Many of you must have read my post on home buying vs. renting calculation. We are renting and I always have this aspiration to become a rental property owner. This post is a part of that preparation. Nothing is firm yet, just about to start tasting waters aka looking around.
We rent with an aim to reduce loan amount when we eventually buy. Perhaps we can buy with full down payment if we wait for a few more years. But, owning a rental property is a different ball game, where an investor looks for covering mortgage and other costs with rental income. A positive or break even cash flow is what we look for.
In following sections we will cover different aspects of rental property investment.
Creating Extra Wealth Streams
Having an investment property is where active income meets passive income. Where you don’t have to work for generating extra income. If you set yourself up right the first time – like our landlady, Karina, had done – you’ll have to put in minimal effort in order to receive maximum return on your investment.
I know a few people with investments in rental real estate. I even know a fellow blogger who has a scheme where he buys a property, rents it out and then takes equity out of it to buy another rental property. He, then, goes on to take out equity from the second home and buys the third one. He now has multiple rental properties without spending much from his pocket.
His loans are being paid out by the renters, and, he gets to keep the profit. Whatever profit it may be, at the end of a few years, he’d own a handful of properties. I know others who have 2 or 3 rental properties. They even claim rental property can return more than stock market because of the recent real estate meltdown.
Paying The Rent vs. Paying The Mortgage
When our agent showed us the property we are renting now, she remarked that when our landlady first bought the place, it was a dump. After purchasing it for a rock-bottom price, she put in about $40,000 worth of improvements and changes, doing most of the work themselves, she paid about $1,400 a month in combined mortgage and escrow. Because she’d done quality work, her monthly maintenance costs were next to nothing.
And what was our landlady charging us to live on the building’s second floor? $1200. I knew that the downstairs neighbors paid slightly more than us, because they had access to a walkout deck and a little garden space in their unit. I estimate that they pay about $1400 a month to our landlady, giving her a tidy $800/month profit on our duplex alone. Multiply that times the 8 other buildings she own, and she was pulling in $6400 a month, before tax, with minimal work!
The Tax Benefits
When you’re a homeowner, you don’t always get to write off your HOA dues, cleaning and maintaining the property, or paying the utilities from your income tax liabilities. But, when you’re a landlord, however, things are different. According to IRS Publication 527, everything from advertising a vacancy to the interest on your mortgage is a potential deduction. Even the commission you may pay to the broker who finds your tenants. Essentially, this is one of the ways you can bring down your tax burden.
Financing A Rental Property
If you’re thinking about jumping into the rental property game, you’ll need to consider the upfront costs – including how you’ll finance the purchase. When you apply for a mortgage on an investment property, you’ll likely face higher interest rates, just as you would for a vacation home. Be sure to compare home loans using a home loan calculator to evaluate different options. Some landlords do live in their investment properties, perhaps occupying one floor of the home while renting out the others; in this case, you may be more likely to qualify for a standard home loan, along with a lower interest rate.
If you don’t have the liquid assets on hand to buy a rental property, there are other options. If you’ve been in your current residence for several years, or made a large down payment when you purchased it, you may be able to draw upon the equity in your primary residence (just like my blogger friend is doing) to finance the purchase of the investment property. Refinancing your mortgage while simultaneously pulling cash out is one option; using a home equity line of credit, or HELOC, may also give you the cash you need to make the dream a reality.
Rental Property Value Appreciation
If your property increases in value, so does your wealth. Current real estate doom can’t sustain for ever, prices should go up someday. If you buy now you may reap rewards tomorrow. Rent appreciation is another asset. Your loan repayment amount can stay constant but, your rental income can only grow if you select rental properties at good location, near businesses, schools, etc.
Landlords in our area increase rent by 5% every year. 5% increase in your rental income year over year could mean thousands of extra money in your coffer.
Readers, are you a rental property investor or a buyer planning for a property purchase? Share your thoughts/suggestions here.