So You’ve Been Thinking About Investing In Rental Properties: 7 Reasons Why It’s An Unbeatable Method Of Building Wealth
Real estate investment can be extremely worthwhile, depending on how diligent and motivated you remain throughout the process. Despite the big talk about making millions of dollars and owning huge portfolios of properties, people forget that most investors started with just one property. Whether you do it as a side hustle, or as a full-time job, earning enough money to achieve financial freedom is a matter of pursuing your investments as you would any other kind of entrepreneurship, like inventing a new product, or opening a shop or online store.
There are certain aspects of rental properties that make them a solid source of wealth over the long term.
1. You’ll have positive cash flows from the start.
Rental properties, when well maintained and wisely chosen, generate positive cash flows once the mortgage and other expenses are paid. For every year you own the property, receive rental checks, and pay down the mortgage, you’ll receive more and more income. You’ll have to take into account the costs of vacancies and capital expenditures (more expensive renovations and maintenance work).
2. Property appreciates over time.
In the current and forecasted real estate market in many parts of the U.S., most housing values are increasing year over year. Even if you get out of the rental game, you can create a nest egg when you liquidate your portfolio. You can also increase the value of your properties depending on how you improve the property through renovations and additions.
3. Leverage increases returns.
Whatever your down payment on the property, your rental income is based on 100% of the property value. For example, say you put down 20% ($20,000) on a $100,000 property and charge $1,000 in rent. If the monthly mortgage payment plus taxes were $700, your profit would be $300 per month, or $3,600 per year. This represents an 18% profit from your initial down payment, which is a great return compared to any other investment out there, including the stock market.
4. Loan paydown builds equity automatically.
As you collect rent and use it to pay the mortgage each month, you decrease your loan balance without using any of your own money. Even if the property doesn’t appreciate, once the mortgage is paid off, you’ll own 100% equity in that property.
5. Refinancing the property allows you to grow.
When you pay down the mortgage consistently, you can borrow against the equity you acquire. Whether you use this to grow your portfolio or use it strictly for emergencies, it’s a handy source of cash. For example, if you’ve made improvements to the property, you could refinance in order to get the added value in cash, and then use that cash as a down payment on your next rental property. Another way to use refinancing is to lower your mortgage payments each month, while keeping the rent payments the same, and the extra profit can be used to grow your investment business.
6. The tax code gives advantages to property owners.
The U.S. tax code encourages property ownership. Landlords have the ability to deduct insurance fees, maintenance costs, and interest expenses from their tax returns. The cost of capital improvements to the property is also tax deductible, while the added value becomes yours. Even depreciation can be written off. Also, if you sell a property and then reinvest the profit into another property, you can defer your capital gains taxes.
7. Time is on your side.
Growing your portfolio from one property to several, is difficult. Your ability to overcome challenges is limited by how much time and money you have, and the quality of your tenants. However, if you manage one property well, you’ll have positive cash flow, and there’s no need to rush expanding your portfolio as long as you keep your eyes and ears open for new opportunities.
The Bottom Line
While we won’t say that it’s for everyone, there isn’t just one way to create wealth through real estate. You can work alone, or you can find partners to reduce risk and and share the work. You could also invest in a real estate investment trust (REIT). You can specialize in a certain type of real estate that suits your abilities and experience, such as:
- rental properties for families or students
- vacation homes
- commercial spaces
- flipped or “rehabbed” homes
Whatever niche you choose, it should be appropriate for the amount of time and money you’re willing to invest.
Are you looking for a rental property to invest in? We might be able to help. Talk to us today.