. I don’t know if the U.S. is heading into a recession, but history shows that equity markets usually bottom before recessions. If the average bear market decline for the S & P 500 is (-30%), then we are already 2/3 of the way there. The time for a flight to safety or to get defensive would have been last year. The age-old adage of “Buy low, Sell high” runs counter to human instinct when markets are in a decline. But these times of pain present ideal opportunities for the future.

Sources: Blackrock, Goldman Sachs, First Trust, Merriam- Webster

Taxes Are Your Biggest Liability

When we refer to something as being a “liability,” we are speaking about owing money to another person or party. They stand in stark contrast to “assets” because assets are things you own that can be used for financial gain. For example, your mortgage is a liability, whereas the money you have in a checking or savings account is an asset. 

Ask a few people what their most significant liability is, and most of them will say it is the thing we just mentioned: their mortgage. At Worth Advisors, LLC, we want you to understand two things: 

  • – Taxes are your most significant liability
  • – They do not have to be

Take control of your finances by truly understanding and appreciating both points. Most people assume that the ability to lower tax liability is reserved for wealthy individuals who have access to a team of accountants and attorneys. Tax strategies are for you regardless of your income level, and we want to explain why. 

The Basics of Lowering Your Tax Liability 

Tax liability and tax due are not synonymous. Your liability is based on your taxable income. Tax due is the money you owe after credits, deductions, and withholdings have been taken out. We needed to highlight that distinction because you must reduce your taxable income to minimize your tax liability.

Doing this is not as complicated as you may assume. For example, you can achieve this by increasing your contributions to your retirement account. These include traditional IRAs and employer plans that allow you to make pre-tax contributions, such as a 401(k) or a 403(b). (Roth IRAs allow you to withdraw money in the future without paying taxes on the funds, which is why they are different from traditional IRAs.) Here are some other examples of ways to lower your tax liability:

  • – Sell any stocks that have lost money and claim the loss on your taxes.
  • – Make donations to charity, document them, and claim them. 
  • – Deduct the interest you have paid in student loan debt.
  • – Start a Health Savings Account (HSA).

Worth Advisors, LLC

You may understand how to limit your liability, but you still want to know how to put this into practice. Contact the financial advisors at Worth Advisors, LLC, and set up a consultation. Let us learn more about your unique situation and explain your options for successfully lowering your largest liability. 

These strategies are not for the gifted or privileged few; they are for you. Allow us to make your money work more efficiently for you.

The Error Of “Timing The Market”

Buy low, sell high. That is a common adage that people put forward to explain why some investors are so successful. When it comes to timing the market, we tell our clients the following: You cannot time the market. At Worth Advisors, LLC, we want you to take that information and be optimistic about how successful you can be at investing. Stop thinking that there are gifted or one-of-a-kind financial advisors who can turn thousands into millions instantly by telling you when to invest and how much to generate a quick profit. 

Although timing the market is legal (as long as no insider information was used), it is challenging. Even on the rare occasion when it happens, you can’t rely on it consistently and throughout your life. Look at how quickly housing prices have dropped and increased in the last twenty years. Although you may not be familiar with stock trends (yet), the housing market shows how cyclical markets can and will be. Unlike houses, stock prices change rapidly. 

Financial giants such as Warren Buffet have found success in doing this, but that is not his cornerstone. Furthermore, as successful as Warren Buffet has been, he has also said the following:

“Our favorite holding period is forever.”

Rather than believing you can time the market, shift your perspective. Accept that you need to invest money and that you will do so over the long term. Perfect timing is not a prerequisite for financial success. For instance, studies have shown that you can invest with poor timing and still see favorable returns over twenty years or more. 

Dollar-cost averaging (DCA) directly applies to this mindset. DCA is when someone invests equal amounts of money at basic intervals in different stocks, regardless of the stock price at the time of purchase. These are how 401(k) plans operate. Rather than waiting for a stock to skyrocket, DCA allows you to protect your investment from the market’s inherent volatility. 

