If you’ve been on the fence about whether or not you should invest in rental real estate, then this is the perfect article for you to dive into. In it, I’ll be discussing the key benefits of owning a rental property – from the incredible tax advantages to the fact that the tenant actually pays your mortgage for you.
Also, I know from personal experience that rental real estate is the smartest way to build significant wealth, and it’s my hope that after reading through my talking points, that you’ll feel the same way and jump on the path to financial independence. With that said, let’s find out what makes investing in real estate so great.
6 Key Benefits of Owning a Rental Property
Most individuals are interested in owning rental real estate solely for the purpose of creating wealth for themselves and their families. Although the ability to generate wealth is one of the main benefits of investing in real estate, there are also several other benefits that are worth mentioning, such as the fact that it enables an investor to earn passive income, it’s a hedge against inflation, rental real estate can also greatly lower your tax burden, allows your tenant to pay down your mortgage for you, and it’s an investment vehicle that requires no experience. Now that your interest has been sparked, let’s get started and dive into all these benefits:
1. Real Estate Investors Can Build Wealth with Passive Income
When it comes to generating income, there are two primary ways that people typically go about it – they either create active or passive income. Active income normally refers to earnings that come from working hard at a 9-5 type job, or what they call “trading time for dollars”. Passive income, as earned through rental real estate, is money earned with little to no effort. Of course, there is the initial work to get things going, and then some work periodically to maintain things. However, it’s really as much work as you set it up to be.
For instance, you can have a full-service real estate company set you up with a property, where everything is taken care of for you when it comes to making the deal happen. Then, moving forward, a property manager can handle just about everything on your behalf, as you sit back and enjoy monthly rent checks. The beauty of passive income is that it’s earned from working smart, not hard, and this is possible when you own a rental property.
Maximizing Your Passive Income Potential
To ensure you can actually earn the passive income you’re striving for, it’s essential to carefully determine if a property has what it takes to be profitable. This may sound obvious, but some investors get caught up in the excitement and neglect to do their due diligence.
With that said, you’ll want to do some calculations to see if the projected monthly rent collected will cover the mortgage payment, as well as all of the other associated costs, such as property taxes, insurance, repairs, and so on. It’s also best to research the area to see if it’s on an upward trend when it comes to its neighborhood class. I put together an article on neighborhood classification that can give you a head start – What’s the Difference Between A, B, C & D Class Neighborhoods?
Once you’ve located a property that meets your financial criteria, it’s time to start thinking about how you can increase its profitability even more. One way to do this is by making some simple upgrades. For example, adding curb appeal, painting walls, or replacing carpets can boost your rent asking price. You can read all about which upgrades make the most sense by heading over to my post on this topic – 10 Rental Property Upgrades for Landlords.
As mentioned previously, when using a full-service real estate company, everything is taken care of for you, and this includes such things as already having new carpets or hardwood floors installed, as well as making sure there’s excellent curb appeal. So, when going down this path, right out of the gate, you’ll own a lucrative, cash flowing rental property where you can create passive income for years to come.
2. Investment Properties Provide the Best Hedge Against Inflation
There are a few key reasons why rental properties can be such an effective hedge against inflation. For starters, when the economy takes a dive, so does Wall Street, pulling many investors’ retirement accounts down with it. But this is not the case when you’re invested in a rental property.
No matter how bad the economy is doing, everyone still needs a place to live. This means that your investment does not falter during economic downturns. Additionally, when inflation starts rising, rent typically increases along with it, meaning that when inflation pushes up the cost of goods and services, rents will generally follow suit, which can also help you to offset some of the impact of inflation on your overall finances.
Being a hedge against inflation is a major benefit of owning rental real estate – it ensures that your investment stays secure, stable and cash flowing.
The below video touches on this subject and can educate you on how to recession proof your investment:
I also would like to share this detailed interview I had with one of my clients that’s related to the topic – Recession Proof Your Investing – An Interview with Jarret.
3. A Rental Property is an Incredible Tax Shelter
First, let’s dive into what a tax shelter is – it’s anything that can legally lower your taxable income and allows an investor to retain more of their earnings and profits. In many cases, a rental property owner can lower their tax burden to the point of not owing anything to the government. This is all possible by utilizing tax strategies such as depreciation, deductions, 1031 exchanges, and more.
For the sake of not bombarding you with the details of all the tax strategies out there, I thought we could discuss just one that I feel can have a significant impact on your bottom line as an investor, and that would be accelerated depreciation. However, if you would like to learn about additional tax strategies, then head over to my other article – Tax Shelters for Real Estate Investors.
One of the benefits of owning a rental property is that you get to take advantage of depreciation. There are two common types – basic (straight-line) and accelerated. Basic depreciation allows you to reduce your tax burden by depreciating an equal percentage of your property building each year, over the span of 27.5 years, and it’s pretty straightforward.
