Real estate investing has become a hot topic among industry circles. It’s touted as a great way to build wealth, own a business, and diversify investments. Another major “plus” for investing in real estate is that it can be done in any market. There is a demand for rental properties in cities and towns of all sizes. No matter where you reside, you can become an investment property owner and landlord. This post starts a new series because the topic of investing is so diverse and involved that I wanted to be sure I cover the information from all angles. Let’s first dive in from the perspective of a potential investor. The investor wants to know the benefits and potential drawbacks of owning a given investment property. He or she wants to see the scope of what this venture will entail in order to make an informed decision about whether real estate investing is the right financial move.
What are the benefits of investing in real estate? There are many, but these typically are the most important to potential buyers.
Cash Flow: This is extra money “in your pocket” after all bills have been paid. This money is what is leftover from your tenant’s rent payment after the mortgage, insurance, taxes, and maintenance costs are paid. In a strong market, many property owners enjoy an extra several hundred dollars each month that allows them to build savings, expand their business, travel, or invest in additional properties. Generally speaking, this cash flow is stable and predictable when you have tenants who pay rent on time and have a low vacancy rate at the property.
Tax benefits: The federal government offers some nice benefits for rental property owners. Included are considerations that account for depreciation of a property and lower tax rates for long-term rental profits. There are also quite a few tax write-offs that property owners should look into such as maintenance, insurance, and legal fees. Talk to your accountant for a more comprehensive idea of what you can write-off as an investor.
Building Equity: This might be the most convincing benefit associated with real estate investing. Just as we try to pay down the mortgage on our primary residence, as an investor, you want to pay down your loan on our investment property and build equity as quickly as possible. The great thing about renting to tenants is that they actually pay your mortgage for you through their monthly rent. This increases your net worth and equity stake as owner of the property. Even better? You are essentially building another form of savings with this asset, and boosting your financial credit by paying off a significant debt. Keep this in mind as you determine what to charge tenants. The amount should stay within your market value, but it also needs to cover your mortgage, taxes, and insurance. Further, it should include a cushion for maintenance and your monthly cash flow.
Ability to Control Investment: Unlike stocks or many other business ventures over which investors have no control, you can make decisions to affect your situation as a real estate investor. As the buyer, you choose the property you want to buy and you can negotiate the price and terms of sale for the property when you make an offer. You can also make improvements and updates as you see fit before renting the space. As the owner, you will “call the shots” on how to market the property to find a quality tenant. To a degree, you also get to decide to whom you decide to rent, as long as you comply with Fair Housing Laws. Of course, you determine what to charge for monthly tenant payments. This control puts real estate investors in a unique position because in many businesses, the owner cannot control many of the outcomes associated with his or her business. As a real estate investor, you have the choice to be as involved or hands-off as you wish.
Rising Property Values: We all know real estate can be fickle and market values can fluctuate to a degree. However, generally over the span of five, ten, or even thirty years, property values will go up. They will appreciate, especially in strong markets. Eventually, the property you own will be worth substantially more than what you paid for it, providing an opportunity to make a nice profit if you choose to sell. The best case scenario would be selling at a high point in the market after you’ve paid the mortgage in full. The entire value of the property would be your profit for retirement, a college fund, or a nice vacation to celebrate your hard work and prudent financial decisions.
Ready to invest? Before you call your local agent to tour properties, stay tuned for the rest of this series. My next article will focus on some potential drawbacks and frustrations real estate investors face. Owning investment property does carry some risks and considerations along with its rewards, so potential investors need to be aware of those too. The idea that real estate is simply passive income can be a bit misleading, but knowing both the pros and cons of investing your money in real estate will allow you to make an educated, confident decision.