You may shrug off the concept of owning a rental property and having tenants, due to the time and skills it may take to manage a rental portfolio. But let me list a few reasons that may change your mind:
1. The use of leverage.
Real estate is one of the few investment vehicles where using the bank’s money couldn’t be easier. The ability to make a down payment, leverage your capital and thus increase your overall return on investment is incredible.
2. Tax deferred growth.
Buying rental property based on speculation of its value is a dangerous tactic since cash flow is the key. However, appreciation over the long run is certainly realistic and at the least, you should be considering a tax-deferred strategy. In the future, you may even consider a 1031 exchange, charitable trust or installment sale to lessen your tax liability further.
3. Tax-free cash flow.
It’s no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That’s right! The far majority of the time, an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.
4. The tax write-offs against your other income.
Having a rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Also, depending on your classification as an Active Investor or Real Estate Professional and your income level, there is a good chance that your rental property will give you an overage of tax deductions that you can use against your other income. With that said, this is something you will want to discuss with your tax professional before investing so that your expectations are realistic.
