We are in a constant search for the next best way to make money. However, sometimes the best answer to the question “How to make money?” lies with an old strategy: investing in rental properties. Real estate investments in general and rental properties in particular have many important benefits which make them stand out from other types of investments. Let’s have a look at what advantages investing in rental properties offers:
- Rental Properties Are a Low Risk Investment
Many people have good business ideas but are too afraid to invest their money in a risky endeavor. One of the greatest things about real estate properties is that they are relatively low risk investments. First of all, because they are physical assets, it is virtually impossible to lose everything in your real estate business, provided that you have a good insurance. Second, the real estate market is much less volatile than the stock market, the main competitor of real estate in the investment field. While it is true that the housing market goes through periodic ups and downs, the general trend with both property prices and rental rates is upward.
Thus, the safety which rental properties provide as an investment is a factor which attracts many American as well as foreign investors.
- Rental Properties Offer a Source of Regular Income
Unlike fix and flips, rental properties are an excellent source of stable monthly income. You can start making money from your investment as soon as you buy it, prepare it for tenants, and place it on the rental market. As long as you are able to find good and reliable tenants, you will receive cash from them each and every month.
An added benefit of investing in rental properties is that in practice your renters are paying your mortgage. Unless you are filthy rich, you will have to take a mortgage to buy your investment property. However, once you start renting it out, you will not have to worry about making the monthly payments as the rent will take care of that. You should conduct diligent real estate market analysis as well as investment property analysis though to assure that your rental income will cover all rental expenses and leave you with positive cash flow. Remember, positive cash flow is a must with investment properties!
- Rental Properties Appreciate in Value
Making money from real estate doesn’t have to happen in the short term only; it can happen in the long run too. Most – or indeed nearly all – housing markets appreciate over time, which means that the real estate properties increase in value. This is known as natural appreciation, and it just happens without you having to do anything about it. Moreover, you can also force appreciation on your property by introducing improvements to it.
So, once you decide the time has come to sell your real estate, you will receive for it more than what you had to pay for it initially.
- You Can Switch Your Rental Strategy
One of the most important decisions for the success of your rental property business is choosing the optimal rental strategy in your particular market. Some places are major economic hubs, producing thousands of new jobs every year, and attracting new residents each month. They are ideal for traditional – or long-term – rentals. Other locations offer a bunch of tourist attractions, which makes them perfect for short-term rentals, also known as vacation rentals. You have to study the local market, research the legislation, and decide which rental strategy to go with. Tools such as Mashvisor’s rental property calculator can help you figure this out by providing you with the expected rental income as well as cap rate and cash on cash return for your neighborhood and property.
However, if you realize a few years down the road that your rental strategy is not the best one anymore, you can always switch. Such flexibility is rarely provided by other types of investments.
- Rental Properties Are a Hedge Against Inflation
Most of us hate the word “inflation”, but this is not the case for real estate investors. Both property prices and rental rates go up with inflation, so your real estate investments protect you against the negative effects of inflation both in the short and the long term. Indeed, while year-on-year inflation has rarely reached 4% in recent decades, the average annual real estate appreciation in the US housing market has been 6%.
So, if you are looking for a hedge against inflation, real estate is the answer to your quest.
- Rental Properties Benefit from Tax Deductions
Real estate investors in general and owners of rental properties in specific should make sure to take advantage of all possible aspects of their business. One way to do that is through tax deductions. Depreciation is one thing you can deduct from your taxes. In addition, you should deduct your rental expenses (such as mortgage insurance, property insurance, utilities, etc.) from your income tax when you file taxes. Both traditional and vacation rentals are eligible for tax deductions, but the rules differ somewhat, so make sure to study the tax rules well to make use of all available deductions without running the risk of tax fraud. You might even consider hiring an accounting to do your taxes for you.
- Rental Properties Help You Expand Your Real Estate Investment Portfolio
Owning one rental property is great, but owning a few is even greater. A major advantage of investing in rental properties is that you can use the rental income to buy more properties.
Remember how we said that positive cash flow is a must with investment properties? The more positive cash flow you have, the easier it will be to save up cash for a down payment on a new rental property. That’s the snowball effect in real estate investing. As you add more and more properties to your investment portfolio, you start saving for a new property faster. So, don’t be surprised if within a few short years you see yourself sitting on a portfolio with dozens of rental properties in it.
- Investing in Rental Properties Is as Active/Passive as You Want It to Be
Many potential real estate investors dread the idea of becoming a landlord. This is a common misconception. Buying a rental property doesn’t necessarily make you a landlord, at least not in the traditional sense. Recent years have seen a surge in the number of professional property management companies, both for traditional and vacation rentals. This means that it is absolutely viable to be a passive investor in rental properties. Property management companies will take care of all tasks including finding tenants, collecting rent, repairing the property, paying utilities, and filing taxes. Of course, you will have to pay a fee, but chances are it is worth it so that you have the time and energy to devote yourself to your 9-to-5 job, to your real estate investment business, or to your family and hobbies.
Alternatively, if you prefer to be in charge and have things in control, you can be an active landlord.
- Owning Rental Properties Can Be a Part-Time or a Full-Time Job
When you are just starting your real estate investing career, you will probably need to stick to your full-time job to secure enough money for you and your family. However, as you begin to add new properties to your investment portfolio, you might be able to take on real estate as a full-time job. It all depends on your preferences.
Investing in rental properties is an excellent way to make money and achieve financial independence. While it is a demanding business endeavor, it has numerous advantages which make it much more beneficial than other types of investments.
Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that usually takes 3 months can now take 15 minutes. We provide all the real estate information in easy to understand visualizations.