If you’re thinking about getting involved in this industry, the absolute best way to invest in real estate is buying a rental property. We’re going to list exactly what benefits come from investing in rental properties, and the rest is up to you. Whether you were looking for it or not, here’s the best way to make money in real estate.
Owning a Rental Property: Benefits of Investing in Real Estate
If you’re a beginner, rental properties are the best way to get started in real estate investing. The basic motivators behind investing in real estate are simple: passive income, long term wealth, and financial stability. Rental properties can provide all three.
There are different strategies you can use when investing, but there’s a lot that’ll point you towards rental properties as the best way to invest in real estate.
Cash Flow From Rent
Whether you’re investing in long term rentals (traditional) or short term rentals (Airbnb), you can achieve cash flow. Cash flow is your profit left over after you subtract rental expenses from rental income.
Positive cash flow should be your target as a rental property owner, meaning your investment property is performing well and covering its costs.
Equity Buildup
Here’s another reason making rental properties the best way to invest in real estate. Your goal as an investor is to create and build value- that’s what it’s all about. Investing in fixer-uppers to rent out might not be an attractive path for some, but it’s the best way of making money in real estate for others. This is how you can build up equity yourself. Search for some over-looked properties in the best neighborhoods and work on some minor repairs. With the effort you put in, the property’s value can increase beyond current market values.
Passive Income
Anyone searching for the easiest way to make money, rental properties are the best way to invest in real estate for you. Assuming your rental property was promoted properly and is occupied by tenants, a steady stream of income will flow in with little (or even no) daily work. Also if you hire professional rental property management, these really are the best real estate investments for anyone after passive income.
Tenants Pay Your Mortgage
The monthly rent you collect from your tenants will be what covers your monthly mortgage payments for the rental property. And if you live in one of the units of your rental property, this means you’re basically living for free; you don’t pay rent to someone else and the other tenants are covering the mortgage!
Appreciation
Another great factor for passive income investors. Other than the cash flow generated by your income properties, you may also realize appreciation. The real estate market is known to increase in value with time. Inflation and interest rates are what cause fluctuations in the market and, with interest rates at around 3-4 percent, many people can afford to invest in real estate. A real estate investment is an asset- an asset that gains value as time passes. While your rental property is operating and giving you a great return on investment, it’s also growing in value on the market.
Tax Deductions
Owning a rental property is the best way to invest in real estate because it’s seen as a business. And so, there are many expenses that you can count as tax deductible.
The biggest deductible is depreciation. The IRS allows you to deduct the value of the asset over its useful life; in the case of a rental property, that’s 27.5 years.
Another big chunk of deductions comes from the operating expenses involved with owning a rental property. A couple of these could be mortgage interest, insurance, repairs, advertising, property management, maintenance and utilities, etc.
There are also deductions which fall in the ownership expenses category. So this would be property taxes, fees for lawyers or accountants, travel, home office, and the like.
Deferring Taxes on Your Property
There’s something called a 1031 exchange in real estate. It’s when you exchange the property you own for another “like-kind” investment. The reason we bring it up when talking about the best way to invest in real estate is to help you avoid one of the worst things about it- taxes. Using a 1031 exchange will allow you to defer taxes when selling your property.
If you want to find the best way to invest in real estate, sign up for Mashvisor. Our real estate analytics will tell you where to invest and our tools will help you analyze your current and future rental property investments.
How to Get Into Rental Properties
So now you know why rental properties are the best way to invest in real estate. What’s next?
To make sure you can actually benefit from everything mentioned above, you want to invest intelligently. Take your time and do your research before investing in a market. For example, learning where to invest in real estate is a great start. Our blog offers data on cities with the most profitable real estate investments in the US. Click here to find out where the best cities to buy rental property 2019 are.
The best way to invest in real estate is to use the right tools and sources. Even when you find a rental property you think is the perfect deal, if you’re not using the proper real estate investment tools, you could be blindsided. Every real estate investor should use a rental property calculator to analyze potential investments. This way you’ll know which prospective rental properties are worth the extra negotiation and which aren’t.
And yes, rental properties are a very lucrative investment, but you still need to have a handle on the costs involved. Other than the initial purchasing cost, there are ongoing costs associated with owning a rental property. To make sure these aren’t cutting into profits, be proactive. Keep funds set aside to cover them.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.