Being a landlord has become easier with the rise of the Internet because there is always helpful information just at your fingertips. If you use property management services, being a DIY landlord is easier than ever. From finding and screening tenants to building a lease to maintenance, property management can be done in a simple, efficient manner.
Yes, buying an investment property is a large undertaking, but it is also immensely rewarding. Here are 7 reasons why you should take the plunge, buy investment property and become a DIY landlord.
1) High LeverageReal estate has high leverage. You can get a loan more easily for real estate than for other investment vehicles.
“Try walking into your local bank and asking for a line of credit for $800,000 secured against only $200,000 of your cash for the purpose of investing in gold, stocks, mutual funds, commodities, etc. They would probably laugh at you. But, if you walked into that same bank and told them you wanted to buy 10 houses at $100,000 a piece, they would usher you over into their mortgage division to begin working on your 10 loans.”
Getting financed to begin fulfilling your investment goals is easier when you invest in real estate. Part of the reasoning for this is that the return on your investment is more likely to occur.
2) High ROIHigh leverage and a high return on investment (ROI) go hand in hand. When you use borrowed capital for an investment, you are only using a small portion of your own money to invest in the property, which helps you get a better return on your investment in the long run.
Furthermore, when you rent to tenants, you expect their rent to cover not only marginal expenses, but also to pay off the interest payable on your loans. This allows your profits to exceed many other types of investments. You are ultimately expecting your profits to be made greater than the interest you owe, which increases your ROI.
This is also why real estate is considered to have a high payout over the long-term and is considered a “high-performing asset.” Essentially, the high leverage allows your monthly cash flow to increase, thus giving you a higher ROI. What’s more is that any appreciation on the property makes your ROI even higher.
3) Diversify Your Assets & High AppreciationOne of the first lessons you learn about investing is the power of diversification. In order to see real benefits without too much risk, it is smart to invest in many markets. Real estate is its own market and your asset is the property itself. Having real estate as an asset is beneficial because it appreciates over time.
Even despite recent crashes in the real estate market, it’s safe to assume some level of appreciation in the long term. The value of real estate can rise and fall, but it is considered a safer, steadier market, especially in the long haul.
Moreover, in real estate, you have the ability to research the market based on the location you want to invest in. You can learn the trends and make a more informed decision about the market, which makes for a less volatile investment compared to others, like the stock market.
Appreciation with real estate is also unique in that the money you invested in the property (or, your down payment) appreciates in addition to the actual asset. In other words, the entire asset is appreciating, and not just the initial money you put into it. For more information on how real estate investments are worthwhile.
4) Tax BenefitsOwning real estate allows for many different kinds of tax deductions, like the ones below:
- Interest: Landlords can deduct interest from mortgage interest payments on loans used to buy or improve the property. You can also deduct interest on credit cards used for goods or services used for your property.
- Depreciation: Real estate gives you tax benefits by way of depreciation if the property is providing you income. This way, landlords can deduct the cost of the property over several years.
- Repairs: The cost of repairs is deductible in the year in which they are done. For example, if you repaint, fix the floors, or replace any broken appliances, you can deduct these costs.
- Home office: If you work from home, which is common as a DIY landlord, then you can likely deduct home office expenses from your taxable income, provided you meet certain requirements. This is true whether you own your home or whether you are also a renter.
- Insurance: You can deduct insurance premiums from any insurance policy that has to do with your rental investment. This includes landlord liability insurance, flood/fire/theft insurance, or the cost of an employee’s insurance.
5) Ward Off Inflation: Rising RentsRising inflation is more easily combated in real estate than in other markets. This is because as prices rise, so will the value of your asset. When you use leverage to buy real estate at low interest rates, you more easily ward off inflation. Inflation endangers investments because it can lower the value of your assets.
But in real estate, you own an asset that “rises with the tide,” which is a great way to protect your wealth. The rise of rent means that you will be pocketing more money, which will be necessary as inflation makes all goods more expensive (like the cost of repairs and appliances).
6) Retirement IncomeReal estate investment is most valuable over the long term when gains can be seen from appreciation. That’s why real estate is a great platform for retirement income. Income on rental properties is considered passive income, meaning it generates money with less work compared to other income-generating jobs.
Of course, that’s not to say being a DIY landlord is perfectly effortless! The potential to retire on rental income is very real. The retirement strategy is this: own a property (or several) for a couple of decades, create a high net worth, use the cash flow to supplement a retirement fund, pay off mortgages using rental income, and sell for a cash intake when you want to.
7) The Decision to Sell: How and When to Exit the InvestmentReal estate is a good investment platform because you can sell whenever and however you choose. Although it’s recommended to hold onto your property over the long term, there are no fixed rules. You govern the decision on when you sell. You can also use different exit strategies to maximize your profits. The power is in your hands. Due to appreciation, you are likely to sell your property at a higher price tag than what you bought it at, which makes selling an exciting and profitable end goal to your investment!
OverviewWhile buying a property and leasing it sounds hugely beneficial (and it is), it’s important to keep in mind that you have enough resources before you begin. A common mistake DIY landlords make is underestimating the amount of capital it takes to renovate, cover unexpected damage, or unexpected legal/eviction fees.
It’s important to have a safety cushion of capital in case of unanticipated problems. Tenants don’t always pay rent on time, which can throw off your anticipated monthly cash flow. They also sometimes don’t take good care of a property, which means an added cost of repairing the property as needed. However, you can decrease the risk of renting to bad tenants by thoroughly screening potential tenants. What to look out for in rental applications to make sure you that you choose quality tenants.
Tasks like finding and screening tenants, building a lease, and other DIY landlord responsibilities are easiest when you use our services here at Rentalutions! Feeling the rewards of investing in real estate with less of a hassle is a big deal, and we can help make it happen.
Posted on December 30, 2015 by Kasia Manolas