When it comes to diversifying your portfolio, you already know the importance of not putting all your eggs in one basket.
So, how about taking one of those eggs and putting it into a rental income property?If “stock market” is the first thing that comes mind when planning for the future, it might be time to expand your investment horizons. Specifically, we’re talking about a proven segment of real estate investing that’s affordable and practical with minimal risk: single-family rental homes. Read on for five reasons why purchasing a rental income property might be the most sound investment you can make.
1. Rental Property is Tangible
When you buy a house, you know what you have. The value is tangible, and doesn’t require interpretation by algorithms or Wall Street traders. Or, as Financial Samurai puts it, “every physical real estate investment you make puts you in charge as CEO. As CEO, you are able to make improvements, cut costs (refinance your mortgage now that rates are back down), raise rents, find better tenants, and market accordingly.” The more direct control you have over your investments, the better.
Bonus: Even if the value of your rental income property takes a dip, you can continue to earn and hold rent — and wait to sell until the market value goes back up.
2. Other People's Money Makes Yours Grow
Real estate loans are easy to obtain and allow an investment much larger than the actual down payment. For example: While you might only put down 20% on a $100,000 rental income property, you can still reap the gains of the entire asset appreciating in value over time — not just the $20,000 you initially invested. This is known as leverage, where investing with other people's money increases the potential return on your investment.
Real estate is the only investment where you can put down a fraction of the asset’s value, yet you still receive 100% of the returns. —Rent Prep
3. Owning Rental Property Brings Big Big Tax Benefits
Real estate investment has favorable tax laws, especially for landlords. This is because the interest expense on your mortgage — along with operating expenses, property taxes, insurance and depreciation — is tax deductible. Come tax time, this added layer of savings increases the overall value of your investment.
4. It’s a Hedge Against Inflation
A rental property is essentially a savings account that grows automatically, without you depositing money each month. —Brandon Turner, author and real estate entrepreneur
Real estate is one of the few assets that react proportionately to inflation. While some costs such as insurance and property taxes might increase, a fixed-rate mortgage stays the same. And as the value of your property climbs, so does the amount of rent you're able to charge. As of March 2017, the annual U.S. inflation rate was 2.4 percent, while U.S. home prices have risen 6.9 percent over the past year.
5. Demand for Real Estate is Getting Hotter and Hotter
Not only does rental property yield steady cash flow while building long-term wealth, it’s also known to have it’s bull markets where even larger gains can be expected. In fact, housing demand has accelerated across all markets year over year in different regions of the country, according to John Burns Real Estate Consulting.
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