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.
- 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.
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.
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.
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
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.
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.
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
Contact us today for a free consultation.