Top Benefits of Owning Rental Property as a Business

Just because you own a rental property, doesn’t mean you own a real estate investment business. The difference ties to how you classify your business for tax purposes. However, more importantly, it ties to your mindset about your investments.

When you treat your rental properties as a true real estate investment business, you not only receive tax benefits, you also open the door to financial freedom. You can grow your business from one rental property to your primary source of income.

Buy and Hold Strategy Works for Rental Properties

Have you heard the term buy and hold? It is an investment strategy where an investor purchases a property for long-term investment. This allows time for the property value to appreciate.

However, while the investor “holds” the property, they usually rent it out as a source of passive income while the equity grows. Rental properties work for both long-term and short-term rentals. The type of property and location impact how best to position the property for rent.

Buy and holds also support the BRRRR method which allows investors to take the equity from one rental property and use it to purchase additional properties. This is a great method to grow your real estate investment business.

Top Benefits of Turning Your Rental Properties into a True Business

Treating your rental properties as a real business leads to many benefits. When managed right, you determine the size and growth of your business. As the world faces economic uncertainty, demand for rental properties increase. Now is the perfect time to build a real estate investment business with rental properties.

1 – Grow Wealth with Appreciation

Real estate stands the test of time. Even in times of economic downturn when properties may lose value in the short-term, over the long term the value recovers and grows. The best gains typically occur after a minimum of 7 to 10 years.

Over time, the property gains equity that may be used for property improvements or, as we discussed, to fund new investments. The key is to hold the property long enough to realize true gains in value.

2 – Pays for the Mortgage

When you treat your rental property like a business, then you run it like a business. This means you understand the rent rate must cover the mortgage and other property expenses, like taxes and insurance. The goal of business is to make money. Therefore, manage the financials to make a profit with your rental properties.

Over the years, the renter’s monthly payment reduces your principle balance. When you finally sell the property, you may even own the property outright. Also, consider a refinance at a lower interest rate to reduce your expenses for the property. You then make more money each month from the rent.

3 – Receive Tax Benefits

The tax benefits are one of the best benefits of managing your rental properties as part of your real estate investment business. Work with an accountant experienced in real estate investing so that you receive the best tax benefits from your rental properties.

Also, when you build an investment business, you can deduct business expenses from your revenue. For example, HOA fees, maintenance, repairs, supplies and travel all act as deductible business expenses when related to the rental property.

The mortgage interest deduction becomes another tax benefit. But, to achieve these financial benefits, you must classify your business correctly. The IRS has specific criteria for real estate classification, and a qualified CPA helps ensure correct classification for maximum tax savings.

4 – Gain Passive Income

To build wealth with real estate investing, you need passive sources of income. Your passive income is the money you make monthly from collected rent. You aren’t actively putting in effort to earn the monthly rent. This means you have the time and energy to focus on new investments while having the financial security of monthly income.

As your costs go down over time, your passive income increases. Plus, as you add more rental properties to your portfolio, your business grows.

Rental Properties as Part of Your Investment Business

Rental properties are solid long-term investments. They have a proven track record for performing well. However, you want to treat all your real estate investments as part of your business. A diversified approach provides even more financial security and opportunities to grow wealth.

To be successful, establish a real business both legally and operationally. Create a business plan, stay organized, put the right team in place to run a well-managed business.

Build a diversified and strong real estate investment business that provides short-term, long-term and passive income. For example, conduct wholesale deals while also owning rental properties and managing fix and flip projects. As your confidence and portfolio grows so will your business.