Shift Your Perspective With Worth Advisors

You no longer need to be too afraid to invest because it is the “year of volatility,” nor do you need to worry about the absolute perfect time to buy low. At Worth Advisors, LLC, we tell our clients that they need to stick with their investments over the long run because it is in their best financial interest. Furthermore, due to the cyclical nature of the markets, there will be new sectors that emerge. Technological growth is exponential, and there is innovation happening daily. Why would you not have to be a part of that? The good news is that you can, and if you aren’t concerned about the short term, you can do so without unneeded pressure. Contact Worth Advisors, LLC, to schedule a consultation.

A Glimpse From the Past

It seems like just yesterday…  but 1987 was the worst year of my life. I was 11 years old, my parents were getting a divorce, our newly divided family was struggling for money, and I was not handling it well at all. Despite my mother’s strength, wisdom, independence, and education—including a Master’s degree in Theology—at the end of the day, she was still a single mother trying to figure out how to make ends meet. 

As I watched the only life I had known fade into the distance, and experienced an unwelcome new reality filled with fear, disappointment, transition, doubt, and the devastation of not having enough of anything, I learned a lesson that would serve me well, and ultimately lead me to my current career as a financial advisor. At age 11, I realized that regardless of your age, race, class, background, education, or status, if you don’t have control over your own finances, then you don’t have any control at all. 

For the first decade of my life, I had grown up in what seemed to be an ideal, two-parent home where Dad was the primary breadwinner and chief financial engineer. Mom was the primary homemaker, caretaker, and nurturer with an income that was secondary to his; and as long as nothing ever changed, then everything would be OK. But things did change, and everything wasn’t OK. 

There’s an old saying that the only constant is change. It’s true. But if you don’t prepare and plan for change, then you are accepting financial defeat before the battle even begins. I decided to prepare myself by going to school, getting the appropriate certifications and degrees, and changing the way I thought about money. I acknowledged and embraced the idea that until I took control of my own financial destiny—in Christ—that my life would never be my own.

I accepted early on in my walk with the Lord that I would endeavor to know and embrace His word and His will for my life. One of the first and most enduring lessons I learned was that it is God’s will for His children to be blessed; for all the promises of God in Him are yes, and in Him, Amen. But I also realized that my future was not solely God’s responsibility. I had to do my part too. Once I understood this principle, there was no question in my mind about God’s position on money. The real question was, ‘How does God want me to handle the finances and abundance that He blesses me with?’ I learned that most people give money too much credit and associate it with values it simply does not possess. For years, parents, preachers, and Sunday school teachers have misquoted the same famous passage of scripture, often stating that “money is the root of all evil,” when in reality the Bible states in Ecclesiastes that money is a [defense] or asset and answers all things; while “the love of money is the root of all evil.” The irony of finances within Christianity is that everything belongs to God, yet at some point almost everyone manages their money like it only belongs to them.

A Blessing Beyond Our Own Lifetime

A popular radio host used to say, ‘Blessed are those who give without remembering; and blessed are those who take without forgetting.’ 

Do you know why you are blessed with the things you have? Is it so that you can boast and live a comfortable life of convenience? No, we are called to be a blessing to the nations; essentially ambassadors for Jesus. We are called to be distributors of God’s wealth. We are called and blessed to actively demonstrate the love of Christ through our living and through our giving. Or, to echo the words of a young minister, ‘We can give without loving, but we cannot love without giving.’ Yes, indeed, we are blessed to be a blessing which means we have access to various resources for the purpose of helping elevate others in different aspects of their lives. Consider the words of the Lord Jesus himself: ‘It is more blessed to give than to receive’ (Acts 20:35 ESV).

Blessed to be a blessing is about more than just money. When you are blessed with health, favor, prosperity, and abundance, you are a source of encouragement to others that they too can overcome the challenges and hardships of life. When you are blessed with a quality education, it empowers and motivates others to pursue knowledge for the sake of knowledge, advancement, and mentoring the next generation. When you are blessed with a loving family, it provides a model for others to emulate and to also surround themselves with love and support instead of toxic, negative, and unhealthy relationships. When you are blessed with a spirit of giving and gratitude, it compels other people to follow your example and give to those less fortunate. When others see love in action, it inspires them to act in a like manner. 

