Rental Property Benefits
One of the greatest advantages to owning investment real estate is the potential for passive income that does not need to be earned. This is one of the many reasons that investors are attracted to rental properties.
However, the benefits of rental properties go much further than just the rental income. This article will focus on the other benefits associated with rental properties and a few rules that will help you get the most from having rental properties in your investment portfolio.
Rental properties can be a great investment vehicle for the following reasons:
- Cash Flow – This is the primary reason that investors purchase rental or cash flow properties. The tenant makes a monthly lease payment that exceeds the expenses on the property. The remaining money is cash flow for the investor. Many investors accumulate rental units with the intention of using that income to pay their monthly expenses or to provide retirement income. When these rental properties provide them with enough monthly cash flow that they will no longer depend on having a job, they reach a point when their investments become their job.
- Appreciation – Historically, properties have increased in value over time. So if you bought a $100,000 property and put $10,000 down as a down payment, you would have a $90,000 mortgage. Let’s say that after five years, the home is worth $150,000. You now have a $50,000 profit for your $10,000 investment. That is a 500% return on your investment over a five-year period and it does not even include the cash flow received during those five years. Even though appreciation rates in many parts of the country have been negative or flat over the last few years, appreciation has still increased over time. This is also not the primary reason why you would purchase a rental property. It is just a nice side benefit of owning rental properties.
- Mortgage Reduction – This is where you get to use the power of other people’s money (OPM) in real estate. As your tenant makes monthly payments on the mortgage, the mortgage balance will decrease (assuming you have a fixed, amortized loan). As the mortgage balance decreases, you end up with more equity in the property, all at the expense of your tenant. It is a great thing to have someone else pay your bills. We know many investors whose retirement plan is to buy a couple of rental properties each year, let the tenants pay the mortgage until the loan is paid off, and then sell the home or use the income for retirement. The possibilities are endless.
- Depreciation – Depreciation is an accounting term used to let people take a tax benefit for owning rental property. Depreciation is based on the idea that tenants cause “wear and tear” on the property. The depreciation is a way to reduce your taxable income at the end of the year. This will then provide you with more income because of the reduction in taxes you pay.
As you can see, there are a lot of good reasons to own rental property. Many people invest so that their money will grow, so it will provide income, or to take advantage of tax break opportunities. With rental properties, you get the best of all worlds because you can do all three (growth, income, and tax shelter) with the same investment. This is one example of why real estate is unmatched in its ability to provide wealth for investors.
In order to get the most out of a rental property, there are a few rules that you need to follow. You have probably heard a nightmare story about how a landlord was abused by their tenant, or something happened to the property. While this can happen, there are ways to minimize the possibility of problems happening. The whole point of setting these rules is so that you do not fall into traps.
If you do not stick by rules as a landlord, tenants will run all over you. In order to be successful with rental properties, you must not only manage the tenants, but the property as well. We recommend a few rules to live by as a landlord:
- Rent to good tenants who pay on time
- Set policies and enforce them
- Repair and maintain your properties
- Solve tenant problems and meet their needs
- Do not be afraid to evict if necessary
- Do what you can to keep the tenants you have
- Find a good handy person
- Set up a system to manage your properties
- Run the business instead of letting it run you
When it comes to owning rental properties, you really have to break everything down into a couple of categories. The first one is finding the right tenant. As you are screening potential tenants, the main thing that you will want to ensure is that they check out. Many of the horror stories you hear from landlords that were burned are because they did not do their homework on the tenant. They didn’t verify that they had the ability to pay the rent. They didn’t do a background check or credit check. They didn’t call the references. So, the lesson is that by following the proper steps, you will eliminate many potential issues from the start.
The next step is to fill out the proper agreements. Another huge mistake landlords make is that they do not have a lease agreement signed by the tenant. This greatly reduces their ability to quickly evict a tenant if the need arises. The agreement is protection for you and you are asking for problems if you do not get one signed.
You will also want to properly manage the property. We highly recommend that you find a competent, highly skilled property management company for this. If you spend all your time collecting rent, doing repairs, and everything else, then you are not going to have time to find the next deal. The point is that you want to own your rental properties instead of them owning you.
We also highly suggest that you have a pool of money that you set aside for repairs and upkeep on the property. That way if something needs to be replaced, it will not hurt you financially.
Rental properties are a great way of making passive income. These principles and rules will help you make the most of rental properties so they are an asset to your investment portfolio instead of a liability.