Owning a rental property can be a financially rewarding experience, helping you build true wealth over time with an income generating
asset. Financial gain aside, it’s also an opportunity to learn new skills as a
landlord. If buying a rental property is firmly in your sights, here are ten
key benefits to consider.
*A small disclaimer before we begin. Many of the benefits listed below require the owner to meet specific standards, such as
having excellent credit, financial stability, choosing the right property, and
your ability as a landlord to manage this investment properly. Ziprent is also
not claiming to be a tax expert or offering financial advice with the below.
Always consult a professional that can analyze your individual situation.
Key Takeaways:
Understanding the various ways a rental property can benefit an owner.
Understanding the financial implications of owning a rental property.
Understanding the drawbacks and time-constraints of ownership.
Passive Income
The primary benefit of owning a rental property seems clear:
passive income. Passive income is money earned without actively working for it,
in this case in the form of monthly rent payments from tenants. While owning a rental
property still requires real work, such as finding tenants and managing the
property, it does provide a steady stream of income that can help supplement
your other income sources.
To generate actual profit from your rental property, you’ll
need to manage your expenses correctly to ensure the rental income exceeds your
overall expenses. You’ll want to consider things like your monthly mortgage,
utility costs, any future repairs and more. Once you have these things
settled, you’ll be ready for some serious cash flow.
Property Appreciation
Another benefit of owning a rental property is the
possibility of asset appreciation, which is the increase in property value over
time. Should the value of the property go up over time, you may consider
eventually selling for profit. There are many factors that can influence whether
your property appreciates including the local real estate market, the condition
of the property, and any renovations or improvements that are made to your rental
property during your ownership. It’s rare for an asset like a property to
suffer depreciation, assuming you were able to purchase at a fair price.
Another important point regarding appreciation is the idea
that as the home appreciates, you are building equity. Typically, you are able
to take out 80% of your equity in the home.
For an example, let’s assume you buy a $100,000 home
and then spend another $50,000 in renovations.
You’ve now spent a total of $150,000.
Now that the property has been renovated, it’ll typically be
valued at a higher price which represents appreciation. For the sake of this
example, we’ll assume the property value has now increased by $50,000 to
$200,000 total to align with the renovation costs.
That $50,000 increase would be considered equity, which we
discussed above. You would now be able to take out 80% of that equity as a loan
against the property. In this example, that would represent $40,000 you can
take out as a loan, typically not counted as income and therefore not taxed as
income.* This loan could be used to purchase another property, quickly building
your portfolio of real estate investments.
Tax Benefits
Rental properties often qualify the owner with different
opportunities for tax deductions. Owning a rental property can also provide tax
benefits, as an owner may be able to claim deductions for expenses related to
ownership of the property. Some of these investment property opportunities may
include mortgage interest, property taxes, and maintenance costs.
These deductions can help an owner reduce their overall tax
liability, thus increasing their return on investment. While Ziprent
provides award-winning property management services, you should ultimately
consult a tax professional to understand the tax implications of owning a rental
property. Nobody wants that dreaded letter from the IRS, so be sure to
enlist the necessary expertise to take advantage of these tax benefits
properly.
Diversification of Investment Portfolio
While the word diversification might be something you’re
more used to hearing from Jim Cramer talking about the stock market, it’s just
as important when it comes to buying a rental property. Diversification at its
core is about reducing risk to your overall investment portfolio. High level
and amateur investors alike have used real estate to diversify for generations.
By investing in a variety of asset classes, such as stocks, bonds and of course
real estate, an investor can spread their risk and help mitigate the impact of
any poorly performing investment. Diversification is even more important for
those nearing retirement, as it can help ensure a more stable source of
income.
Forced Savings
Owning a rental property can often end up being an
unintended savings plan. A smart owner will be saving monthly for
emergency expenditures like repairs and maintenance. Ensuring that safety net
will keep the property well-maintained, thus attracting and retaining tenants
for your rental property. Being prepared for the unexpected expenses that can
arise in the short-term is crucial for rental property owners.
Control Over Property
As the owner of your investment property, you have ultimate
control over how it is maintained, any renovations or improvements, and in some
states, who can rent the property. This can be particularly appealing to those
who want a say in how their investment is managed and maintained. When it comes
to selecting tenants and the various local laws that decide how much control
you have over the process, using a property management service like Ziprent
might be wise to help avoid violating any relevant fair housing laws.