As believers we should follow the examples routinely demonstrated in scripture. In the Old Testament, when God bestowed blessings upon an individual, He blessed the entire household, blessed the ancestral lineage, and then rained blessings upon the family for multiple generations. When the Bible speaks of savings and inheritances, it instructs us to be a blessing beyond our own lifetime – to think in terms of perpetual blessings, hence, our “children’s children.” When Jesus returns in full glory to restore His kingdom on earth, it will be for eternity; for those who have accepted Christ and received eternal life through His gift of salvation. God’s ultimate plan is to bless us eternally so that we can in return bless and worship Him through our life, love, and service.

On Your Mark, Get Set, Go!

How many times have we heard someone say, “If you fail to plan, then you plan to fail?” Well, in actuality, there is a lot of truth in that statement because not having a financial plan is the equivalent of throwing darts in the dark or basically leaving your financial future up to chance. 

My experiences as an athlete and as a college basketball coach have enabled me to learn and develop skills that I have been able to use on the court and in real life situations. It was during my coaching years that I realized how the lack of a plan or being ill-prepared can be detrimental to your future. Knowing what play to call when you are down by two points with eight seconds to go in a double overtime game does not matter if you have not practiced (planned) a play to run for that very situation. 

Perhaps the most important part of any type of plan is the goal-setting process. Our goals provide a mark to aim towards, or better yet, a direction to advance. They also bring about the structure that is necessary to plan successfully. When I was a college basketball player, every year I knew that our coach would call a team meeting prior to the season to make sure we were all mentally on the same page. As a team of players and coaches, we would write out our goals and the objectives that it took to reach each one. Our coach would then copy the goals and post them on our lockers so that we could see them and be reminded daily of what we were planning to do. It’s amazing how the basic tenets of goal-setting can be used in sports, academics, and with your finances. What’s even more amazing is how the Bible similarly used an example of an athlete in scripture to help me apply these same principles to my own life. 

First, you have to have a goal to work toward. Having no goal is like walking in the dark with a blindfold on. It’s not possible to see in the dark even when your eyes are not covered, but when you don’t have any directions or plans to get out of the dark, then you choose to cover your own eyes (blindfolded) and you choose to continue to wander aimlessly. We have to follow the example the Apostle Paul set for us in 1 Corinthians 9:26, “Therefore I run in such a way, as not without aim; I box in such a way, as not beating the air.” Second, your goal(s) must embody the principle of sowing and reaping. Simply put, you will get out of something what you put into it. 

I like the way the Message version of 1 Corinthians 9:26-27 communicates this principle: “I don’t know about you, but I’m running hard for the finish line. I’m giving it everything I’ve got. No sloppy living for me! I’m staying alert and in top condition. I’m not going to get caught napping, telling everyone else all about it and then missing out myself.” 

And last, your goal(s) should always put you in a position to be successful. 1 Corinthians 9:24b tells us to “Run in such a way that you may win.” What is the purpose of setting a goal if you do not have plans to attain it in the first place? Why set a goal if you don’t expect to be successful?”

Follow the Money

There’s a great quote by Mahatma Gandhi that says, “Be the change you want to see in the world.” We submit to you that real change only comes when you allow God to change you too. And the only way to truly accept change in yourself is to know exactly what you’re dealing with by taking a good, long look in the mirror. The majority of people we’ve counseled over the years are living a double life. We’re not talking about a secret agent, hidden agenda, and clandestine type of life. We’re talking about something less sinister, but equally as damaging because they are living lives they cannot afford built on lies they cannot sustain. Most people live the life they want other people to see, and then build a reputation on it. Then there’s the life representative of who they really are. In most instances, those lives are vastly different, and the common denominator is money.

Something we have learned about money over the years is that it tells the truth about who a person is. If you follow the money trail, you can learn almost anything and everything about someone that you need to know to better understand who they are, where they’re going, what they want out of life, and what their plan is to accomplish it. 

