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TurboTax Specialist

Rental Property as an Investment Option

Investing in rental property can be a great way to invest over time. Listed below are some reasons why rental property can be a great investment.

 

1. Other Peoples Money (OPM)- You don't have to invest 100% of your money into property. You can purchase property using leverage. Put some money down and borrow the rest. This will increase your returns. OPM are paying the debt for you over time. This increases your net worth. Rentals allow you to invest bigger than you could with stocks or other investments.

 

2. Different levels of involvement - You can become a landlord, manage your property yourself, flip properties, loan money to others, invest in small properties or big projects. Or not.  Lots of ways to be involved indirectly too. There are management companies who can take of your property for a hands off approach and deal scouting, to name a few.

 

3.  Control your investment outcome -  You are not dependent on others to analyse and pick your strategies.  You pick the property and influence its performance. You can tweek/change variables to suit your market area.

 

4. Fairly stable over time- Real Estate will always be around- People always need a place to live. Economic forces can work in your favor if individuals struggle to qualify for mortgages due to high interest rates or high debt levels. Maintaining a property in great condition will ensure its rentability.

 

5. There is a lot of variety - Single family homes, multi-family, small and large apartments, commercial property, land, etc. There is variety within those categories too-older, newer, smaller, etc.

 

6. It's simple - It's not easy, but it is simple. Buy property and receive rent. Lots of websites, books, podcasts to learn from. It helps to have an analytical mind somewhat, but no degree in finance, business or accounting is required.

 

7. 4 profit centers - These 4 areas are working for you. Compare with other investments.

  • Cash Flow
  •  Appreciation
  •  Loan pay down
  •  Tax benefits

8. You don't have to be present - It's a passive investment/business. You won't be working 40hr/wk to maintain this investment, unless you want to make real estate investing your sole work.  Develop systems to maintain your property, list and rent, repairs etc, that will greatly reduce the amount of time you spend with your rental unit(s).

2 Comments
Catalyst V

Rental Property as an Investment Option

All the listed "pros" on this are absolutely true. But why not list the potential cons also? I've been in the rental property business for almost 30 years now, with 3 rentals of my own. I've learned a lot of lessons in that time and paid my share of "stupid tax" for what I didn't know.  So I'll start from the bottom of the list and work it up to number 1.

7. 4 profit centers - These 4 areas are working for you. Compare with other investments.

  • Cash Flow
  •  Appreciation
  •  Loan pay down
  •  Tax benefits

Cash flow is not always what one may think it is. If renting for $1000/mo and have an $800/mo mortgage payment, a popped water heater can eat up 4-6 months of that cash flow in the blink of an eye.

For appreciation, yes it's tru the value of the property will increase over time. But that get's easily offset by depreciation which you are required to take on any business property by law. That depreciation is required to be recaptured in the year you sell the property, and it's taxed then. That can quite easily put you in the next higher tax bracket and the jump in your tax liability can give you regrets, if property financial planning is not done to take this into account "before" you even purchase the property.

On the loan paydown, basically it's the renter making those mortgage payments, not you the landlord owner. However, understand that only the mortgage interest is tax deductible on that payment. The principle part of the payment is taxable income to you the property owner.

For the tax benefits, they're great, as with proper planning it's perfectly possible for all your rental property deductions and depreciation to totally negate the taxability of every penny of your rental income each year you own the property. But that's assuming you actually have a renter in it, and assuming that renter actually pays the rent as promised each month. The legal process of evicting a renter for non-payment or other breach of the rental contract can take months if you don't know what you're doing, and become quite costly thus eating up any cash flow you may think you have. But those tax "benefits" can and usually will "turn on you" in the year you sell the property. That recaptured depreciation can easily bump you into the next higher tax bracket so that now you're paying a higher tax rate on all of your income - not just the rental income. Planning is the key here.

 

6. It's simple - It's not easy, but it is simple. Buy property and receive rent. Lots of websites, books, podcasts to learn from. It helps to have an analytical mind somewhat, but no degree in finance, business or accounting is required.

 

Yeah. That's like when asking directions and the person providing you those directions ends with "you can't miss it". Murphy's law guarantees you will miss it - and more than once too. It's simple for those that do their homework "in advance". SO do the research, talk to others who own and manage their own rental properties, and file their own tax returns. It's true that it is simple for them. But trust me, they didn't learn that "simplicity" through osmosis. They paid their share of stupid tax in the process - and paid it more than once to. Do your homework.

 

5. There is a lot of variety - Single family homes, multi-family, small and large apartments, commercial property, land, etc. There is variety within those categories too-older, newer, smaller, etc.

