Typical home financing involves a buyer finding a home and applying for a mortgage, getting…
A good rental property can completely change your portfolio. While most investors are only focused on the next deal a quality rental property can supply long term wealth. Five, ten and even twenty years may seem like a lifetime from now but often comes much quicker than we think. With a strong rental portfolio to lean on you don’t have to worry about making money in your retirement years.
Rental properties can also be used to generate short term monthly cash flow. This monthly return is often greater than anywhere else you would park your money. Additionally, there are a few not so obvious benefits that by themselves make rental ownership worthwhile. If you are on the fence as to whether or not a rental property is for you here are four benefits that might change your mind.
- Monthly Cash Flow. An investment property may produce streams of income years down the road but unless it has an immediate impact most investors will look in another direction. The first benefit of rental properties is in the monthly cash flow. A basic definition of cash flow is the residual income that is left after subtracting all the expenses from the income received. On a high performing property this equals hundreds of dollars every month. The percentage of income generated is typically higher than bank savings rates, mutual funds and most bonds. The best part is that you also own the underlying asset of your investment, the property. As long as there are no significant changes to the property taxes or other expenses you can expect to generate roughly the same amount of cash flow for as long as you own the property. This money can be used to pay down other debt, grow your business, buy other property or reduce the balance of your mortgage. Receiving monthly cash flow alone would make rental properties an attractive investment but there are additional reasons as well.
- Appreciation. Appreciation is the second benefit of owning a rental property. It is not first because you never want to buy on future appreciation alone. You never truly know where your market may be headed. While it is certainly possible, and even likely, that the value will rise there are times when the unexpected happens. That being said historically speaking property values have always increased over the years. Depending on when you buy and the market you buy in you may be sitting on a large amount of potential equity. Every payment you make reduces your principal balance in some form. Even though most of the payments for the first ten years is to the interest you can still make a good dent on what you owe. This directly impacts your bottom line if you decide to sell. Your initial investment of your down payment (10-20%) can lead to three or four times that if your property appreciates over the years. All the time you are still receiving monthly cash flow.
- Tax Benefits. One of the hidden benefits of owning a rental property is the tax benefits. Most investors list appreciation and cash flow as the reasons they bought a rental without thinking about their taxes. When it is all said and done the tax benefit could be the biggest benefit of them all. For starters you can write off all of the payments for the mortgage interest, insurance and property tax payments. You can also write off most of the expenses associated with the property including utilities, snow removal, lawn care, repairs and maintenance. What makes rental property so attractive from a taxpayer standpoint is that you can also use depreciation to your property even if your value has appreciated. After all is said and done it is possible to turn an income tax negative into a huge positive. Instead of owning Uncle Sam you may receive a return of thousands of dollars. This may not happen on every property you own but is certainly within the realm of possibility. The final tax benefit occurs when you sell the property. Instead of being taxed at the full capital gains rate this number is lower based on your years of ownership. Tax benefits may not have the sizzle of cash flow but they could end up being just as beneficial.
- Multiple Options. Having your tenant pay down your principal balance gives you a handful of different options. You don’t have to wait until you own the property free and clear to sell if the market appreciates. It is quite possible that even if you have owned the property fewer than five years you can sell at a handsome profit. If you want to retain the property but pull out some equity you can consider refinancing your existing mortgage or taking out a second loan. The more equity you have the more options there are with the property. In just a few years your equity may grow to a point that you can take cash out through a refinance to cover your initial down payment. With interest rates still hovering near all-time lows your monthly payment will not take a substantial hike. Whether it’s selling, refinancing or taking a second loan a good rental property offers multiple options.
Rental properties can have their share of ups and downs but they also have numerous benefits. Once you see the impact that a rental property can have will be sure to explore adding one to your portfolio.