If you are considering investing in real estate, then you are in luck. Homeownership rates are at their lowest levels in 50 years. This major shift away from homeownership can be attributed to several factors I will discuss in this blog.
Renting offers the kind of flexibility that younger Americans appreciate. This flexibility allows them to delay certain decisions such as starting a family or marriage that may precede buying a home. Apart from this, buying a home is not affordable for many renters. This is because home values and incomes have risen disproportionately. As a result, millennials are renting for longer periods. Equally, the number of baby boomers staying in the rental market has also increased. All this points to the fact that the U.S. rental market is at an all-time high. With owner households lagging behind renter households, it’s a great time for investing in rental property.
Here are six of the main reasons to buy and hold rental properties.
1. Investment Diversification - investing in real estate will allow you to diversify your portfolio. Properly diversifying your portfolio allows you to balance risks of losing money in one type of investment, such as stocks or bonds. Diversification also has the potential to help you take advantage of positive market swings.
2. Control - owning rental properties gives you control over your business. You will be responsible for your success or failure. If values drop, you can choose to wait it out or improve the property to drive the value back up. If the rental property gets more competitive, you can compensate by increasing your advertising. In other words, you get to control your financial future.
3. Sweat Equity - maintenance and upgrades will undoubtedly push your property’s value up. For example, landscaping the yard, renovating the interior, adding a new siding, and repainting the home will add value to the home without breaking the bank. This not only increases the property’s value, it will allow you to charge more rent. This has the potential to give you nice dividends by adding value to the property.
4. Appreciation - even if you don't improve the rental property, you stand to gain from an increase in value over time. However, this is dependent on various factors such as the property’s location. In the Boulder area, we are currently seeing between 8% - 10% per year in annual appreciation. Check your local area's trends on appreciation rates.
5. Tax Benefits - there are a variety of perks that property owners enjoy. You may enjoy tax deductions when owning rental properties including legal and professional services fees, insurance premiums, employee and independent contractors wages, home office expenses, repairs and travel. Starting in 2018, the Tax Cuts and Jobs Act will qualify you for a new pass-through tax deduction. We always recommend speaking to a CPA before making any assumptions about tax write offs.
6. Rental Income - this is perhaps the most obvious one. Owning rental properties will allow you to have a direct income stream. For example, if you have a rental unit that you rent out for $1,200 per month, that unit will gross $14,400 into your accounts each year when fully occupied.
For the entrepreneurial-minded investor, owning rental properties is one of the best ways to build wealth. However, as with any other business, a thorough research is necessary prior to venturing into the business.
Marina Gorbounov is the owner of Evolve Real Estate and Property Management, a full service real estate brokerage in Denver, Colorado, representing sellers, buyers, as well as rental owners in the Denver, CO area. If you’re thinking of buying or selling a home, Evolve Real Estate and Property Management in Denver is your one-stop solution. Marina can be reached at firstname.lastname@example.org.