Not ready to buy a home for yourself but want to take advantage of great market conditions? Consider buying an investment property! It’s a trend that’s taking over real estate as savvy investors look to put their money in an appreciating asset. Here are seven reasons to make this smart move.
1. Rates are crazy low.
Lower rates mean more affordable lending, or more for your money if you choose to reach higher.
2. Because it will appreciate.
According to CoreLogic, “The overall home price index (HPI) has increased on a year-over-year basis every month for seven years.” The long-term price appreciation of real estate can provide one of the safest investments out there.
3. Because passive income is good.
Yes, it’s nice to know there will likely be appreciation over time, but the real key to success with investment properties is passive income.
“The best part about rental properties is that they provide a stable income,” said Mashvisor. “What would be better than having a check sent to you every month? In order to have positive cash flow, you have to make sure you invest in a profitable rental property.”
Many real estate investors use the one percent rule when looking for a cash flow-positive property. “Monthly rental income ≥ one percent of purchase price,” said Norada Real Estate Investments. “So according to the rule, a property with a total investment (price + upfront repairs) of $200,000 should rent for $2,000/month or more in order to be a good investment. If the rent is only $1,500/month, the $200,000 price would not meet the rule. Or if you had to pay $250,000 for a property that rents for $2,000, it would not meet the rule either.”
4. To turn it into a short-term rental.
The short-term rental market has opened up a new world of opportunity for investors. By buying in the right location—by the beach, bear a ski resort, or in close proximity to a popular annual event like Coachella, you have the potential of making six figures in a short period of time.
If you’re considering purchasing a home to turn into a short-term rental, be sure to check the local laws. Lots of cities have been cracking down on Airbnb and other services, stripping away some of the income potential for property owners.
5. Because you can be a homeowner without living in the home.
What you can afford to buy may not match up with your expectations. Perhaps you don’t want to live in an attached residence or move to the suburbs, or even out of your current neighborhood. If you’ve been priced out of what you want to buy for yourself right now, you can still make a smart investment in the type of property other people are looking to rent.
6. Because it can help you buy the home of your dreams down the line.
“Buying an investment property before your first home does not imply that you won’t have the funds to purchase your actual home at some point,” said Mashvisor. “In fact, investment properties that have been purchased wisely and have grown in value can offer you a sizeable amount of wealth and equity.”
7. Because there are tax benefits.
“Rental real estate has more tax benefits than almost any other investment out there,” said Real Wealth Network. “Failure to take advantage of rental property tax deductions, can cost landlords thousands of dollars a year. So why are rental property owners paying more in taxes than they have to? Simply, because they have no idea there are multiple tax deductions they could be taking advantage of. Tax deductions include:
Interest savings—“Interest on rental property is typically the biggest tax deductible expense for owners. This includes, interest on your mortgage loan, or other loans used to improve the property, and if you use a credit card for anything relating to the rental property, interest can be deducted.”
Depreciation of Rental Property—Depreciation or wear and tear on the property is not tax deductible in the first year, but, after that, “Rental property owners can deduct depreciation in smaller amounts, over a longer period of time.”
Claim All Property Expenses—Certain repair costs, furnishings, and insurance including “fire, flood, theft, and landlord liability insurance” can be deducted.
Pass-Through Tax Deduction—“This is an income tax, not a rental tax deduction, made by the Tax Cuts and Jobs Act. Depending on your income, landlords can deduct (1) up to 20% of net rental income, or (2) 2.5% of initial cost of rental property, plus 25% of cost for any employees or independent contractors used (if applicable). This deduction is scheduled to end in 2025.”