Michael W. Braddock
5 Benefits of Rental Property Investing
Real estate is one of the most popular investment choices as they can provide tremendous opportunities to build long-term wealth and can be a source of passive income. However, not many investors realize that there are five major sources of profits from real estate investing. Obvious profit opportunities from real estate investing include cash flow and appreciation, but there are also huge tax advantages for investors when purchasing and owning rental properties. In this article I’ll review the five ways you can benefit from real estate investing.
1. Net Rental Income: This is the amount of money you have left over at the end of each month. It is calculated by subtracting all of your expenses from your gross income. Your monthly expenses usually include mortgage, insurance, property management fees, and HOA. This is the simplest way to earn passive income. It’s up to you on how you want to use the rental income. I know some people who save it to use towards their next purchase, while others use it to take a major summer vacation. The choice is yours.
2. Appreciation: This is the increase in value of your property over time as the real estate market grows from more demand and population growth. It could be because the real estate market is doing well and there's a greater demand for housing in your area (which tends to push prices up).
Do note that appreciation doesn't necessarily mean you'll see an instant increase of money in your pocket but once you do sell, that appreciation is yours to keep. But keep on reading as I will show you how investors can take advantage of their property appreciating even without selling.
3. Principal Paydown: There are many ways that real estate investments can pay you, but the most obvious one is through your mortgage payment principal paydown. As you receive rental income a portion of that goes to pay your mortgage payment and each one of those payments goes towards paying down your loan balance. This is a great way to build equity in your property and reduce your overall mortgage balance.
4. Equity Growth: The equity in your home is the difference between the home’s market value and the balance left on your loan. There are two ways your home builds equity. The first is when your home appreciates, your equity also increases. The second way is when you pay your mortgage, you reduce your loan balance and thus increasing your home’s equity. When both happen at the same time you can really build a lot of equity to tap into. The equity you build in your rental property can provide multiple opportunities for you as an investor. You can tap into that equity by taking out a mortgage against it in the form of a Home Equity Line of Credit (HELOC). Equity can be used to fund the down payment of a future rental property, pay for renovation costs, or pay off debt.
5. Tax Advantages: As a real estate investor, you can take advantage of some tax advantages that others don't get such as offsetting your tax liability through deductions like mortgage interest and property taxes. Since property values tend to go up every year, your property tax deduction will also increase. You can also deduct any maintenance expenses related to the upkeep of your property. Replacing major items like a roof or doing a full renovation can help you build up your Capital Expenses (CapEx) that can be used to make deductions on your taxes for years to come.
Investing in rental properties can provide multiple ways to increase your income and help reduce your taxable income. If you invest wisely and select property in the right market, you can possibly have a portfolio of properties that could generate an income stream to hopefully live off of one day. As with any investment, there are risks involved so it’s important to do your due diligence before investing and remembering that real estate tends to work best over a long-term investment cycle (10-20 years). Nevertheless, the benefits of rental property investing are what continue to draw people toward it. Take advantage of all five real estate profit opportunities and start building your path towards financial freedom!
Thanks for reading!
I am not a financial advisor. The content of this blog are for educational purposes only and I merely cite my own personal opinions and do not reflect the views or the opinions Thirdstone Properties. There is also no guarantee that the information cited in my blog is accurate and may have changed since it was initially published. In order to make the best financial decision that suits your own needs, you should conduct your own research and seek the advice of a licensed financial advisor, if necessary. Know that all investments including real estate involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing and it's possible that the value of your investment will go down.