Why should I become a rental
property owner?
Real Estate Holds its Value:
Real estate is one of the most popular investments available, because income-producing rental properties have held their value through many economic cycles over the decades. Throughout history, the tangible nature of real estate has been extremely important to both people and the economy.
Real estate is cyclical. Many businesses have their ups and downs, and real estate is no exception. However, real estate usually rebounds and grows in value after a slump. Historically, many solid real estate investments have depreciated for a period of time but then grown again in value. Real estate appreciates because its quantity is limited. Over the long run, real estate is an established performer and offers a solid foundation for your financial future.
Diversification of Investment:
Buying rental property helps vary your investments. Owning your own home is a first step toward diversification, but owning rental real estate is a prudent strategy to protect your assets from volatility in certain areas of the economy. Unlike owning your own home, owning a rental property that someone else calls home is an investment because you don’t have to live there.
A Little Capital Goes a Long Way:
A lack of money is often cited as the number one factor that keeps people from investing in real estate. But you can typically purchase real estate for a down payment of 20 percent or less, with the balance provided by others. Real estate loans are readily available at very competitive terms throughout the U.S. Some sellers are willing to assist the buyer by financing a portion of the purchase price. Plus, if you’re a first-time home buyer, you may qualify for up to 100 percent financing. So basically, you can take advantage of a first time home buyer program, build up equity in your home, and then refinance it to generate additional capital, which you can use as the down payment to buy rental property.
It is a Second Income:
If you have any doubts about real estate’s role in making many of the world’s great fortunes, just look at the annual Forbes 400 list that catalogs the richest people around the world.
The majority of residential rental real estate in the U.S. is owned by working middle-class individuals of all backgrounds and ages who sought viable opportunities to augment their current incomes or careers. Real estate investing can truly begin as a part-time job and supply a second income.
Great Tax Benefits:
The federal tax code has many unique advantages for real estate. Property owners can benefit from expense deductions, depreciation write-offs, tax deferred exchanges, and favorable capital gains tax rates. Owning and operating rental property is a business, and the tax laws allow deductions against your rental income for the cost of payroll, property management, advertising, maintenance and repairs, utilities, insurance, and property taxes.
Disclaimer: Be sure you understand the basic concepts of real estate taxation issues, but rely on a tax specialist, accountant, or attorney for advice on details, procedures, and tax laws. Tax codes change from year to year, so discuss your personal tax situation with your accountant or tax preparer.
Utilize Leverage for Profit:
Real estate leverage is the use of mortgage financing to purchase an investment property with only a small cash outlay, with the expectation that appreciation and inflation will create a disproportionately high return on the original cash investment upon sale. The key to successfully using leverage is having a mortgage interest rate lower than the return on your real estate investment.
Here’s an example: A buyer purchases a $150,000 rental home for $30,000 cash down and a $120,000 loan at a 7 percent interest rate. If the property appreciates and sells in three years for a net of $180,000, the owner will have earned $30,000, or 100 percent return on his money. This is called positive leverage. Conversely, high interest rates and flat real estate values with no increases in cash flow result in negative leverage, and under capitalized investors may lose their properties.
Stay Ahead of Inflation:
Inflation is the loss of buying power as prices rise. Most investments, such as money market accounts, bonds, stocks, and mutual funds, have trouble keeping up with the inflation rate. As a result, investors in these assets often find that they lose purchasing power over time. Real estate, however, is a formidable tool in the battle against inflation. When rental property is purchased with fixed-rate financing, the property’s price and financing cost are set. Other operating costs, such as property taxes and utilities, are bound to increase, but rental property owners typically can increase the amount of rent charged to offset these heightened costs. Of course, temporary softness or downturns in the rental market may delay rent increases in the short run, but historically, real estate cash flows have been able to maintain an owner’s purchasing power in the long run.
Retire Wealthy:
Real estate investment is one of the best methods to fulfill the dream of retiring wealthy. This worthy goal requires a diversified investment strategy with assets that are purchasable with leverage, generate cash flow, appreciate consistently over time, and maintain their purchasing power in an inflationary environment. Like most investments, the earlier you begin your real estate investment career, the better your results. Buying and holding the right rental properties for 20 to 30 years is an ideal way to hedge inflation, take advantage of unique tax benefits, and build wealth for retirement.
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