There are up sides and down sides to owning an investment property, but those who do their homework and give their investment property the attention it needs can reap big dividends. Following are some benefits to investing in an income property:
You are the boss of the income property. You choose the property to invest in, what tenant you will rent to, how much you will charge in rent, and how you will manage and maintain the property as a whole. In the average job, you are subject to the wishes of your boss and the company infrastructure in general, such as a dress code. As your own boss, you can choose your hours and wear what you want.
Leverage, in layman’s terms, means you invest a relatively small amount of your own money and borrow the rest, often four to 20 times more, from a lender. If you purchase a property using significantly more debt than equity, the investment is said to be “highly leveraged,” which can result in huge appreciation profit.
Rental income is money in your pocket. Assuming that you are investing in an income property to occupy it with tenants, you will be able to receive rental income. Suppose you have one tenant. You charge that tenant $1,100 a month in rent. Your PITI mortgage payment is $700 a month. Thus, subtracting $700 from $1,100 will leave you with $400 that goes into your wallet each month, right? Not exactly.
From this $1,100, you will want to assume about five percent in monthly maintenance costs and five percent in vacancy costs. Therefore, you will put $110 into a designated bank account each month to deal with maintenance issues and potential vacancy costs. When all is said and done, you will have about $290 each month directly into your pocket.
Your tenants will amortize your mortgage for you. The most popular type of loan is a 30-year fixed-rate mortgage. It has an interest rate that will remain the same for the entire 30-year term of the loan. In the beginning of the loan, significantly more money is paid to interest than to principal, but by the year 15, it is close to a 50/50 split. Therefore, the longer you hold the property, the more of the loan principal your tenants are paying down and the more wealth you are creating for yourself.
You are entitled to huge tax deductions on income properties. You can write off interest on your mortgage, on upkeep and purchases for the property, the insurance, travel, and even your property taxes. The government also allows you to depreciate the purchase price of the property, even if it is actually appreciating in value.
Basically, if everything falls into place and you take care of business, you can make a lot of money from a rental property. It’s hard to argue with a direct income stream like rental
payments from an investment property, but you must keep the property rented at least 75 percent a year.
You can also gain from an increase in the property value over time due to changing demands in the area. Ideally, this value growth holds pace with inflation at a minimum. In addition, your sweat equity is likely to add additional value to the property as you maintain and upgrade.
The bottom line is that there are multiple advantages and benefits to owning an investment property, but there are an equal number of disadvantages. Do your homework, consult with your accountant (or financial planner), and make your decision based on all the pros and cons you have gathered and from those you know and trust.