Five Reasons to add Rental Properties to Your Investment Portfolio
This will put more money in your pocket
One area that usually gets overlooked is investing in real estate. A lot of people talk about investing in the stock market which has had an interesting year in 2020. Investing in the real estate market has just as many financial benefits if not more.
Personally I invest in real estate and have for the last 15 years and love this investment. There are very few ways to earn passive income and this is a tremendous gamechanger.
Don’t Confuse this with REITs
For real estate investing, I am referring to buying a real estate property and renting the property out to a tenant. The property can be a single-family home, duplex, triplex, fourplex, or an apartment. Some real estate investors buy commercial properties and lease them to businesses.
Real estate investing is a great addition to anyone’s portfolio. They are worth a look if you want to add passive income to your portfolio.
What is a REIT?
Yes, some people prefer investing in Real Estate Investment Trusts or REITs to say they are investing in real estate. But are they really?
Investopedia says:
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments — without having to buy, manage, or finance any properties themselves.
I am not downplaying the benefits of investing in REITS but pointing out they are not the same as investing in rental properties.
REITs are similar to a Stock
To me, investing in a REIT is the same as investing in a mutual fund or an ETF but they have benefits like a stock. You can buy or sell REITs just as you do stocks. You can log into your brokerage account and make the trade in a matter of seconds.
REITs invest in several different markets in the world of real estate. In a single REIT, you can invest in a pool of single-family homes, commercial properties, shopping malls, and so on.
REITs Pays You Monthly or Quarterly
When you invest in REITs, you also get a dividend that is paid to you monthly or quarterly.
Investopedia says a Dividend:
is the distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock by the ex-dividend date. Dividends may be paid out as cash or in the form of additional stock.
Instead of receiving rental income from a property when you own a rental, you receive dividends from REITs.
Of course, you have to do your due diligence to make sure you invest in the right REIT. This year, REITs took a pounding as the corona virus affected this market quite heavily. Many REITs dropped or lower their dividend which hurt investors.
I like REITs but love rental properties more. Let me point out a few of the benefits of this investment.
Why Rental Properties
When you invest in a rental property, it is similar to when you buy a house but there are a few differences. For one, you’ll most likely get charged a higher interest rate from your lender. So don’t expect to get the same interest rate that you do that are advertised by your local bank. Because this is an investment, banks don’t want to take on this risk so you’ll get charged a little more. So make sure you do your due diligence and research if you plan to own rentals.
You’ll Start to Love the Taxman
When you own rental properties, this is one benefit that I really like. There are so many tax deductions available that you can claim that you wouldn’t if you owned a personal property.
- You can deduct the rental property taxes just as you would for owning your own home.
- You can take the tax deduction and depreciate the rental property.
Investopedia says:
Rental property owners use depreciation to deduct the costs of buying and improving a property. Depreciation starts as soon as the property is placed in service or available to use as a rental. Most residential rental property is depreciated at a rate of 3.636% each year for 27.5 years.
3. If you hire a property manager, these costs are tax-deductible.
4. Any repairs or upgrades are made on the rental property are tax-deductible. These repairs have to be made while the property is a rental. The use of a contractor or repair person is also tax-deductible.
5. You can turn visiting your property into a business trip and get a tax write off. When you visit your property, you can write off most of the trip. So if you live in New York and own a rental in Hawaii, you can turn your trip into a business trip. You can write off the airfare, hotel, some business meals with your landlord, and travel to the rental.
Treat this like a Business
Just the tax deductions and benefits alone make a dent in your tax bill. When you own real estate, you essentially own a business and should treat this like a business. Owning a business offers you so many benefits as compared to a person who works a 9 to 5 job.
These tax benefits are written in the IRS tax code. With a smart accountant, you can use these to your benefit.
I have never taken a formal tax class but paid for a tax program over a decade ago at a Robert Kiyosaki event. Robert Kiyosaki wrote Rich Dad Poor Dad and several other books and courses. This was probably one of the best classes I have paid for since I saw a return of 10 times the value of the course. I normally hand my accountant a huge stack of papers when I file my taxes.
If I owned a lot of REITs, I wouldn’t get the tax benefits as I would for owning rentals. This is something to consider if you decide to go this route.
The Tenant Pays Your Mortgage
Owning real estate rentals is all about the numbers. Instead of you paying down your mortgage, your tenants are paying the mortgage. If the numbers don’t make sense, then you are not benefitting as much from owning the rental property.
The idea is to get the tenant to pay their rent which covers the mortgage, taxes, insurance, and property management fees if you use one. Of course, you should have an emergency fund for periods when your rental is vacant.
Try to keep your personal bank account separate from your business bank account for your rental. If you don’t have this setup, you should work towards it. Investing in real estate is a great way to increase your networth.
You may hear horror stories about investing in real estate. I won’t lie, you will get a bad tenant once in a while or have to replace items in your property. The idea is to screen the tenant as best as you can. If you don’t want to, you can hire a property manager to do the screening for you.
I think having a property manager takes a lot of pressure off of you and leaves you with a good nights sleep. Some people like to count all of their money and would rather do it themself which is fine. Personally, I’d rather not and have no complaints. This gives you more time to do other things than worrying about calling a plumber on a Friday night. That’s a great job for the property manager.
Do you have or plan to invest in real estate?
Check out these other articles that cover real estate investing:
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
