Benefits Of Rental Property Ownership
By Paul Esajian on February 19, 2016
It is difficult sometimes to think about the future. Five, ten and even twenty years down the road can seem like an eternity. The reality is that the future often comes much quicker than we would like. That is why it is important to build a solid real estate portfolio today to brace for the inevitable. While home flipping and rehabbing is currently the most popular form of investing, a solid rental property can set you up for years down the road. Monthly cash flow is the most common reason to pursue a rental but it is far from the only benefit. If you are thinking about adding to your portfolio here are a few benefits of rental property ownership.
- Cash Flow. As many long term benefits as there are you cannot ignore the short term gains. A rental property that delivers monthly cash flow is almost too good to be true. It is certainly not easy dealing with tenants and everything else that comes with being a landlord. But, for as difficult as it can be sometimes the benefits are worth it. Your tenants will provide you with some degree of surplus cash every month. This cash can be used to improve the property, pay down debt, boost savings or anything else you like. This money may not seem like a large sum every month but added up over the course of the year can be the money for a big ticket item you are looking for. If nothing else this money can be the start to your savings that you may have been looking for.
- Reduction Of Principal. There is an important side benefit of having tenants provide you with monthly cash flow. What is often overlooked is that in a rental property your tenants are essentially paying down your debt. Every month they are reducing the principal of your loan. If you own the house for the duration of the loan they will essentially pay the loan off for you. Even if you don’t own for the life of the loan paying down your loan balance gives you multiple options. For starters you have the ability to sell whenever you like without having to worry about bringing money to the closing. If the market turns you can quickly sell for a profit. Principal reduction also gives you the ability to explore refinance options that are available. Loan programs are based on the loan to value. The lower the loan balance the more equity you have. This allows you to lower your term or possibly take cash out under the right scenario.
- Appreciation. There is no telling where the real estate market will be in a few years. Buying solely for appreciation is not recommended. That being said appreciation is one of the benefits of a rental property. If you have purchased in the last five years the odds are you have bought near the bottom of the market. Even in areas that are on the rise they are far from the peak. There is typically much room for upward appreciation. You won’t see the massive increases that you did last decade but 1-2% a year is not realistic. Over the course of ten years or so you could be sitting on a terrific return on your investment. This increase takes a conservative approach to the market. There is nothing saying that in a given cycle values won’t shoot up 5% in one year. Buying solely for appreciation is not advisable but it is certain possible to happen during the time of your ownership.
- Tax Benefits. There are multiple tax benefits that come with rental property ownership. There are numerous write offs and deductions with a rental property that you can take advantage of. For starters you get to write off the interest on the payments you make. Additionally you can use depreciation to your benefit. On top of that you can write off any repairs, homeowners insurance and a handful of other items. These benefits can turn a tax return where you owe money to one where you are actually collecting. You may not see any individual tax impact but coupled with other properties over the course of the year the tax benefits can come in handy.
- Portfolio Diversity. If you ask any financial planner they will tell you that the key to a successful portfolio is diversity. You don’t need to stock your portfolio full of rental properties but even a few can have a big impact. This gives you another layer of protection in the event that something happens to the economy. Rental properties have always been a strong performer if they are run correctly. The greater number of rental properties you have the stronger your overall long term portfolio will be.
Solid performing rental properties will not just fall on your lap. Not only do you need to put work into finding them but you also need to take the time to manage them. If it was easy anybody with money would own them. There is plenty of room in the business for flips and rehabs but every now and then you need to think about the big picture long term. One or two new rental properties a year can completely change your portfolio.