Babies, Bath Water and Rent Payments
By Brad Thomason, CPA
Many people who own rental property as part of their investment portfolio are re-thinking that decision right now. Many tenants are not paying their rent, here in the midst of the pandemic.
As the whole purpose of income-producing real estate is to produce that rental income, it can be easy to view the whole exercise as pointless.
But like a lot of moments in life when a person is under stress, now may not be the best time to be too hasty about drawing big conclusions.
Obviously you would like to collect rent. You may even need to collect rent, either to service debt or for your own income. But be aware that the present moment is an opportunity to turn a temporary problem into a permanent decision. Something anyone should approach with wariness.
In addition to the rental income, real estate investing has other beneficial factors going for it, factors which are likely still just as present or possible as they ever were. If you decide to exit a property holding solely on the basis of how it performs on the income front for a few months, you may do so at the expense of these other factors.
A rental property represents a unit of productive capacity. Think about it like this: if you had a machine in your garage that spit out hundred dollar bills every few days, would you throw the machine away just because it blew a fuse or had a part go bad? Doubtful. Instead, you’d hang on to it until it could be put back into service; even if that took awhile or cost some money.
Rental property (like all real estate) also serves as a store of value, one which may increase simply because the ground it sits upon exists in a world where asset prices tend to creep higher over time.
Finally, if you have some debt on the property, rent payments provide a means for other people to pay the loan back. The result is that your equity position grows with time, even if the underlying property value is flat. The leveraged rental property provides you a means to tap into earning a financing spread, which is one of the prime ways that non-household entities earn money, the world over.
If you sell the property because of a hiatus in rent collection, you lose all of those benefits.
So before you pull that trigger, make sure you have done a full accounting. The rent – or lack thereof – may be what’s drawing your attention. But it is hardly the only important variable in the equation. And even if it was, the current situation, when viewed from the perspective of the decades over which retirement math plays out, is only temporary.
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