I was a 24-year old MBA grad know-it-all. I had life perfectly figured out and I certainly knew everything about investments. Working in the finance industry for a large multi-national firm, I often worked with high networth business owners. Much to my surprise, these multi-millionaires almost always invested in real estate and were generally seeking out new ways to capitalize on real estate opportunities. I was perplexed, didn’t these highly successful business men and women know that the paltry returns of real estate were minuscule compared to the stock market? I mean, I could show them many “Wall-Street” reports that concluded real estate was a really poor investment compared to stocks and mutual funds.
It was almost a full decade later that I would begin to seek to understand real estate investing in earnest. Thankfully, by this point life had taught me the importance of humility and, that much to my surprise, maybe I didn’t know everything. I began to quickly see that with real estate, the “cards are stacked in your favor.” You enjoy the tremendous benefits and advantages that the wealthy have throughout time. The economic structural systems and tax laws are designed for your benefit! I was excited and started learning as quickly as I could.
Rental properties have historically been the #1 wealth building strategy in real estate. You borrow money to buy your asset and then have someone else pay for the costs of your asset as you enjoy the benefits of appreciation, equity build-up, tax advantages, and cash flow. What a system!
Here are the 14 reasons you must consider owning rental properties.
1) Leverage (OPM)
The most powerful tool in real estate! You can typically borrow between 70% – 80% of the cost of the property and yet still receive 100% of the benefit of appreciation. OPM stands for Other People’s Money and is what helps fund your deals.
2) Someone Else Pays the Expenses
A good rental property is one where the rents paid by the tenant more than cover all of the expenses associated with the property and yet you still receive all of the benefits, including appreciation.
Typically home prices increase in value over time. According to the Texas A&M Real Estate Center, the median list price for a home in the Austin/Round Rock, TX MSA in 1990 was $72,252. In 2015 it was $260,000!
4) Loan Paydown / Equity Buildup
Even if you do not have much equity when you initially purchase the property, without contributing any additional capital you can build up significant equity. You get the duel benefit of using the rents collected to paydown on your mortgage while simultaneously enjoying appreciation. The house is now worth more in value than when you bought it and your loan balance is now lower than the original amount you borrowed. Over time, these two factors are significant!
5) Tax Benefits / Deductions
Most expenses associated with the cost of ownership can be directly deducted from any income you receive on the property. The tax benefits of owning real estate are extensive and are definitely worth exploring.
So even though as we discussed earlier home prices historically rise over time, for tax purposes you get to “depreciate” a certain percentage of the value of the rental property each year. Depreciation, which is an expense for tax purposes, serves as a powerful income shield.
Inflation normally has a very negative connotation for most people. As a real estate investor, you put the power of inflation on your side. As the cost of living increases, you concurrently increase rent. The loan payment is fixed and you are now paying back the loan with “cheaper” dollars. Inflation is a great ally for debt financed properties!
8) Yield (Passive Income)
One of the key problems facing retirees is where to achieve decent yield on their investments. Real estate offers incredible passive income once the note is paid off.
9) Positive Cash Flow in Interim
Until the note is paid off, a good rental still returns several hundred dollars a month in positive cash flow.
10) Hard asset / Less volatile
With real estate you have the security of a hard asset that you can drive by and inspect at any time of your choosing. Additionally, although property values can go up and down, real estate is typically less volatile than other asset classes.
11) Own Property Free and Clear at End of Note
If you have a positive cash flow rental, other than the initial down payment, the rents collected from tenants have paid for all of the costs associated with the property. Once the loan is paid off, you now have an incredible cash flow producing asset with no debt attached to it.
12) Easy to Refinance
As property values increase over time, rental properties are relatively easy to refinance. This allows you to pull out equity and move it into other great property opportunities as they come along. Your initial down payment on the first property could serve as the equity that springboards you into many others.
With rental properties you decide when you sell. This is critically important for any tax minimization strategy. Additionally, by controlling the timing of a sale, you may also be eligible to capitalize on tremendously positive tax deferment programs like a 1031 Exchange.
14) Financial Freedom
This is the ultimate goal and what makes all of the hard work worth it! With long-term ownership of rental properties, you are able to create enough passive income that all of your living expenses are covered. You have no financial need to work at a job and have the freedom to pursue work (or any activity) for fulfillment.
As you can see from the list above, the economic structural systems and tax laws truly do benefit real estate investors! Is there any wonder why all of the successful, high networth business owners I came in to contact with utilized real estate as a wealth building tool? Real estate truly is an amazing tool you can use to transform your life!