Benefits of Buying an Investment Property
Investing in real estate has one of the highest rates of return. With the right properties, you enjoy consistent cash flow, diversification, and tax benefits. So, you’re considering taking the leap and investing in a property. Here’s why you should do it and what benefits to look for to maximize your return:
Find a Reliable Tenant for Consistent Income
You can secure a high net operating income by renting your property to a long-term, reliable tenant. This is the rent money you collect, minus all operating expenses (vacancy, repairs, management fees, delinquency). Getting a solid tenet that pays rent on time, causes little damage, and is free from delinquency will keep your cash flow flowing strong.
If your investment property is small or in a unique location, another great way to ensure a high return is listing it as a short-term rental instead. A typical Airbnb in San Francisco averages $193/night. This is a pretty good rate for an investment property.
Diversifying Your Portfolio
Limiting your investment portfolio to only stocks and bonds is dangerous because if the stock market crashes, you’re out a lot of money. Diversifying your portfolio to include stocks, bonds, and real estate keeps your money safer.
As a real estate investor, the biggest risk you face is the loss of income from vacancies. This typically happens when you fail to attract the right tenant or a tenant at all. You can reduce this risk by investing in a multi-family property because they draw from the largest pool of tenants.
Tax Benefits
Owning an investment property comes with a few important tax breaks. You must report your rental income on your tax return, and, for the most part, you can deduct expenses like mortgage interest, property tax, operating expenses, depreciation, and repairs.
While you can’t deduct home improvements, it is possible to depreciate them. You can deduct the cost over years. In the beginning of the year, you will want to fill out Form 4562. This will allow you to report depreciation and to recover some or all of your improvements.
Good Rate of Appreciation
Appreciation is the increase in the value of an asset over time. The typical appreciation rate for rental property (depending on your area) is around 3-5%. In San Francisco, the appreciation rate is 6.74% putting SF in the top 10% in the nation!
Once you own an investment property, you can use your mortgage and property as leverage to buy other investments. If you have a lot of equity in the property, you can use that as leverage to buy something else.
Home prices tend to rise with inflation. This creates an inflation hedge, which is an investment that is considered to protect the decreased value of a currency. Since your mortgage payments will not increase with inflation, your real estate investment will almost always keep your money safe and go up in value.
Ready to Invest?
Are the benefits of real estate investing looking pretty sweet right now? Whether you’re a first-time or seasoned investor, you need to evaluate your goals to determine what kind of property you want to look for. Then begins your search for a real estate agent who knows the area well enough to advise you what neighborhoods in your area are going to result in the highest returns.