Leverage
Depending on your personal finances, you may be able to use
leverage such as a mortgage to purchase a rental property. By using a mortgage
to purchase real estate, an owner can possibly earn a higher return on their
investment than they would after paying cash for the property. However, it’s
important to note that leverage such as a mortgage can also increase the
owner's risk. If the property does not generate enough income to cover the
overall cost, the mortgage still needs to be paid. Factors like the interest
rate on the mortgage, down payment cost and maintenance costs need to be
considered carefully.
Potential to Generate Retirement Income
You may remember in our 4th reason on diversification that
having a stable source of income during retirement is important. Supplementing
your social security, pension, and personal savings with a rental property
could be the key to enjoying retirement without financial headaches. Even if
retirement isn’t necessarily right around the corner for you, it’s important to
consider your future now.
Opportunity to Learn New Skills
While some of our previous listed benefits may have focused
on the financial side, it’s also important to note the benefits owning a rental
property can provide when it comes to acquiring new skill sets. By managing a rental
property, an owner can gain practical experience in key areas such as property
maintenance, people skills and property management skills in general. Not
everyone enjoys these types of experiences however, which is why you may want
to consider a service like Ziprent to handle the complexities of owning and
maintaining a rental property.
Build Long-Lasting Wealth
With careful planning and management, owning rental
properties can be a way to build generational wealth. We’ve covered the
opportunity to earn a steady stream of passive income and to benefit from
appreciation, while also enjoying the tax benefits of owning a rental property.
Additionally, owning a rental home offers the opportunity to leverage your
investment, increasing your return. You may also consider keeping your rental
home in the family, giving you the ability to pass down an asset with
long-lasting cash flow.
DRAWBACKS TO OWNING A RENTAL PROPERTY
It’s important to note that owning a rental home is not
without its challenges. Being a landlord to tenants can be time-consuming. An
owner will need to find renters and manage them, as well as handling any
maintenance or repair issues that may arise. Additionally, there is always the
risk that the property may not generate enough income to cover the costs of
ownership. It’s important for owners to carefully consider these risks and do
the necessary due diligence before making such a large investment.
To summarize, here are some of the main drawbacks:
Time investment
Managing tenants
Dealing with repair issues
Ensuring profitability
Financial risk
Operating Expenses
TWO IDEAS TO HELP MANAGE DRAWBACKS
1. Work With a Property Management Company
One way to considerably manage your risk is working with a property
management company like Ziprent. We’ve managed thousands of rental properties
across multiple states, offering the expertise that only comes with time and
experience. Ziprent can handle the day-to-day tasks that can take time away
from an owner while offering expert consultation on financial decisions like
rent price, operating expenses, maintenance and repair vendors, and more. With
one of the lowest monthly service costs in the industry, we can help ensure you
rental home nets positive cash flow.
2. Own Multiple Properties
If finances allow, owning multiple rental properties may
help lower your risk. Although that sounds counterintuitive, different
properties represent varied rental income potential, costs and appreciation.
For example, you may have one property that has unexpected maintenance costs
during a certain month that makes it unprofitable. While another property may
be maintenance free and profitable that month. An owner can shift the profits
from one investment property to the unprofitable property to cover the
unexpected costs.
However, just like the drawbacks we mentioned above,
multiple properties mean all those possible drawbacks are multiplied. Real
estate investors will need to carefully consider whether they can manage those
drawbacks or if outside help will be needed.
Conclusion:
Ultimately, the decision to buy a rental property is a
personal one that depends on an individual’s financial goals, risk tolerance,
and other factors. However, for those that are willing to put in the time and
effort, the benefits of owning rental property is clear to see.
Like most great investment opportunities, there is no reward
without risk. While some of the drawbacks listed above may seem scary, they’re
also easily managed with proper planning. A owner may also consider the support
system they have around them. Whether that’s a partner (spouse or business),
family member or trusted friend that’s ready to pitch in on the day-to-day
responsibilities, or a partner like Ziprent that will shoulder the bulk of the
landlord task on your behalf. Identifying these partnerships ahead of time may
go a long way to easing the fear associated with real estate investing.
Simplify the Property Management Experience
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Contact us today for a free consultation.
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