Many real estate investors prefer either the immediate payout that comes from fix and flip investment properties or the substantial one-time return garnered from a construction project transaction. While both are solid strategies to generate income, another method is the buy-and-hold approach with rental properties that allows investors to net consistent, long-term passive income. Rental properties come in many shapes and sizes, from apartment units to entire homes, and can range in type when it comes to duration whether that be a short-term vacation Airbnb rental or a long-term dwelling. While there is certainly the obvious financial benefit of owning a rental property, there are a number of additional, often-overlooked reasons why you should consider a rental property for your next investment venture. The experts at Express Capital Financing have compiled the following overview to help you make an informed decision when it comes to planning your future.
Hedging Against Inflation
The current state of the U.S. economy has everyone thinking about the negative impacts of inflation. As the Federal Reserve continues to hike interest rates in an effort to rein in inflation, savvy investors are searching for assets to preserve value. The good news is that acquiring rental properties is a tried-and-true method of shielding wealth against the deleterious effects of prolonged inflation. Buying a rental property essentially locks in the property value as opposed to just allowing your cash to slowly erode in a savings account. And while fix and flips and large-scale construction projects offer an enticing fast profit, that money may end up being worth less than anticipated once the transaction is all said and done due to the currency not keeping pace with the elevated expenses associated with day-to-day living. Investors that own rental property avoid this conundrum by tying their money to an asset that simultaneously generates positive cash flow and appreciates in value, truly a win-win scenario.
Rental income can provide a steady stream of supplemental income that can be used for a retirement fund, paying off debts, or making purchases. The amount of rental income depends on market conditions and the quality of the property. However, when done correctly, rental properties can yield returns far exceeding those of the stock market or bonds.
One of the major pros of rental property ownership is the predictable stream of passive income these assets generate. Being able to rely on a fixed amount of monthly income being deposited straight into your bank account provides investors with the financial flexibility and independence to effectively prepare for long-term investments and accrue wealth. By earmarking these ongoing return on investments to cover the interest installments on your mortgage or to save up for a deposit on other income-generating rental assets, you can leverage this steady income stream to diversify your investment portfolio and set yourself up for success in the future. With housing inventory levels at an all-time low coupled with skyrocketing home values, rental properties are in high-demand and prospective tenants are willing to pay premium prices for the right property. Statistics show that the median monthly rent spiked over 20% this past year, coming in at over $2,000 for the first time in history.
Favorable Tax Treatment
The US tax code is generally quite friendly to rental property owners, allowing them to take advantage of numerous tax benefits that are not available through other real estate investment assets. For instance, a major tax incentive is that the majority of maintenance costs and operating expenditures that rental owners accrue can be written off on your annual taxes. That includes things like landscaping, repairs, insurance and property management fees. You can also deduct up to 27.5 years of depreciation expense to cover the costs linked to the normal wear and tear on the asset that may impact its overall value. If you eventually decide to sell your rental property, the transaction may be impacted by capital gains; however, the good news is that real estate investors can defer these expenses via a 1031 exchange.
A 1031 exchange, also known as a like-kind exchange, is a strategy available to rental property owners that allows them to defer capital gains taxes on the sale of one property by reinvesting proceeds from the sale into another qualifying investment property. This powerful tool can help investors more strategically manage their investments and overall tax liability.
The primary advantage of a 1031 exchange for rental property owners is that it allows them to defer a portion of property taxes on an ongoing basis, while still allowing them to use the proceeds from the sale to invest in additional properties. Additionally, 1031 exchanges can be used in tandem with depreciation deductions and other tax strategies to help maximize return on investment.
Pass-through business income is another strong incentive for rental property owners. This is a type of tax structure that allows rental property owners to pass through their business’s income and expenses directly to their personal tax return, as opposed to paying corporate taxes. This can provide substantial tax savings since the owner does not pay double taxation on the profits.
In order to qualify for pass-through business income treatment, rental property owners must be organized as a partnership, limited liability company (LLC), or S corporation. Generally, rental property owners will be required to file an annual business tax return in addition to their personal tax return.
The primary benefit of pass-through business income is that rental property owners are able to deduct certain expenses related to their rental activities, such as repairs and maintenance costs, on their personal income taxes.
The Time is Now
Ready to lock in a rental property to realize some of these outstanding benefits? The team of experienced financial professionals at Express Capital Financing are standing by to assist you in obtaining the capital you need to quickly close property transactions in a fraction of the time and hassle it takes than if you went through a traditional bank. Our innovative funding solutions are specifically tailored to accommodate the unique challenges of real estate investing. Contact us today to learn more about how we can take your investment plans to new heights!