Your Partner in Short Term Rentals
You don’t need a management company – you need a partner. What’s the difference? Everything!
Drawbacks to a management company
Utilizing a management company makes you a passive investor. Sound good? It does until tax time rolls around! Depreciation (ie BIG $$$s) counts against your passive income, not your active income. As your property depreciates, those losses don’t count against your active income that most people earn through a company or self employment. How much can a property depreciate? Using cost segregation you might be surprised to find that the depreciation is front loaded over time- meaning that you can write off more in the early years of your rental property than later on.
However, if you self manage (with or without a partner) and make sure you qualify via a few simple tests the IRS outlines, the depreciation of your real estate now counts against your active income – those same depreciation write offs now offset your income, lowering your taxable income! Partner with us and we will make sure you are set up for success!
Active, passive… what difference does it make?
Let’s take an example. Sam and his wife makes $175,000 per year as a software engineer. He sees real estate as a way to build generational wealth for his family – which way should he go?
Strategy A – Traditional Management Company
Sam invests $250,000 of hard earned money into a nice rental property. His 1st year his returns are slim to none as he paid to upgrade items in the rental, but his 2nd year, he has a return (after expenses) of $25,000.
Sam’s 1st year return would be $0, his 2nd year was $25,000, or a 10% return on his money. Combined for year 1 and 2, he averaged 5% per year return. Not bad considering most management companies can take anywhere from 20%-50% of the gross revenue!
Strategy B – Your STR Partner
Sam wisely decides to use Your STR Partner to help him self manage his rental. After an initial consultation, Your STR Partner sets up Sam with the same automated system they use. Sam and his wife find it is easier to manage through automation, and Sam and his wife both put a few hours per week into the project. Doing this, they are sure to track their hours worked to stay compliant with the IRS to maintain their tax advantages.
The 1st year cash returns are the same $0, and the 2nd year cash returns are the same $25,000 (though they would likely be higher without paying a manager). However- because the property showed a non-realized loss in the form of depreciation, Sam paid no taxes in year 1 – saving him saving him $40,210 on his $175,000 income. Additionally, in year 2, he saved $46,960 on his now $200,000 income with his $25,000 gain from the rental.
Summary, in year 1, Sam made an additional $40,210, and in year 2 Sam made an additional whopping $71,960 – a combined total of $112,170 or a 45% return – averaging 22% per year.
Achieve more with your rental
The good news- it isn’t too late to change. Contact us to learn more about what it takes to qualify as a real estate professional in the eyes of the IRS and let us help you manage your own property.