Investing in rental real estate; the advantages of owning rental property: Part 1
There are many advantages and disadvantages to consider when you are deciding to purchase rental real estate.
Owning rental real estate can be a great investment. There are many advantages and disadvantages to consider when you are deciding to purchase a rental property. When investing in rental real estate, the goal is to put money to work today and make it grow into more money for the future. There are many types of investment properties; ranging from a small condo or single family home all the way up to a multi-unit apartment complex. A few of the more common investment types are:
- Single Family Homes
- Small Multi-family Properties (2-4 units)
- Apartment Complexes
- Commercial Buildings
- Mobile Homes
The advantages of rental real estate are quite substantial. One of the greatest advantages to owning investment real estate is the potential for passive income that does not need to be earned. This is one of the many reasons investors are attracted to rental properties. There are several advantages to investing in rental properties that you might want to consider. However, the benefits of rental properties go much further than just the rental income. Here are a few examples of the advantages of rental real estate.
- Appreciation- A home value can appreciate when the market conditions of a neighborhood improve and can also increase based on improvements made by the homeowner.
- Depreciation- Depreciation is an accounting term used to let people take a tax benefit for owning rental property. Depreciation is based on the idea that tenants cause “wear and tear” on the property.
- Tax Benefits- Rental properties allow you to claim tax deductions. (See your tax advisor for more information)
- Principle Reduction- If you carry a loan on the investment property, each month your amount owed decreases slightly.
- Leverage - Rental properties can be purchased with borrowed funds. This means that you can purchase a rental property by putting down only a percentage of the total value.
- 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 and your property produces it for you.
Remember: There are a lot of advantages of owning rental real estate. Many people invest so their money will grow, so it will provide income, or to take advantage of tax opportunities. Before deciding to purchase or invest in rental real estate always consult a licensed realtor and tax professional. In Part 2 of this series, we will cover the disadvantages of owning rental real estate.
Michigan State University Extension offers financial management and home ownership education classes. For more information about classes in your area, visit either the MSU Extension Events feed or MIMoneyHealth.org.
Other articles in this series: