Rental Property: The Advantages of owning a Residential Rental Property

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Investing in real estate can sometimes look like an awesome idea on paper. You, in essence, buy a place in a nice area, find tenants, and let your bankroll grow. However, it's not always that easy. There are definite advantages to owning a rental property, but take into consideration some things before putting a 'for rent' ad in the paper.

Advantages of Rental Real Estate

The advantages of rental real estate properties are many. One that is not listed below is the fact that when you own rental real estate, you own a tangible thing. You can hug it when you're happy with it and throw stones at it when you're not. Shares of Apple, by contrast, are much harder to hit with a rock.

Many people who feel uncomfortable investing in financial assets have no problem with investing in real estate by contrast. This is a psychological difference, as a bad stock and a bad rental property are equally capable of losing money, forcing you to sell for a loss. That said, below are the advantages that show up on paper.

Current Income 

This refers to the rent money that is left over after the mortgage and related expenses have been paid. Current income is basically monthly cash that you did not have to work for - your property makes it for you.

Appreciation

This is the increase in value that properties generally gain as time passes. Appreciation is not guaranteed though. However, if you own a property in a stable area (cities), the property will likely increase in value over the years if it is kept in good condition. Even properties in sparsely populated and less desirable areas may appreciate due to inflation.

Leverage

Rental properties can be purchased with borrowed funds! Yay! This means that you can purchase a rental property by putting down only a percentage of the total value of the property. Essentially, you can control the whole property and the equity it holds while only paying a fraction of its total cost. Also, the property you purchase secures the debt rather than your other assets. You may lose the rental property, but you shouldn't lose your own home.

Tax Advantages

Your rental income MAY be tax free if you do not receive net cash flow after expenses are deducted. This means that your mortgage is being paid down and you own more of the total value of the property (rather than just controlling it), but you do not pay taxes on the money that is doing this for you. In addition to this, you can also pull out tax-free money by refinancing your loan if the property appreciates and the interest rates have fallen. Lastly, you may be able to avoid paying taxes on the sale of a rental property if you sell it and reinvest the money in another property. Neat huh?

For every upside there is a down - stay tuned for our next blog when we discuss the downside of owning a rental real estate property and tips on how to keep the pros outweighing the cons.