6 Benefits of buying rental properties that you don't want to miss.
1. Cash flow
The most important reason for buying rental properties. Some people buy rental properties with poor cash flow, and hope that they'll either make even or appreciation will cover their loss. But you, as an educated real estate investor, should evaluate each property carefully to determine your CAP rate, return on investment and cash flow.
My strategy is if the property gives me good cash flow, I'll keep as rental property. If it does not have good cash flow, I just fix and flip it for a profit.
How to find real deals in Honolulu real estate market?
Related article: Invest in Leasehold Property for Cash Flow
2. Tax Deductions
The Federal government provides many tax benefits for rental properties owners. As a small business owner, you can deduct all operating expenses, such as property management fees, utilities, insurance, property tax, etc.
Another benefit that not many people realize. Say, you have a child attending college in Southern California and you purchase a rental property in San Diego. Each year you visit Southern California to check on your rental property, just to be sure your property manager is doing a great job. Each time you visit your rental property, you also visit your child. The whole trip can be written-off as a tax deduction as it is considered a business-related trip.
Ha...that's what I plan to do when my daughter goes to college.
We're not done yet. You also benefit from what is called "paper loss". Your rental property incurs depreciation, which you can write-off on your tax. This depreciation is calculated by dividing your property market value by 27 years. This is a "paper loss" because it is a loss that happens only on paper. Your rental property does not just vanish after 27 years.
This greatly reduces the income tax you pay each year.
Related article: Tax Deductions for Rental Properties.
3. Mortgage Reduction
This one is self-explanatory. As you, or should I say "your tenants", pay down the mortgage, you own less and your equity accumulates.
Related article: Pay Off Mortgage in 7 Years
Even though I listed appreciation as one of the benefits of buying rental properties, it should be looked at as the "icing" on the cake. Real estate market ebbs and flows, no one can guarantee that your local market would grow forever. So don't bank all your money on the property appreciation. The most important thing is cash flow. If you have a rental property that is giving you a positive cash flow every month, you're already making a profit.
5. Avoid Risk of the Stock Market
I'll let this South Park "It's all gone!" video explains the point.
6. The IRS Hobby Loss Rule does not apply to rental properties
The IRS Hobby Loss Rule states that business should make a profit in 3 out of 5 years, which means it's okay if you lose money the first two years during your startup, but by the third years, there should be some profits showing.
This is why rental properties make such great business. Rental properties are immune from the IRS Hobby Loss Rule.
With all these benefits, buying rental properties is like wealth building on autopilot. It's a no brainer!