I don’t get it. Many folks can’t retire because they’re broke. They’ve worked their whole lives and have little to show for it. Lord knows, getting a $1,000 Social Security check every month isn’t my idea of a retirement plan. However, receiving $15,000 a month in mailbox money is a lot more like it – don’t you agree?
People often point to the downside of being an investor – tenants. True – if you put a bad tenant in your house, then you’re not gonna have an enjoyable time. The other side of the coin is this: Most tenants – if you screen them properly – are easy to work with, take great care of the property, pay their rent on time and are good neighbors. And here’s the best part – you get to choose which tenant – a good one or a bad one – goes in your investment property.
Let me ask you a simple question: When you retire, would you rather go to your mailbox on the first of every month and pick up a single, measly Social Security check, or would you rather see your mailbox cram-packed with rent checks? Guess who gets to decide which it will be? You do, my friend.
There’s another upside of owning rental property. Landlords get incredible tax breaks. Let’s look at an example. Two fellas, Tom and David, will each make $50,000 this year. Tom works at a big box store and gets W-2 income. David owns 10 rental properties and gets passive income. Let’s look at what each fella gets to keep after the government gets done stealing a chunk of the money they’ve earned.
From Tom’s paycheck, he pays $2,100 in Social Security tax, $725 in Medicare tax, $6,250 in Federal Income Tax and $2,430 in State Income tax. After paying the government a total of $11,500 in taxes, Tom got to keep only $38,495 of the $50,000 he earned.
Now let’s look at David’s paycheck: He received $100,000 in rents and had $50,000 in expenses, so his net income is the same as Tom’s: $50,000. But because David got Passive Income from rents and not Earned Income like Tom, he didn’t have to pay Social Security or Medicare tax. Wait – it gets better. David got to take a $27,272 depreciation write-off against his properties – and this is a paper loss only, not a real loss. This lowered his taxable income to $22,727. At this income level, he paid $1,559 in Federal Income tax and $1,364 in State Income tax, for a total of $2,923 in taxes. He got to keep $47,077 of the $50,000 he earned.
I know, dry stuff, and I’m no CPA, but here’s the point: If you make $50,000 this year, would you rather be able to keep $47,077 of it, or would you rather have the government steal an additional $8,582 of it and let you keep only $38,495? It’s your choice.
Long ago, I learned that it’s not how much you make that counts, it’s how much you keep. Here’s a sad reality to prove my point. Do NFL players make a lot of money? Would you call them rich? Did you know that within two years after retiring, 78 percent of them go bankrupt? 78 percent, can you believe that?
So which would you rather be, a landlording geek, or a struggling retiree, praying the Social Security system stays solvent?
Bill and Kim’s North Georgia Real Estate Investors Association meets on the second Thursday of each month, from 7 to 9 p.m., at the Hilton Garden Inn off Main Street in Cartersville, Georgia. For more info, go to REIoutpost.com.