“Bill, is a rental property a capital asset?

I answered, “David, I majored in finance. I know balance sheets backwards and forwards. Of course a rental property is a capital asset.” I said this with much assurance.

David smiled at me and then asked, “Bill, are you SURE a rental property is a capital asset?”

Folks, when David looks at you and asks whether you are sure about something and has a sly grin on his face, the one thing you become certain of is that you are no longer certain about the fact you just stated.

I said to David, “Yes I’m sure a rental property is a capital asset. I know where it belongs on a balance sheet, David.”

David paused and then asked, “If a rental property is vacant is it STILL a capital asset?”

All I could do was stand there and look as dumb as I felt. I pausingly said, “Well, if a rental is vacant it costs you money…a lot of money…and it’s dangerous. I guess when it’s vacant it’s a liability.”

And here is where David rocked my world and gave me the best landlording lesson of my life.

David asked, “So what is the true capital asset? What’s the thing that actually sends you money?”

I weakly answered, “The tenant.”

“That’s right, Bill. Tenants are your capital asset, not the property. And isn’t your goal to gather together the best assets possible?”

“Yes, David, my goal is to gather together the best, most reliable assets possible,” I replied.

“So how do you attract the best capital assets?”

I looked at David blankly.

Now comes the second part of David’s lesson. David said, “Bill, isn’t it true that the better the rental property, the better the area it’s in, the better condition it’s in, the more likely you are to attract the VERY BEST capital assets?”

David was absolutely right. When it came to being a landlord and seeking financial freedom, the better properties you have the better capital assets (tenants) you’ll attract.

Over the following two years, Kim and I traded our C properties to A properties. Today, all we have are A properties. Guess what else we have…GREAT CAPITAL ASSETS who pay on time, stay a long time, and take great care of our investment properties, which I now know are all liabilities.

Thanks, David! As I said, you are a man among men and I cherish our friendship!

Love y’all,

Bill Cook

When you have a bad tenant they are a liability tho.

So the same holds true for the property as well as the tenant.