Rental Real Estate
Rental properties have become a significant part of modern-day real estate investing.
The premise is simple enough as one looks to purchase a property and lease it to a willing tenant. The resulting rent is generated as an income on top of the asset’s appreciating value. The average property tends to grow in value and while waiting for it to appreciate more, investors look into setting up rental options through the same asset.
Most income properties are residential assets (i.e. single-family homes) but they can be commercial assets too (i.e. strip malls). This depends on the investor and what they’re looking to rent out. Instead of letting the property sit as it grows in value, investors prefer having someone as a tenant to help manage monthly expenses while making a profit.
What makes rental real estate such a fascinating option for investors?
It has to do with being able to make one’s own decisions without having to think about anything else. The investor is able to be their own boss as the property is under their name. This includes being able to choose specific properties, set up particular rental agreements, and finding the right tenant. Everything is managed by the investor. For those looking to move away from bosses and managers, it’s a great opportunity to make money while being a boss. This is one of those opportunities where a person receives comprehensive control over their assets unlike anything else in real estate.
Along with being in control, investors are able to take advantage of the natural appreciation in value. Real estate tends to grow in value as it stays in place making it one of the more intriguing assets in an investor’s portfolio. As a result, holding the property for longer periods means greater returns as time goes on.
Investors are also able to use leverage in order to gain access to a rental property. This is done by receiving funds from a lender on the basis of an asset’s value. Leverage is important when it comes to rental properties because it allows one to use less money to earn more. For example, a person with $100,000 is able to borrow $400,000 and immediately purchase a $500,000 property under their name. As the property continues to age, it will grow in value through natural appreciation. This appreciation can be set at 4-5% depending on the asset. Over time, the appreciation in value gets larger and larger making it beneficial to the investor even in a leveraged position.
It’s important to note rental properties give rise to real income on a monthly basis. The tenant continues to pay a set rate as determined by both parties and the funds go into the investor’s pocket after all expenses are paid for. For example, if the property’s expenses are $500 and the tenant is paying $1,500, the investor goes home with $1,000 per month in profit. Even with additional maintenance costs, as long as the property has a tenant, it will continue to generate money.
For those in a leverage position with a mortgage, it’s important to understand the value of monthly payments. The rental income can be used to pay off the mortgage while the main asset grows in value. It’s the easiest way to gain a fully paid off asset at the end of a 25-30 year term through nothing more than rental income.
The reason more and more investors like the premise of rental properties has to do with the quick increase in value. Most tenants will continue to pay a monthly amount and this goes back into managing the property’s debt. Over time, the debt starts going down and that is when more money goes directly into the investor’s pocket. This is the real power of rental properties and why it’s considered a reliable way of making money in real estate. The longer a person waits, the more they are able to generate.
Rental Real Estate Advantages
The government supports those looking to invest in rental properties and there are significant tax deductions on offer. Accountants are able to help real estate investors with these details including potential interest expenses on mortgages, interest expenses on property-related purchases, and more. There are several different tax discounts available to those investing in rental properties.
In most cases, there are additional financial benefits associated with rental properties including a set depreciation price on the property. This means the government allows investors to claim a reduced price on their asset even if it is growing in value. This is done to incentivize those investing in rental properties.
There are several advantages associated with rental properties and why they’re considered a good option among real estate investors. There is a sense of safety in relation to other real estate investments because of control. Investors are able to manage everything and are able to control all aspects of funding down to the eventual income. Having this level of control is ideal as an investor because it ensures no third party is involved during the investment cycle. Everything goes through the landlord and tenant while the asset continues to rise in value. It’s the ideal setup for those wanting to move forward with a long-term plan while earning money in the short-term through rental payments.
For those looking to dive into the world of rental properties, it’s important to assess the merits of a particular real estate asset and how well it’s going to do as soon as it’s put up for rent. The right property is able to grow in value and bring in a good amount every single month through rental income. Anything short of this isn’t good enough.