Monday, September 21, 2015

7 Ways a Rental Property Can Increase Your Net Worth

Below is a great article about investment properties that generate positive cash flow.  My comments can be seen in red.
If you can find a property where the rental income covers the monthly costs, then you have a winning scenario.
Have you ever dreamt about buying a few units in the condo building downtown and converting them to rentals? Or that cute home near the college campus — just for investment and a side rental profit?
While rental properties do have pesky monthly costs and the sometimes-dreaded responsibilities of acting as a landlord, buying a rental property where rental income covers your monthly mortgage payments is a winning scenario. Here are seven key ways a property can exponentially boost its value — and your net worth!
1. Rental properties create cash flow
Cash flow is one of the cornerstone principles of all real estate wealth building, and rental properties create the opportunity for cash flow. A house or a building with multiple units can generate money each month that pays more than your carrying costs, mortgage, and expenses.
Multi-unit properties such as duplexes and triplexes typically make it easier to generate positive cash flow because there are more units to rent out.  It is almost like buying multiple houses with one purchase.  If you are a first-time homebuyer, FHA may allow financing on multi-unit properties so this could a smart way to get started off with buying your first house to live in and, at the same time, building your rental portfolio.  
2. Positive cash flow pays off your mortgage early
Positive cash flow is created when rent from your tenants exceeds your property’s expenses. Put simply, it’s the money left over each month after all your property bills are paid. Having positive cash flow allows you to pay off mortgages early.
Expert tip: Work to reinvest any positive cash flow to pay down your mortgage balance as soon as possible. The sooner you can pay off your mortgage, the sooner you’ll have checks coming to you, not the bank.
Although it is great to be debt free and have no mortgage obligations, current mortgage interest rates are extremely low from a historical standpoint. This means you may be better off investing that positive cash flow elsewhere instead of paying down your mortgage balance at a faster pace.  Please consult with a licensed financial adviser about this topic to see what makes the most sense in your situation. 
3. Other people’s money pays off your mortgage
Someone else pays off your entire mortgage for you. As you use the rent money from your tenants’ payments toward your mortgage, you are actually paying down your loan amount. Keep that property rented for at least 15 to 20 years and you can own that house free and clear without a penny more out of your pocket. It’s a simple, but brilliant, concept.
This is a great one.  I often tell my friends who rent that if they aren't paying their own mortgage, they are helping their landlord pay his/her mortgage.
4. Improving the property increases its value
Making the right improvements can increase your property’s value and protect you against downward swings in the market. Look to invest in properties where you can add equity and value by making smart, cost-effective improvements.
The key words are “smart, cost-effective improvements.” The average remodeling project recoups just 62.2% of its cost in added home value.  Here is a great article on the average cost and resale value of some common remodeling projects. 
5. Market appreciation boosts your equity
Market inflation and simple supply-and-demand economics also increase home prices over time. The combination of appreciation from improvements and long-term market appreciation is a huge bonus for rental properties. It’s a profit, equity, and wealth builder.
6. Tax advantages keep more money in your pocket
Another aspect of wealth building, from an accounting standpoint: It’s “on paper.” There are tax benefits to owning rental properties, which include depreciation, rental expenses, and mortgage interest deductions you can take each year.
There are great tax benefits to owning a home.  Please consult with a legal tax professional about this topic. 
7. Increasing rents increases the value of your property
When you improve your property, you can increase your rents, which in turn increases the value of the property again. It’s a wonderful cycle. If you buy a run-down property that was poorly managed and you improve it, you not only stand to significantly boost its value and your equity, but you’ll also boost its rentability. You will be turning an underperforming rental property into a gem that attracts quality tenants and higher rents!

Please note:  this post is for informational purposes only and does not constitute legal, tax, or financial advise.  Please consult with a qualified representative on these issues.