On the outside, many people live like their finances are under control and they have all the money they need to fund the extravagant and luxurious lifestyles they lead. However, on the inside, many of the people who have come to us for help are financially barren – practically destitute – and can barely afford the designer clothes on their backs, much less the luxury automobiles and huge houses they live in. 

How you spend your money is often a good gauge of where you are in your life. Something we say in our business is, “Follow the money.” When you identify where someone spends most of their time and money, you can learn a lot about them and find out what their priorities are. For some, it’s a matter of basic necessities like keeping the lights on and putting food on the table. For others, it’s a matter of appearances such as frequent trips to the hair and nail salons and sporting the latest designer bag and shoes – regardless of the fact that most of these expenditures are paid on credit and almost never paid off in full. For most, it’s keeping up appearances – and living up to the professional degrees, titles, and positions that have been acquired. It is often about joining the right country club, paying for private school, living in certain neighborhoods, dining at certain restaurants, and basically bankrolling the present while bankrupting the future.

Warning Signs

As with any type of failure, it is very difficult to point the finger at one particular cause. When I meet with couples after years of frustration in their marriage, there is never just one thing that caused the marriage to spiral downward – and ultimately out of control. After a long season of college basketball, there is never just one thing that caused the team not to win a national championship. Most likely, there was a series of errors; missed shots, poor passes, turnovers, and missed opportunities adding up to a loss. 

Likewise, if you are on the brink of financial failure, there is not just one thing that you can identify to be the root cause of your circumstances. There are probably several things including poor financial habits and training, inadequate financial knowledge, reckless spending habits, bad debts, mismanagement of credit, etc. Although there are many things that lead to financial failure, there is some commonality in each scenario. If there was ever a simple answer to the cause of failure in general, it would have to be poor financial planning and lack of preparation. Perhaps the best skill set to hone is that of preparation and planning because it can affect the outcome of every aspect of our lives. Preparation and planning do not require any type of educational degree, but they do require effort. They are not necessarily spiritual gifts, yet they do require wisdom. Careful execution can create the subtle difference between being rich and being wealthy. Christ also placed emphasis on the importance of planning. In Luke 14:28- 30 (NIV), His example transcends the barriers of time. The passage reads, “Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying, ‘This fellow began to build and was not able to finish…’” 

Isn’t this what happens when we fail to plan? When viewed from God’s perspective, the lack of planning seems to be quite careless, let alone costly. Later on, we will talk about the importance of setting goals as this is the all-important start to preparation and planning.

Assessing Our Needs

Without question, everyone needs somewhere to stay, but does each child really need his or her own private suite or wing in the home? It’s amazing to me to hear people that grew up years ago with four brothers and sisters in a 1,400-square-foot home now tell me they need a 10,000-square-foot mansion because they have two children and one on the way. As opposed to viewing a home as a dwelling place, many families bought into the idea that they would invest in their homes and use them for financial leverage. Unfortunately for millions of people, they didn’t do all the necessary research and legwork to make sure they could legitimately afford the house they purchased. There was no emergency reserve fund in place. There was no savings account, and there was no contingency plan in case one or both spouses lost their jobs. Though there are a thousand different variations of that story, the end result is often the same: failure to plan for the worst resulted in planning to fail the home ownership test. Who said that you have to own a McMansion? Who are you trying to impress… and why?

Wardrobe is another area where people tend to spend excessively. No one is questioning whether or not clean, warm clothing is essential, however designer labels are not necessities. Clothing can be a big budget buster. 

I have studied books about frugal millionaires who live like paupers; eventually growing too old or decrepit to enjoy their wealth. I’ve also read articles and books asserting that Christians are not supposed to have, enjoy, and maintain wealth. I disagree. I believe that Christians are supposed to have all that God has made available for us. We see examples from the Old Testament to the New Testament (from Solomon’s regal raiment to Jesus’ seamless robe) that indicate quality clothing is important, but it has its proper place. Yes, looking good and having nice quality clothing may not be cheap, but there are things you can do to minimize wasteful spending on clothes: 1. buy sale items. 2 clip coupons 3. save where you can by spending less on general items like socks or pantyhose, or purchasing them in quantity for discount savings. If you are willing to look for a solution, there is always a way to save more money.

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