The 6 Best Arguments for Investing in Rental Property
Real estate investing is great because there is a strategy for everybody! You can flip houses, syndicate apartments, buy and hold rental properties, wholesale, buy notes, invest in real estate investment trusts (REITs), and so on.
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Regardless of your risk tolerance, experience, or capital, you can find a strategy that works for you.
In this article, I’m going to discuss why I prefer buy and hold investing over other strategies!
What are the Four Pillars of Rental Property Investing?
The four pillars of rental property investing are cash flow, debt paydown, depreciation, and appreciation. Some of these pillars can be found in every real estate investing strategy but not in the same capacity.
For example, when you flip a house (properly), you will receive a large amount of appreciation in a short period of time. You will not, however, benefit from cash flow or debt paydown with a fix and flip.
Wholesalers won’t see returns from any of these pillars but will instead receive a large fee, essentially for finding the deal.
As you can see, these strategies are all different, but I really enjoy benefitting from all four pillars of buy and hold real estate investing!
Cash flow is the life blood of rental properties.
Every month you (hopefully) receive a rent check from all of your tenants. You then subtract the principal, interest, taxes, insurance, utilities (if applicable), and budget for maintenance/capital expenditures, plus all other expenses.
The money left over after subtracting all expenses from your monthly rental income is called cash flow!
Cash flow is important for a few different reasons:
- It is income that you can save/re-invest in your portfolio. Think of it as a kind of dividend.
- When the market plummets, cash flow will continue covering the mortgage payment so you don’t get forced into selling the property at a loss.
- Cash flow can be increased in various ways, thus adding value to your portfolio and wallet!
An added bonus to cash flow is that when markets crash and people are forced to sell their homes, the rental market may actually bring in more money. This is due to supply and demand laws, as fewer homeowners equal more tenants in a market.
Debt Pay Down
Unless you’re buying real estate with cash (not my favorite method), you are going to have a mortgage payment to someone. Every dollar of principal you pay off on that mortgage is a dollar you didn’t really spend.
I say that because you are basically just stashing cash in the equity of your home, and as long as the value doesn’t plummet, you’ll be able to get that money back. You can even tap into equity before you sell the home!
Rental properties make this even better because you aren’t paying the debt down. That is because the rent your tenants pay will cover your mortgage payment.
A great example of this is one of the properties I own. The mortgage payment is $1,625/month. It brings in around $4,500/month in rental income.
After all expenses, I cash flow around $1,000/month on this property. Every mortgage payment I make pays off around $800 worth of principal. That means I pay off roughly $9,600 of my debt every year!
So, I build almost $10,000 in equity annually without paying a penny out of pocket. Couple that with the cash flow, and this property is building my net worth very steadily!
Bonus: the interest on the mortgage payment is a tax deduction. This deduction is also paid for by your tenants!
This big fancy word is an awesome tax credit for real estate investors!
The IRS understands that buildings, appliances, furniture, etc. get old and eventually need to be replaced. They compensate you for this by allowing you to write off a percentage of the income you receive utilizing depreciation.
Residential rental properties are depreciated over the course of 27.5 years. Commercial rental properties are depreciated over the course of 39 years.
This is calculated by dividing the purchase price of the building by the number of years it takes to depreciate. For example, a residential residence purchased for $100,000 would allow you to write off $3,636.36 annually.
This depreciation is a great way to keep an additional portion of your rental income in order to reinvest it!
Everybody loves appreciation!
Appreciation is simply the value of your property increasing over time. This can happen due to market value increasing, renovations, adding square feet/bedrooms/bathrooms to the property, rezoning, and several other ways.
Ultimately, if the value of your building increases due to either improvements or market cycles, that is appreciation! Appreciation is a great bonus for your rental property portfolio but should not be the only reason you invest in a property. That is because appreciation can quickly disappear if the market tanks, and you don’t want to be stuck holding a property that you’re underwater on.
Additional Benefits of Investing in Rental Properties
In addition to the four pillars of rental property investing, there are various lifestyle and long-term benefits to rental properties.
I owe it to you to point out a few of these bonuses, and you owe it to yourself to think through them!
Real estate investing is a great inflation hedge! As you know, we have dealt with 1 to 3 percent inflation (or more) for decades. Every year, your money is worth less and less because of this.
Every dollar you have sitting in a bank, stocks, 401(k), and so on is affected negatively by inflation. Real estate, on the other hand, is not negatively affected, because the cost of land increases with inflation.
Think of it this way: every dollar you spend is worth less and everything you buy costs more as a direct result of inflation. However, because you own real estate and inflation increases the value of land, your money is less affected by inflation. In fact, it may even be a good thing for you!
Rental property investing requires a lot less time and work than Airbnb rentals or flipping houses. It is considered passive income because you can automate almost everything and not have to deal with it much after purchase.
I have a property manager who handles just about everything for my properties. I spend less than an hour a month on my rentals on average, and this allows me to focus my efforts elsewhere. This makes rental properties a more ideal investment strategy for those of us who still maintain a W-2 career.
It is also more scalable than active investing with systems in place for management!
Rental Properties for the Win
In case you haven’t noticed yet, I prefer buy and hold investing. Rental properties are a great way to build long-term wealth, and the cash flow you receive can even continue to pay you in retirement!
There are many other successful real estate investing strategies; the point of this article wasn’t to give them a black eye. Instead, I wrote this solely to showcase some of the reasons that rental properties should be a part of your portfolio—whether it is your main investment strategy or not!
Do you own rental properties? Or do you intend to in the near future? Why or why not?
Please leave a comment below.