Taking Advantage of Depreciation with a Cost Segregation Study
The next level of depreciation is referred to as accelerated, and it’s a bit more complicated, but if done correctly, and if all the requirements line up properly, an investor can save a considerable amount of money. Accelerated depreciation can be accomplished through what’s called a cost segregation study.
With straight-line depreciation, you’re depreciating the building as a whole, but with accelerated depreciation done through a cost segregation analysis, you’re also taking into account the non-structural elements. This could include items such as kitchen cabinets, the roof, window treatments, appliances, the driveway, electrical and plumbing, and a whole host of other items. All these additional elements are placed in either 5, 7, or 15-year accelerated depreciation timeframes, as opposed to 27.5 years.
This was just a brief overview on the topic; you can actually read more about how a cost segregation study works by diving into our full write-up on the subject – The Power of a Cost Segregation Study Can Save You Thousands. You can also watch our video below – Is a Cost Segregation Study Worth it?
It’s important to mention that if you’d like to maximize your tax savings, you really should utilize a good CPA. I recommend Tom Wheelwright of WealthAbility, and you can get more details on his services on our Lower Your Taxes page.
4. Your Tenant Pays Your Mortgage Off for You
Another benefit of owning a rental property is that it’s an investment that pays for itself. By this I mean that the monthly rent that your tenant pays can be applied towards your mortgage payment, so they’re actually paying down your mortgage for you.
Most people pay their mortgage down in 15 to 30 years, but if you would like to take steps to pay it off quicker, then you’ll want to look into my book that’s available on Amazon – How To Pay Off Your Mortgage In Five Years. It’s an interesting read that has helped many of my clients speed up the mortgage payment process.
5. Increased Demand for Rental Properties Sets Investors Up for Success
If you’re deciding which investment type will be more secure and lucrative, your best bet would be rental real estate because the national rental vacancy rate, as of the time of this writing, is 5.1%. As you can imagine, this makes rental properties scarce and in high demand, creating a perfect scenario for those who want to get started in this sector.
What’s Causing the Rental Real Estate Demand?
There are several factors that have pushed the United States into an affordable housing crisis, specifically sky-high housing prices and inflation have made it near impossible for people to buy the home of their dreams, which has funneled many people into rentals.
In relation to this, because of the elevated costs, many Millennials are being kicked to the curb by Baby Boomers, so to speak, and this has pushed a lot of them into rentals. To further explain, a good number of Millennials are being priced out by the Baby Boomer generation that’s been around a bit longer, providing them with a longer credit history, and in many cases, they have had more time to build up a greater savings that can go towards the large home down payments that are required.
In addition to this, now that the pandemic is settling down, many individuals that were forced to move in with family members are ready to reside in their own place again, and this has flooded the rental market.
I’ve created a video on this high rental demand, so feel free to dive in:
6. Anyone Can Own a Rental Property Without Any Experience or Knowledge of the Industry
One of the most notable benefits of owning a rental property is that you can invest and build wealth without any experience whatsoever. How is this possible? The answer is that there are full-service real estate companies, such as Morris Invest, that do everything for you – from start to finish.
This is actually an important piece of information because there are many people out there who would like to have cash flow from a rental property but have no idea how to go about it. So, a full-service investment company provides you with a lucrative rental property, and as mentioned, a property manager can take it from there – collecting rent, taking care of maintenance calls, and everything in between.
Here are a few details on what’s done for you when you invest in one of our new construction properties, making it possible for you to own a rental property without any industry knowledge:
- Our team can provide you with information pertaining to multiple funding strategies, and can even set up an SDIRA for you if you happen to have a 401(k) that’s not performing very well.
- Market research is completed for you, ensuring your rental property is in a profitable location.
- We provide new construction multi-family and single-family rental properties that can yield a high ROI.
- Fully vetted, quality tenants are placed in your rental, so it’s cash flowing immediately.
- An experienced property manager will also be placed, which means the property, and the tenants are taken care of for you – this allows you to earn true passive income.
- When certain requirements are met, a cost segregation study comes complete with our new construction properties. This can save you a considerable amount of money on your taxes.
- We are also here to help you learn during the process, if you’re interested. This provides new investors who have a desire to grow their knowledge base a chance to create a foundation that they can build off of.
The Benefits of Owning a Rental Property Will Set You on the Path to Financial Independence
If you’re still on the fence about investing in real estate, know that owning a rental property can be one of the smartest financial decisions you can make. Hopefully, I’ve given you some great reasons to consider taking action on realizing your dream of owning a cash flowing property. Don’t forget, if you’re new to the game, Morris Invest can take care of everything for you; all you have to do is contact us to get the ball rolling. In the meantime, we have an outstanding write-up on all our programs; take a moment to dive in and see what our team can do for you.
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