How should you invest your money?
In this digital age, it seems like there is an endless number of ways to invest your money. Since we hear success stories from every type of investment, it may seem like a challenge to figure out the right type of investment for you. You might even think that you don’t know enough to be able to make any type of investment. That being said, keeping your money in a savings account may be safe, but with negligible interest rates, a savings account will never actually make you money. If you want to grow your money, you have to start investing.
This goal of this article is not to say that investing in real estate or residential rental properties is the best type of investment. Investing is personal in the sense that it very much depends on the short-term and long-term goals you have and the resources available to you in both time and money. In the case that you’re considering investing in rental properties, we compiled a list of benefits of real estate investment.
While we all want to increase our wealth and assets quickly and often have this lofty view of “get rich fast” investing, most people benefit from long-term investing. “Get rich fast” investing often has much higher risk involved and if your goal is to be able to go into retirement feeling secure about your investment portfolio and assets, long-term investing might be the right track for you.
So why invest in real estate? It’s simple. It has a high potential of providing for you steady, passive income that can lead you closer to financial freedom. There are a lot more benefits to owning rental property than you may think. Let’s take a look at some.
1. Passive Income
This is often the first thing people point to when discussing the value of real estate investing. Passive income allows you to earn money, while not needing to put much time and energy into the investment after getting things up and running. It’s a great way to invest if you don’t want it to affect your day-to-day. As soon as you have a tenant paying rent, someone is paying your debt down for you and anything that doesn’t cover your mortgage or expenses becomes profit for you. As long as you have things running smoothly, all you’re doing is collecting checks on a consistent monthly basis.
That being said, purchasing investment rental properties requires a little bit of foresight. You want to make sure that you choose the right location and units that will yield you high-quality tenants and constant demand from those looking to rent.
2. Hedge Against Inflation
History is on your side here. While there may be the fear that a recession can lead to a decreased value of your property, the real estate market has always managed to bounce back, giving you the security of staying on track to increase your initial investment. Additionally, given that your goal is renting out instead of flipping or selling home, finding an ideal location in terms of population and workforce growth will help ensure that your rental properties stay occupied even during a recession.
On the other hand, residential rental properties actually benefit from high inflation, as your property value increases in correlation to inflation, thus increasing your rental income. This creates a hedge against both the short-term and long-term effects of inflation, as a rise in the cost of living in your property’s location will generally translate into an increase in your cash flow.
3. Flexible Equity
Unlike stocks, rental property is a tangible asset that grants you a lot of flexibility with what you want to do with it. You have the ability to let your property mature and increase in value over time or sell the property whenever you want to. Smart investing will mean that you’ll be able to build equity quickly, meaning that you now have the additional resources to purchase new investments and further increase your cash flow.
No other investment strategy will give you the kind of leverage that real estate investment will. A loan using your stocks as collateral typically maxes out at 50% of their value, but a loan taken out on a rental property can be anywhere from 75-90% of the total cost. With that kind of money at your disposal, it’s a lot simpler to pay the purchase price on more property, and your income can continue to rise as your investment portfolio grows.
4. Increasing Value Through Renovation
While choosing a prime location can lead to your rental property’s value increasing over time, you can also choose to have a direct effect on its overall value by making renovations on your unit. While it does require more money upfront, you’re able to justify a larger rent charge, which will accumulate and lead to an increase in your cash flow at a faster rate.
There’s volatility in a stock market and when the market is down, many people sell to cut their losses and wait until the market picks back up to invest again. Your investment options are very much dependent on the state of the market, but with a rental property unit, you can find ways to increase the value of your property regardless of the state of the housing market. Not only does this increase your monthly rent charge, but the value of your rental property when you’ve determined it’s time to sell.
5. Tax Benefits
There are several ways real estate investors can benefit when tax season comes around. It can get complicated, so you should always consult a tax agent to make sure you qualify for the various tax benefits before you file. But overall, investing in real estate has more tax benefits than a lot of other investment strategies.
Put simply, one of the key benefits is the tax exemptions that you are able to receive from being a rental property owner. Since income from your residential rental property is not subject to self-employment tax, many investors purchase real estate to benefit from this. Additionally, you also have the potential to be eligible for tax breaks depending on your property’s depreciation or cost towards property taxes, maintenance repairs, or insurance.
The Bottom Line
There is an appeal to rental property investment as it grants you consistent passive income while allowing yourself to be your own boss. Although it may require the need to attend to tenant requests regarding maintenance, you also have the option of making the income completely passive by hiring a property management company that will take care of finding tenants, handling maintenance requests, collecting rents, etc.
If you’re okay with accumulating wealth over a longer period of time, residential rental property investment may be right for you. Regardless, research and planning out what this might look like for you personally is crucial to increasing your chances of finding a successful investment.