Aside from the tax savings, you’ll receive, there are other three benefits of buying a rental property.
A good rental property strategy will not only build passive income and provide a retirement plan but this can also create incredible tax benefits if you plan wisely.
We have identified 4 benefits:
1. Property Appreciation
We do not advise a “fix and flip” approach. You should plan on keeping your rental property for at least seven to 10 years. As such, appreciation is one of the key benefits of your Return On Investment. Keep in mind that not all properties in every market will experience growth, but the increase in housing market value is definitely something to put into consideration. Don’t forget the power of property appreciation.
2. Mortgage reduction
It is an often overlooked benefit to owning rental property. If you purchase wisely, the property should be at least breaking even in your income if you have tenants because you have to keep in mind that the renter is essentially paying the mortgage for you.
This main mortgage reduction is an ongoing tax-free benefit, along with appreciation, that you can calculate and count for a long period of time. Make sure that this is in your spreadsheet when you calculate your total ROI.
3. Tax savings and deductions
It’s no longer a trade secret that rental properties lose money on paper. But the power of depreciation, that you actually get to deduct the mortgage interest your tenant is basically paying on your behalf and the additional deductions you can take for let’s say vacation, property taxes, homeowner association fees, repairs and maintenance, supplies, cell phone, and the list goes on, the tax benefits add up very quickly.
It’s also important to understand these options and discuss them with your CPA. Remember, the IRS might tag you as passive, active, or professional unless you take proactive steps to understand and select the best classification for your situation on your tax return. Even if you aren’t able to deduct losses immediately against your other income, you’ll eventually realize the write-offs, and the tax benefits can be outstanding.
4. Increase in Cash Flow
A good rental property creates passive income while a bad property does not. Purchasing a good cash-flow property may cause the other benefits to fall right into place. If what the past year has taught us, the economic downturn and the drop in the real estate market, is that above all else we must analyze and purchase a property based on our cash flow.
Cash flow is an integral part of your ROI when you inspect a property. You have to consider all of your cash expenses to determine what your cash rate of return is as you try to minimize cash expenses related to the property.
In summary, many investors realize these four benefits work together and can produce passive rates of return on their rental properties. Your overall ROI analysis of any property will include cash flow, the mortgage principal pay-down, property appreciation, and tax benefits. With these benefits and the substantial ROI, it’s no surprise that the wealthiest and most successful people in America hold rental property as a large part of their portfolios.
Are you interested in renting your property? We can help you in earning passive income.