Purchasing rental properties is a popular and stable investment strategy for many people. While the rental market, like any market, is subject to fluctuations and recessions, real estate has historically been one of the more stable markets which can allow it to grow over time while other markets are less stable. Investing in real estate can also bring several other benefits which can increase the return on investment (ROI) for the purchaser. Here are some of the advantages and benefits of investing in rental properties:
Steady Cash Flow
One of the greatest advantages of investing in rental income is cash flow. Many investments grow over time and build wealth, but don’t provide a steady source of passive income. On the other hand, long-term rentals offer a reliable source of income through monthly rental payments. Unlike short-term rentals, which may experience fluctuations in occupancy and rental rates, long-term rentals can provide consistent cash flow. Other real estate investments, such as buy-and-flip projects or property held for appreciation, also don’t provide steady passive cash flow.
Finding a cash-flowing property can be more difficult in a high-inflation market, because high inflation raises the cost of mortgages, and this increased cost often won’t be balanced by increased rental prices. In these markets, investors may have to focus on properties that they can add value to, such as homes that need to be renovated, buildings that can be converted into more than one unit, and properties that can be made larger through additions. Making homes bigger or renovating them can increase their rental value and allow them to cash flow. However, investment properties in Memphis, Birmingham, and many other similar communities are still cash-flowing well and are good sources for rental properties.
Appreciation Potential
Real estate has historically shown appreciation over the long term. Holding properties for an extended period allows you to benefit from potential property value appreciation. As property values increase, your investment can grow in value, providing an opportunity for capital gains when you decide to sell. By holding rental properties as opposed to other real estate, such as vacant land, you can allow your tenants to pay down your mortgage while the property appreciates.
Many investors are seeking appreciation as opposed to cash flow, and in these cases, an ideal property doesn’t have to result in passive income. Instead of working toward disposable monthly income, the investor is working on having a property that appreciates and builds in value over time. In many areas, you will find either cash-flowing properties or appreciation properties. However, occasionally investors will find a market that allows for both cash flow and appreciation.
Tax Advantages
Many people consider real estate to be a great investment for its tax advantages. Investing in long-term rentals can offer several tax benefits such as lower tax rates, tax deductions, and tax sheltering. Rental income is generally subject to lower tax rates than ordinary income, so that is one advantage that applies specifically to rental investing. Additionally, most people are eligible for tax deductions on expenses such as mortgage interest, property taxes, insurance, repairs, and depreciation. These deductions can help reduce your overall taxable income and increase your return on investment and can apply whether you own your rentals in a business or as an individual.
Leveraging Opportunities
Leveraging is a primary way that investors grow their wealth. Real estate investments often involve the use of leverage, meaning you can finance a significant portion of the property’s purchase price through a mortgage loan or other loan service. By leveraging your investment, you can amplify your returns. If the property appreciates in value, you benefit from the increased value while only having invested a portion of your own funds. Some investors even capitalize on their equity regularly by refinancing their properties once they have grown in value. They can then use the money from the refinance to purchase more rental buildings, and in this way, they keep leveraging their money to grow additional wealth.
Hedge Against Inflation
Inflation hedges are investments that are designed to hold their value or lose less value during periods of inflation. Buying physical items is one way to hedge against inflation, and real estate has historically been considered a good way to do this, especially if it is a long-term hold like rental properties. As prices rise over time, rental income and property values tend to increase as well. By holding long-term rentals, you can potentially preserve and even increase your purchasing power, making it a valuable investment strategy to protect against the eroding effects of inflation. While there are no guaranteed inflation hedges, and the market will always rise and fall, real estate can be one of the better hedges because property values tend to rise gradually over the long term.
Conclusion
While there are risks and benefits involved in any investment strategy, holding long-term rentals can provide a range of advantages that make it a good option for investors. Many of the world’s wealthiest people grew their wealth by investing in real estate. It’s important to conduct thorough research, assess the local market conditions, and consider your financial goals before making any investment decisions.
