Want to know why you should invest in rental properties?
Have you ever thought about real estate rental properties as an investment?
In this article, you’ll discover reasons to buy rental property.
Buying Rental Property
Unlike other investments, real estate investing does require some training, education, and knowledge. But once you overcome these hurdles the land of opportunity is upon you. I believe many don’t get into real estate investing because of there mindset. They simply do not want to educate themselves on the real estate investing strategies and finance. They would rather hand over their money to a broker and hope for the best. But real estate is potentially and in my opinion possibly the greatest way to build wealth.
Consider, President Franklin Roosevelt, when he said, “real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world” or billionaire industrialist, Andrew Carnegie, “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combines.” And the advice from the wealthy can go on and on.
What is the best way to gain wealth? I think the verdict is quite clear and it is owning real estate. “Landlords grow rich in their sleep without working, risking or economizing” declares John Stuart Mill.
Picture this! Tom and Jerry are both investors and both have $120,000 to invest and both will retire in 10 years. Tom decides to put all his money in stocks and his ROI is 10%, according to Zacks. In 10 years he will have $311,249. He simply hands his money over to a broker and hopes for the best and in his case, he does quite well in stocks.
Jerry, on the other hand, decides to invest in real estate using leverage, tax benefits, and advantages by utilizing a small business and all at the same time increasing his growth with the velocity banking strategy to accelerate mortgage payoff. In 10 years without contributing to his investment he accumulates 7 rental properties fully paid off (free & clear) generating $5,600 in cash flow from rent. Keep in mind that each of his properties is valued at $120,000 each giving him a grand total of $840,000 in assets, again free & clear.
Obviously, there are many variables to both Tom and Jerry’s investments but I believe using Jerry’s strategies with real estate you can also benefit greatly by utilizing leverage, tax advantages, and velocity banking to build up your retirement in record time.
Leverage
Having access to larger sums of money without a doubt offers you the potential chance of greater returns. If you ever heard the term OPM or other people’s money. It is a true and working concept. The concept has flourished in the eyes of the wealthy and among many real estate investors. In reality, this is one of the reasons why the rich are so wealthy. They understand the concept of leverage. Leverage essentially is borrowing for the sake of gain.
When most borrow money they usually borrow without having no desire or idea to grow what they borrow. For most, they are content of paying the monthly bill that includes the cost of borrowing money (interest) on a mortgage, car note, etc. All the while the bank grows wealthy. Leveraging allows the investor to basically partner up with the banks, hard money lenders, private money, etc. Obviously, if you can’t beat lenders and banks at their own game. Join them!
How can leveraging actually work in rental properties
In simple terms, suppose an investor has $100,000. This investor has many options to invest, stocks, mutual funds, etc. Now the beauty of investing in real estate is the control that you have over your investments and the potential increase of capital.
In other words, this same investor goes to the bank and obtains a bank loan to purchase a rental property for $100,000. For a conventional loan, the bank usually requires a down payment of 20%. So now the investor invests $20,000 and now borrows $80,000 from the bank. With just one rental property the investor has $100,000 working, that is, creating cash flow. If the investor does this four more times. That investor will have $500,000 working to bring in cash flow from the rental properties. This is the power of leveraging. And by using velocity banking to pay off these mortgages faster you can really start creating some cash flow in a few years. And once you pay off a mortgage. Repeat the process as desired.
Tax Deferred and Appreciation
Again, when you have access to larger pools of resources your chance of growth increases. Tax strategies that defer tax payments are more and more popular. And it’s a no-brainer, why!
Investing in real estate allows investors to start basically with other people’s money (OPM), e.g. banks, lenders, private lenders, etc. and grow a business in real estate without paying taxes. That is tax deferment. Because you are not taxed until the sale of the property.
However, there are several ways to sell a property without paying capital gain tax, e.g. 1031 exchange, charitable remainder trust, installment sales, etc. But the key concept in tax deferment is that you can continue to grow your investment in bigger and bigger chunks by pushing off the tax bill.
Appreciation is also very valuable. It is a way to continue to grow wealth without making deposits. Real estate overall constantly and consistently increases over time. In 2018, home prices increase by 8 percent, all the while, the U.S. inflation rate hit 2.9 percent in June, and the average U.S. savings account rate maintained at .06 percent. In reality, you lose money if you keep it in the bank. But one of the best ways to fight against inflation is to own real estate property. Although, there are potential dips in the market, e.g. the crash of 2007 overall the real estate market consistently and steadily appreciates over time. And if you think long-term investment, you are thinking bigger.
Tax-Free Cash Flow
Perhaps one of my favorite reasons to buy rental property. And just having one rental property you can gain all the benefits and write-offs that business get. Why? Because it is a business. Investing in real estate rentals allows you to make a bunch of write-offs that you normally couldn’t as a W-2 employee or other investment strategies. Sounds exciting! In other words, if you set up a legal business entity, e.g. LLC, S-Corp, etc. And your business entity owns your rental. You can write-off your property taxes, depreciation, mortgage interest, maintenance, travel, dining, home office, laptops, cell phones, etc. Which will allow the books to appear that you are losing money even though you are creating more cash flow? Interesting! You bet!
Small Business Tax Benefits
Again, having just one rental property allows you to go into business and treat your business as a business.
There are numerous tax advantages to going into business. And you don’t need to start off with any employees. You can always add them later if you want or as you grow your real estate empire. But my point is, with just one rental property you now have access to this wide area of tax write-offs. As you track all your related expenses to your property, e.g. maintenance, travel, dining, internet, home office, laptops, cell phones, etc. you can enjoy losing money on paper but limiting your tax liability, that is, you pay fewer taxes.
As I mentioned before on building tax-free cash flow. When you combine your personal tax returns and your business entity flows into the tax returns you are able to deduct off your personal income.
Also, more opportunity can open up for you when you treat your rental as a business. Banks and lenders will start seeing you as a business and will treat you like one, thus, allowing more access to capital.
Retirement Plan
Lastly, our of all the reasons to buy rental property. Rental properties are an excellent way to build up a retirement plan. Rental properties actually force you to save. You become emotionally attached to the properties that force you to keep the properties and always paying down the mortgage and building equity, at least until the entire note is fully paid.
And if you do it correctly, you gain all the tax advantages and benefits of a small business all at the same time you have your tenants pay you to do it.
Some employees may match your 401k contribution or pay a percentage of what you pay for it. But investing in rental properties there really are no contributions that you have to make after the initial investment. And as you build up your reserve account for emergencies, maintenance, etc. Most of this can be a tax write off.
Conclusion
Owning real estate as rental properties really do correlate to financial freedom. If you strategically consider your options creating the best scenario for growth by leveraging, creating business entities, controlling cash flow and taking advantage of tax benefits your retirement plan will bloom much more faster than other investment strategies.
Meet Maurice, a staff editor at Bigger Investing. He’s an accomplished entrepreneur who owns multiple successful websites and a thriving merch shop. When he’s not busy with work, Maurice indulges in his passion for kayaking, climbing, and his family. As a savvy investor, Maurice loves putting his money to work and seeking out new opportunities. With his expertise and passion for finance, he’s dedicated to helping readers achieve their financial goals through Bigger Investing.
