Every real estate investor has different goals. Maybe you want to diversify a larger investment portfolio with real estate so you can achieve a level of financial security now and in the future. Perhaps your goal is to build generational wealth so you can pay for your children’s college education and then pass down the property you’ve owned for decades.
Whatever you’re hoping to accomplish, rental properties are an excellent way to earn money. However, they do require an initial financial investment.
Measuring Cash Flow and ROI
As an investor, you need to be prepared to spend a little money before you earn anything. The properties worth having as good investments and wealth-builders do not always produce a positive cash flow in the early years of ownership. This is especially true if you’re paying a mortgage on the property. The ownership costs and the mortgage payments will not be completely covered by the rental income you’re collecting. You need to be prepared to spend a little money on this investment when you’re committed to your long term financial and investment plan.
There is good news. Over time, your ongoing financial commitment will reduce. Rent will increase to the point that your monthly expenses are covered. And, if you hold the property long enough, the mortgage will eventually be paid off, and you’ll own the property free and clear.
Think of Rental Properties like a 401k
Investment real estate is like a 401(k), only better.
With a 401k plan, you put money into your account each month and over time you expect its value to increase. This becomes a significant part of your financial plan. The same applies to your rental property. When you first become a landlord, you will put money into your property each month. Over time, its value increases and your financial asset will eventually generate a monthly income for you.
Rental Property Investment Benefits
Once you get through the early years, there are a number of benefits to owning your rental property. Capital appreciation, for example, will bring higher property values over time. When the asset you bought for $150,000 is eventually worth twice that amount, you’re going to make some money.
You also begin to earn more cash flow. The rental income provides a monthly income even after the ongoing expenses are paid. This income is usually stable and predictable and since everyone needs a place to live, you can depend on it during good and bad economic times.
Rental properties serve as a great hedge against inflation. Over time, inflation erodes the value of money. But rental property is an asset that protects you against the inevitability of inflation because property values and rents typically increase during times of inflation.
There are a number of tax benefits associated with rental property. You can write-off the interest on your mortgage, insurance, property taxes, maintenance, repairs, and legal and professional fees. The government also allows you to depreciate your investment while you own it, which reduces your taxable income. When you decide to sell, another tax benefit is you’ll be taxed at lower long-term capital gains rate.
Another really cool benefit of investment real estate is the ability to sell the property to purchase another property and defer income taxes. When you buy or sell a stock or mutual fund outside of a retirement account, you have to pay taxes on your capital gains. With investment real estate, you can perform a 1031 Exchange and defer the income taxes.
For example, I recently sold a two-bedroom bungalow in the urban core of Tampa that was expensive to insure and maintain. I exchanged it for a modern four bedroom home in the suburbs with lower insurance and maintenance costs and higher rents. So, I have higher cash flow. The 1031 Exchange is a powerful tool you can use to optimize your real estate investment portfolio over time.
Real estate is a tangible asset. Compared to stocks or mutual funds, where you are a minority investor, a rental property is a physical and tangible asset and you are the boss. You get to decide how best to operate it.
Don’t be put off by the investment you have to make early on in your career as a landlord and rental property owner in Tampa. Real estate will make you money, especially if you invest for the long term.
We’d be happy to tell you more about what it’s like to invest in Tampa. Contact us at Hoffman Realty.