If you’re considering investing your income into a valuable asset, then investing in income property might be a smart move to consider. Sure, there are other investments you can put your money into like mutual funds, stocks, bonds, businesses and so on, but investing your hard-earned money into income property is almost like having job security, real estate is a huge business that will always be around.
Income properties come in various shapes and forms, but they are put in place in order to earn money. Real estate income properties include residential housing, single family homes, multi-family properties, and of course, commercial properties. But how do you make money investing in such properties? Either by renting out the building, renting out some space on the property, or selling the property after its value has increased. A popular income property investment is buying real estate, ‘flipping it’ meaning fixing it up, and then outright selling it after the work is done to it.
Below are five reasons why investing in income property can prove to be beneficial to your lifestyle and your financial future.
1. The Decisions are Made by You
With investing your money into an income property, you become the boss of that property and get to make all of the decisions regarding what to do with it and how to do it. Investing allows you to choose the property you want to invest in, it gives you the freedom to choose who, if anyone you want to rent or sell it to, the amount you rent or sell it for, and the management of the property becomes your responsibility. You are also in charge of maintaining the property.
Essentially, you become your own boss when investing in an income property. In corporate America, you work for and answer to someone else, but in this scenario, other people like contractors and tenants answer to you. While it may seem like a lot of work to be the boss of an income property you invest in, when done correctly, you will reap all of the benefits of your decision including a great financial future.
2. You Can Enjoy the Property’s Appreciation
One of the nicest aspects of buying an income property, that makes it a unique investment, is that you do not have to use all of your money to do it. You can use a small amount of your own money and borrow the rest from a reputable lender. There are times that a lender will lend you up to four times as much as the property’s cost. When this is done, it is known as leverage.
Many experts say that you should only use your own money to invest in the property, and are against obtaining a loan for it. This is a choice you must make yourself, if you do not have enough cash on hand to buy the property outright, you can always reconsider the investment. But know that there are other options out there for you, and borrowing the rest of the money is just one of the many.
When you purchase a property using more debt than equity, the property becomes highly leveraged. An example of this is as follows:
Let’s say that you invest $10,000 out of your own pocket, then borrow $90,000 from a lender. Your out-of-pocket money and the lender’s money adds up to $100, 000 when combined. Now you can purchase a $100,000 asset/property.
So now, you have $100,000 to invest in a chosen piece of an income property. Every year for the next 10 years assume that your income property’s appreciation goes up 5% per year. This is where the leverage offers you its benefits because the appreciation percentage is on the entire $100,000, not just the $10,000 you invested out-of-pocket. By year ten, the value of your property will then be $162,589. As you can see, the value of the property you originally invested $10,000 of your own money in, has increased almost $63,000, a nice little profit for you. Thank goodness for leverage.
3. Rental Income is Real Money
If you plan on renting out your income property to renters/tenants, the rent that you charge will put extra money into your pocket. Be sure to put aside some money from the rental income you receive for maintenance, vacancy costs, and any other costs associated with being a landlord. Once you put money away for these expenses, the rest of the rental income will fatten your pocketbook nicely.
Be sure to keep in mind that there is often a high turnover of tenants when it comes to rental property. A sure thing to keep in mind is whether or not you can afford the mortgage on the property should it stand vacant for long or short periods of time. With your original purchase of the property, if you do not believe you are able to pay the mortgage when you have no tenants to collect rent from, then you may need to decide against investing in the property in the first place.
4. Having Tenants Helps With Paying Your Mortgage
Should you decide to rent out all or even part of your income property, it is good to know that the rent that your tenants pay can help you pay the mortgage on the property.
When obtaining a mortgage, the most common ones are 15 or 30 year fixed rate mortgages. A fixed rate means that your interest rate will not change, it will stay the same throughout the entire term of your mortgage. This also means that you have 15 or 30 years to pay off the mortgage in its entirety, and having tenants who pay rent can help you do this. As a general rule, in the first 14 years of a mortgage, most money paid on it goes to the interest of the mortgage instead of the principal. By the time your mortgage hits the 15-year mark, half is paid to the interest and the other half is paid to the principal, it’s a 50/50 split.
What this information comes down to is that the longer you keep the property, more of the principals is being paid down by your tenants, and you are creating more money for yourself.
5. Tax Write-Offs
The phrase ‘tax write-offs’, can bring a smile to anyone’s face, but most especially to the face of an investor who chooses to lease out their income property. There are numerous write-offs that rental property owners are eligible for.
Interest on your mortgage
Interest on any credit cards used for purchases that were made for the property
Legal and Professional Fees
Home office expenses provided certain requirements are met
Depreciation value, provided certain requirements are met
There are other tax write-offs for landlords not listed here, so be sure to speak to your tax professional to find out all of the writes offs you could be eligible for as tax rules change regularly.
Other Things to Consider When Investing in Income Property
Diligently research the income property you are considering investing in. In other words, look before you leap and gather as much information on the potential investment as possible.
Consider paying with cash only, not borrowing from a bank or lender.
Be sure to plan out all of your expenses or possible expenses you may need for the income property in the future.
Think in terms of a small investment, perhaps a single story house or a duplex, with a basement you could use as living quarters. Then be aware that you will be living in the same building as your tenants. Save investing in larger investments like strip malls or commercial businesses until you get your feet wet and your finances increase and you get the hang of being a landlord and the boss.
Do not invest in the first property you look at, always consider your options and look around for something that could be better or more satisfying to your needs.
The five simple steps outlined here for income property investments should be used as a guideline for when you set out on your investment adventure. Feel free to adapt them to your personal or business needs, but keep them all in mind when you begin your journey.