Assets that make money for you without requiring the constant investment of your time or physical presence are the bedrock of any strategy for achieving financial independence. Acquiring these assets should be the first step for anyone truly committed to building personal wealth. This is the approach used by the majority of the rich and powerful.
But as an investor just starting out, finding the right assets to put your money in can be challenging. Everywhere you look, there is a new investment option being peddled with the promise of making you tons of money within the shortest time. How do you navigate the noise and avoid losing your hard-earned capital to some foolish scheme?
The simple rule is to follow what has worked for investors in the past and continues to work for new investors today. On that score, no other investment has a long history and better track record than real estate investing. Owning real estate – rental properties, in particular – is one of the most trusted strategies for building wealth that will last through many generations.
Why is investing in rental properties such a great option?
1. Passive income
The number one reason you want to invest in rental properties is because of its ability to generate substantial income on a steady basis. Although real estate is not the only asset class that can generate passive income, no other asset generates income the way real estate does. Stocks can generate income in the form of dividends, but that income is often minimal, and does not come every month. Leenan Properties PM explains, rental properties generate monthly income in the form of rent. This income is sizable and reliable. Moreover, you can increase the monthly income from your property by updating the rental. You can’t do that with stocks, bonds or crypto.
Real estate investing gives you access to the kind of leverage not available with other kinds of assets. When you buy stocks, bonds or crypto, you are expected to pay 100% of the value of the investment in order to own it. That is not the case when you are investing in real estate. Because real estate is a tangible asset that will retain its value for decades, even centuries, lenders are willing to loan you the money to buy the asset. By providing just 20%-25% of the value of a
rental property, you can take possession of it and earn as if you owned it 100%.
Leverage offers a pathway for investors of all sizes to become property investors.
Real estate is not subject to the same volatility that stocks, bonds and crypto are exposed to. While the value of stocks can plummet in one week, on the back of unfavorable news, the value of real estate moves more slowly. Investors are less likely to lose their money to short-term fluctuations in the market. A second reason for the relative stability of rental property is a rental property is tied to a basic human need; shelter. Because real estate is a tangible asset and the
demand for it is based on actual needs, there is very little risk of the asset completely losing its value. Even if real estate prices fall in the short term, they always bounce back in the long run.
The value of rental properties always goes up for two reasons. Number one is the fact that real estate investing is based on the availability of land. Land is a finite resource that cannot be created; the amount of land on earth is fixed. That is in contrast to the second factor, population. While the quantity of land is fixed, the number of people who need access to land constantly increases. By the laws of economics, when demand is greater than supply, the value of the item
increases. You can expect the value of a rental property to appreciate; in a few years, you will be able to sell it for a lot more money than you paid for it.
5. Tax benefits
In addition to being able to make money from monthly rents and value appreciation, rental property owners can also make money from tax breaks. The government offers landlords incentives in the form of tax deductions on many of the expenses for a rental property. The list of items landlords can get these deductions on is extensive, and they include everyday things essential to the operation of the property. The money from tax benefits can make up a significant
portion of a landlord’s profits.
Are you looking to start investing in rental properties but are not sure where to start, we can help.
New property investors have to learn many new things in order to succeed. Jared Franczak & Associates will help you navigate the complexities of owning and profiting from your first rental property. Talk to us today.