 

Item 5 is absolutely true. But if you're new to the game, don't go out and buy the first "good deal" that just "happens" to fall into your lap. Start with a single family unit, be it a house or a condo. You'll find out that regardless of how much homework you may have done to prepare for this, you still have a lot to learn. So as a newcomer to the game, practice the KISS method. (Keep It Simple Stupid).  Again, talk to other rental property owners and ask questions such as "what would you have done different if you knew, when you purchased your first rental property?" You can learn a lot from what I politely refer to as the "past stupidity of others". There's no need for you to rewrite that book in your handwriting when there's thousands of copies in the handwriting of others out there already.

 

4. Fairly stable over time- Real Estate will always be around- People always need a place to live. Economic forces can work in your favor if individuals struggle to qualify for mortgages due to high interest rates or high debt levels. Maintaining a property in great condition will ensure its rentability.

 

Stability is a relative statement. You're not just looking for stability in property value here. You also have to consider the stability of the renter too. If after six months into a one year lease your renter loses their job, what do you think comes first in their financial life? Paying the rent? Or putting food on the table? If your renter doesn't have a history of stable employment, what makes you think they will have a future of stable employment? Yes, you can take them to court and sue them for rent owed, and chances are you win in court too. But if the renter doesn't have the money, do you think that just because a judge ordered your tenant to pay, that they're going to pay?  A few months of no rental income combined with your inability to pay the mortgage because of no rental income, can very quickly turn into a foreclosure that will cost you dearly.  While you can't get blood from a rock, your mortgage holder most certainly can, and will.  Bye-bye good credit.

 

3.  Control your investment outcome -  You are not dependent on others to analyse and pick your strategies.  You pick the property and influence its performance. You can tweek/change variables to suit your market area.

 

Yes, but not as much control as you may think. After re-reading #4 above, take into consideration the fact that while it's true you are not dependent on others for the outcome, you most definitely are "responsible" for that outcome. Both morally and legally. Don't let greed over ride your morality. Otherwise, you are practically guaranteed to lose it all and never get it back.

 

2. Different levels of involvement - You can become a landlord, manage your property yourself, flip properties, loan money to others, invest in small properties or big projects. Or not.  Lots of ways to be involved indirectly too. There are management companies who can take of your property for a hands off approach and deal scouting, to name a few.

 

That's what I refer to as "early dreaming". While it's good to have long term financial plans, don't lock yourself into a single path and most definitely don't depend on others to keep you on your desired path either. My favorite saying on this is, "In God we trust, all others I verify".  You have to work a lot of "what if" scenarios and plan accordingly. For example, what if that paint factory 10 blocks down the road from your rental property experiences an explosion that disperses chemicals that contaminate your property? While it may or may not affect your ability to rent it out, what would that do to property values in the area? What's your plan for that scenario? If your renter works at that paint factory, they may now not have a job after the explosion. Can't pay rent if they have no income. Got a plan?

What I'm trying to say here, is plan many financial paths for your future, and keep those doors open for as long as you can, even if you never intend to walk through those doors. The unexpected could very easily put you in a position where you "have" to walk through that door weather you like it or not. But if you don't have a multi-path plan, you can't walk through a door you never opened in the first place.

 

1. Other Peoples Money (OPM)- You don't have to invest 100% of your money into property. You can purchase property using leverage. Put some money down and borrow the rest. This will increase your returns. OPM are paying the debt for you over time. This increases your net worth. Rentals allow you to invest bigger than you could with stocks or other investments.

 

While that statement does have a "ring of truth" to it, that statement also has a false implication that you are not putting yourself at risk. You are putting yourself at risk, any way you look at it. Basically, no matter how you "work the figures", the down payment is made with "your" money and you will pay taxes on that money too. While the down payment is your initial investment into this endeavor, it is not a tax deductible rental expense any way you look at it. No lender is going to loan you money unless you have something "at risk" that gives that lender a comfortable level of assurance that you are motivated to repay the money they are lending you.

 

With all the above I'm not trying to discourage anyone from getting into the rental property market. It's truly a good investment and has done me and my family well for the 30 years I've been doing it.  But the thing is, you absolutely must do your homework from start to finish so that you're prepared for those "bumps and potholes" you will inevitably have to deal with at one time or another. How do you think I was able to get through the housing market crash of 2008 that didn't start to recover until 2012? Effective planning for every scenario you can think of is the key. Otherwise, you may find yourself falling in midair with nothing to grab hold of after you look back and realize you just stepped off a cliff into a bottomless pit. 

 

Visitor III

Rental Property as an Investment Option

Thanks for sharing, I´ve been thinking on a rental property and this information is very useful!