April Reckoning Time: Really Looking at the Numbers

BY SONYA LOERA

April is often the month when our income and expenses, along with our profits and losses, take on a definite reality as we prepare to submit our tax returns and, in some instances, write one more check to the Internal Revenue Service.

For 2020, owing more tax dollars is not apt to be much of a concern. And, although minimizing tax liabilities may be a benefit gained from owning a rental property, it should not be the driving force behind that investment.

Bill Gorman, in the first chapter of his book, Cash In on the Myths of Real Estate, cites as one of his TOP Four Myths:

“A tax time review is all that is needed.” In many ways, a portfolio review at tax time is counterproductive. When working on your tax returns, the focus is on minimizing tax liabilities rather than on performance and profit potential.”

Additionally, an annual tax-time review is, from Bill’s perspective, insufficient. Trigger events such as changes in interest rates and rental property laws as well as shifts in personal circumstances all have consequences and, as such, may necessitate some degree of portfolio analysis. As Bill states:

“Depending upon the nature of the event, you may also want to review your cash flow needs, long-term investment goals, risk tolerance, and other conditions.”

Certainly, the past year has provided owners and investors with a multitude of both economic and real estate-related events that have affected property performance. Generating a profit from the day-to-day operations has become a challenge. For the most part, rents have stagnated, while expenses have increased. Collecting past-due rents has become increasingly tenuous and extended eviction moratoriums have further impacted how long it will take for an actual return to some degree of normalcy.

These are all well-recognized facts. Now, with all the 2020 numbers readily available, it is time to do some pro forma quantifying and return on investment (ROI) analysis. However, rather than just looking just at the reported numbers, the focus needs to be on using that data and deciphering the trends to make informed projections.

This shift into an investor viewpoint may require some additional assistance. When Bill wrote about Myth 1-2, he recommended:

“When tax time rolls around, you may want to make an appointment not just with your tax preparer, but also with your real estate advisor. In addition to an update on market trends, rents and property values; the two of you should also be analyzing how well your real estate investments are doing in terms of meeting your financial goals.”

Part of this portfolio review process should include investigating other available investment opportunities. This does not necessarily mean that you have to take action. The fact is that quantifying potential outcomes for different options provides a more comprehensive understanding of your current position.

As noted in my article last month, rental property owners in Orange County are not necessarily stuck with having to sell at a loss. Although the multifamily real estate market has tightened considerably, there are still buyers and the lack of inventory has kept prices from dropping significantly.

The pandemic has had a dramatic impact. Even with the roll out of vaccines, everyone continues to live with uncertainties. Priorities have changed and so have future goals. This applies not just to each of us personally, but to our children and to their children. It really is time for some re-evaluation.

Reckoning is defined as the action or process of calculating and estimating something, but that is not necessarily all that needs to be done.

Along with looking at property performance financials and projections based upon the numbers from your 2020 tax returns, a full portfolio review should also take into account how well those properties and/or various available options serve to secure the future that you want for yourself and your family.

About the Author: Sonya Loera joined WR Gorman & Associate in 2013.

With a background in accounting she serves as not only officer manager, but also as property manager, transaction coordinator and real estate agent.

Founded in 1972 by William (Bill) R. Gorman, this Brea-(CA)-based firm focuses on personalized wealth building through real estate. With a client-first philosophy, the firm serves as an expert resource for informed decision-making and transitioning that creates sustainable legacies for investors and their heirs.