Real estate has been one of the oldest and most popular asset classes in the United States. But is real estate a good investment? Making money in real estate is surely one of the most robust investment strategies out there. Not only do real estate investors get to earn a passive income, but they have the ability to diversify their investment portfolio. This will consequently grant real estate investors lifetime stability. What is more comforting about this sector is the numerous investment strategies that you as a real estate investor can choose from. The different real estate investment types include: buying a rental property, commercial real estate investment properties, or ‘flip’ properties.
Of the aforementioned types, buying a rental property provides the best investment opportunities for real estate investors. This is because flipping properties has more risks associated with it than investing in rental properties does. It also depends largely on how rapidly markets rise. While on the other hand, commercial real estate investments often require large cash investments that for many real estate investors can be onerous. Rent in commercial real estate investment properties, moreover, could be disadvantageous to landlords since rent terms can be negotiated. To read more about commercial real estate investments and ‘flip’ properties, visit Mashvisor’s blog.
Related: 7 Steps to Buying a Rental Property
If you are keen on investing in real estate and diversifying your portfolio, we strongly recommend buying a rental property. In this article, we will explore why buying a rental property makes one of the best investment options that you should consider today.
Advantages of Buying a Rental Property: Tax Deductions
Buying a rental property will grant you the opportunity to deduct taxes on several expenses. In fact, rental properties provide more tax benefits than almost any other investment. In some cases, moreover, vacation rental homes could be entirely exempt from tax. Below is a list of the top five tax deductions you can receive when buying a rental property:
- Interest: often the single biggest deductible expense. Interests that real estate investors can deduct include mortgage interest and other interest on credit cards for goods or services used for rental activity.
- Depreciation: While the actual cost of a rental property might not be deductible in the year for which you pay for it, landlords can still get back the cost of real estate through depreciation.
- Repairs: When buying a rental property, the cost of repairs can be fully deductible in the year in which they are incurred. Deductible repairs include repainting, fixing floors or leaks, plastering, and/or replacing broken windows.
- Local Travel: Unlike homeowners, landlords get to deduct expenses incurred from the rental activity. For example, a landlord can deduct travel expenses when he/she travels to the rental property to deal with a tenant complaint. It is important to note that you will not qualify for tax deductions for local travel if traveling is done to improve the rental property.
- Insurance: Even insurance expenses can be deducted when buying a rental property. As a landlord, you have the advantage to deduct the premiums you pay for almost any insurance. This includes fire, theft, and flood insurance and landlord liability insurance.
To sum up, buying a rental property means you get to deduct many expenses that otherwise could be burdensome. This is why buying a rental property marks as one of the best investment opportunities. It is important that you assess and understand thoroughly the various tax deductions that you can qualify for before buying a rental property.
Related: Buying a Rental Property
Advantages of Buying a Rental Property: You Get to Earn Income Without Having to Sell
Buying a rental property allows you to generate rental income without having to sell off your investment. You can even take a mortgage and cover its payments through the rental income you receive every month. In fact, rental properties are preferable to stock and bond investments, because, with bonds, you would have to sell the investment in order to generate gains.
Advantages of Buying a Rental Property: Inflation Protection
While inflation can have adverse effects on some investments, its impact on rental properties can be seen as protective. Naturally, when there’s inflation, the value of investment properties will increase. Additionally, just as the value of investments will increase, the monthly rent will also increase in order to keep pace with the general rise in prices. While inflation can generally hurt both stocks and bonds, rental properties can be a great way to hedge against the possibility of rising inflation. That being said, real estate investors and particularly landlords should not worry one bit about inflation.
Advantages of Buying a Rental Property: Use of Leverage
Another advantage for real estate investors is the ability to benefit from the leverage of purchasing a rental property with borrowed money at relatively low interest rates. Leveraging entails the use of a higher level of debt financing to finance investments. Leveraging a rental property or other investment properties means that you buy more property with less capital. However, it can also mean that you take on some risk as to repaying back the mortgage.
When you buy a rental property through leverage, banks and other lenders can pay up to 80% of your investment. This means that you will be burdened to pay as little as 20% of the value of the investment. So instead of paying the full value of a property from your own money, you could really be buying five investments and gaining rental income on each. Overall, when you finance a rental property through leverage, you enjoy the opportunity to buy several rental properties with little money down and therefore increase your rental income.
Advantages of Buying a Rental Property: Equity Building
Unlike bonds and stocks, when you buy an investment property, you’re continuously building equity in a tangible asset. Your equity stake will increase as the value of the investment increases. This is typical for real estate investments because of value appreciation over time. Moreover, buying a rental property, specifically, will increase your equity. This is because tenants will be paying your mortgage so you won’t have to use equity to pay it back. In addition, having more equity from rental properties will, therefore, allow you to refinance over time and even buy additional assets and grow your investment portfolio.
Buying a rental property allows you to build on your equity, generate income without selling the investment while providing a hedge against inflation. Not to neglect the tax deductions that real estate investors get to enjoy when buying a rental property. Buying a rental property is surely one of the best investment opportunities that you should take advantage of today.
Using Mashvisor’s rental property calculator will further assist you with the necessary calculations. These calculations include cash on cash return and cap rate. Visit Mashvisor to learn more.