Owning rental real estate is gaining popularity as investors move away from the stock market.
Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.
What Investors Want
Unlike other home buyers, investors are highly focused on cash flow and the potential financial return on their investments. Whereas a few years ago, investors were looking for properties that could be fixed up and quickly resold or “flipped” at a substantial short-term profit, investors now seek properties that can be bought at a discount, leased to tenants, and accumulated to build wealth and generate rental income over time. Some investors buy property to supplement their retirement income; others purchase a home they can rent to tenants and then later transfer to their children, who may still be in high school.
Get your finances in shape
Lenders usually require bigger down payments, higher interest rates and generally stronger finances when you're buying rental property. That's because they know people are more likely to default on investment property than they are on their own homes.
Avoid overpaying
What's key is to make sure your rental income will cover your out-of-pocket costs. That includes the mortgage payment on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. If you can at least break even, you'll be able to profit from any price appreciation as well as from tax breaks available to rental property. When crunching the numbers, you should know that there's a big difference in how repairs and improvements are treated for tax purposes. You can typically deduct the cost of a repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made. Replace that roof or those pipes, however, and it's typically considered an improvement, which means the cost can't be deducted. Instead, it's added to the amount you paid for the property to determine your tax basis when you sell.
The Benefits of Investing In Real Estate
Huge Tax Benefits - Properties typically appreciate while the IRS allows you to write your properties off as depreciating.
Using "Good Debt" to Build Wealth - "Good Debt" is debt that makes you money where as "bad debt" does not, it just makes your further in debt... The benefit of "good debt" is LEVERAGE because you don't need to have a lot of money to get started - you can start with the equity from your home.
A Balanced Investment Portfolio - You've heard the expression, "don't put all your eggs in one basket", well the same applies to investing. By investing in real estate (in addition to other investments such as your IRA, 401K, stocks and bonds) you will have a stronger and more stable investment portfolio...
A Personal Retirement Plan - Can we even count on Social Security as a retirement option anymore? When managed correctly, investment properties are a very good potential source of passive income for when you retire.
Deferment of Capital Gains Tax - When you sell an investment property, if you made more money than you bought it for, that’s called your "Capital Gains" and Uncle Sam will tax you on that gain. However, the government allows you to transfer that gain into another "like kind" property by using a 1031 tax exchange. This allows you to bypass taxation by deferring the financial gain into your next investment.
Instant Equity - It’s possible to find investment properties far below market value. When an investor buys properties like this, he or she can instantly use the equity from this for additional buying leverage.
Long Term Growth - My method for real estate investing is about buying and holding properties for the future because I know that their value will almost invariablycontinue to increase!
