The Benefits of Owning Rental Properties
You don’t have to be rich to become a real estate investor
Investing in real estate has long been regarded as a stable and profitable venture. Most people never think about owning real estate as an investment outside of their primary residence. However, owning rental properties offer numerous advantages, making them an attractive option for everyday investors looking to build wealth and generate passive income. In this blog post, we will highlight some of the key benefits of owning rental properties and explore why they are considered a lucrative investment opportunity.
1) Steady Cash Flow and Passive Income
One of the primary benefits of owning rental properties is the potential for a steady cash flow. By renting out your property to tenants, you can generate a consistent stream of income that takes little to no work. Hence the term “passive income”. The rental income can help cover the mortgage payments, property taxes, maintenance costs, and other expenses associated with property ownership. Over time, your home’s value will appreciate. This paired with your tenants paying down your mortgage will equal huge gains in equity.
2) Appreciation of Property Value
Real estate has historically shown appreciation in value over the long term, and rental properties are no exception. While market fluctuations may occur in the short term, owning a well-maintained property in a desirable location can lead to substantial appreciation over time. As the property value increases, so does your net worth. Moreover, rental income often keeps pace with inflation, giving protection against rising living costs.
3) Increased Equity
Every mortgage payment you make on your rental property helps you build equity. Building equity is like forced savings. Your tenants' rent payments contribute to paying down your mortgage thus increasing your net worth. This growth in equity will mean more cash in your pocket if you sell the property. Alternatively, you can use the equity to make other investments without even having to sell.
4) Ability to Move Back
Having a rental property can give you security in the sense that you can always return to that property if needed/desired. We see this a lot with some of our clients getting job offers in other areas. The uncertainty of moving to a new area and taking a new job is stressful. What if you don’t like it? Maintaining ownership of your property can give you options in the future to more easily return to this area if needed.
5) Flexibility to Sell at the Right Time
What if you bought your property less than a year ago and an unexpected life event has you needing to move? Many homeowners would be concerned about losing money in this situation. Especially if your home is located in a desirable growing area like the Charleston area where property values are projected to continue to increase. If you could just hold onto the property for a little longer, so you can break even or better yet, make a profit? Renting your property could be a great solution as rent typically will cover the expenses of owning the home. This will allow you to decide when to sell verses selling out of need.
6) Investment Portfolio Diversification
Owning rental properties offers diversification to your investment portfolio. We all hear recommendations to save and invest for retirement. Most of these investment recommendations come in the form of mutual funds, 401Ks, and IRAs. It’s smart to consider investing some of your savings into something outside the stock market. Real estate investments typically have a low correlation with stocks and bonds, meaning their performance is not solely dependent on the performance of the stock market. This diversification can provide stability during economic downturns and market volatility, helping to balance your overall investment risk.
7) Tax Benefits
Rental property ownership offers several tax advantages that can significantly impact your bottom line often in a positive way. We always recommend talking to your tax advisor or accountant before making an investment decision, but some of the key tax benefits include:
Deductible Expenses: You can deduct various expenses related to your rental property, such as mortgage interest, property taxes, insurance, maintenance, repairs, and depreciation. These deductions can help reduce your taxable income and lower your overall tax liability.
Depreciation: The IRS allows you to depreciate the value of your rental property over a specified period, even if the property is appreciating in reality. Depreciation provides a non-cash deduction that further reduces your taxable income.
1031 Exchange: Under Section 1031 of the IRS tax code, you can defer capital gains taxes by reinvesting the proceeds from the sale of one rental property into another "like-kind" property. This provision can be a powerful tool for building wealth by allowing you to continuously upgrade your investment properties without incurring immediate tax liabilities.
Kevin and I toyed with the idea of investing in real estate for a long time before we actually pulled the trigger. Our only regret is that we did not invest sooner. Investing in rental properties isn’t without risk, but it presents a multitude of advantages that make it a great option for individuals seeking long-term wealth creation and financial stability. However, it's essential to conduct thorough research, due diligence, and seek professional advice to make informed decisions and maximize the benefits of this investment opportunity. Whether you turn your current home into a rental property as you decide to purchase your next home, or whether you decide to purchase a rental property outright, we want to get our clients thinking outside the box when it comes to making their next real estate purchase. Homegrown Real Estate will be honored to use our personal and professional expertise to help you determine if real estate investing is right for you.
