4 Benefits of Buying a Rental Property

Real estate has always been a golden investment opportunity. While there is a perception that today’s real estate market is at a peak, buying a rental property is still a great long-term investment. Here’s how the real estate investment market looks today and the top reasons you should consider buying a rental property. 

The state of real estate investing in 2022

Real estate prices have continually risen over the past few years, save for a few months during the height of the COVID-19 pandemic. In general, real estate is a relatively safe investment that retains its value over time. New and experienced investors are now trying to make the most of this opportunity by choosing to buy a rental property. In early 2022, real estate properties spent less than half as long on the market compared to early 2017.

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4 reasons you should buy a rental property

1. Real estate retains its value over time

Many investors buy a rental property to supplement or replace existing sources of income. However, if you ever intend to sell your property, real estate retains its value very well—even in challenging economic environments. Median home prices in the U.S. continued to rise through the pandemic and this rise is expected to continue in the coming years. 

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2. Investors can expect relatively high returns on investment

Unlike more volatile investment opportunities, real estate investors can plan for most of their expenses and set rental prices to cover those costs and ensure profitability. When landlords buy a rental property, they can also capitalize on tax benefits to maximize their return on investment. Real estate’s relatively dependable income stream appeals to investors across a variety of risk appetites. 

3. Real estate helps investors diversify their investment portfolio

Experienced investors use asset diversification to protect their portfolios from price fluctuations and maintain returns during challenging economic conditions. Buying a rental property is a way to expand into a new asset category beyond the stock market and generate long-term ROI. 

4. New investors can secure financing relatively easily

New investors with limited funds should strongly consider buying a rental property. While real estate financing requires a down payment, mortgages allow investors to spread the cost of acquisition over time. Investors who recently secured a mortgage enjoyed interest rates that have been dropping steadily over the last three decades. And although interest rates are rising in 2022, forecasters see them stabilizing in the near-term.

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Downsides of buying a rental property

While rental properties work well for many investors, here are a few considerations to be aware of before buying a rental property. 

It’s not a get-rich-quick scheme

Rental properties offer an opportunity to build an investment portfolio that will reap benefits over a longer period of time, compared to more volatile and risky short-term investment options. Investors who have a tighter return window or higher risk appetite might want to balance their rental property purchase with more aggressive investments. 

It takes time and effort

Managing a rental property can require a lot of effort from investors. Landlords have to find tenants, address their concerns, and handle maintenance issues. This can be a significant time commitment, particularly for rental property owners who choose not to hire a property manager. 

It requires a large cash investment up front

Rental properties are relatively expensive compared to other investments, requiring investors to make a substantial down payment. Additionally, if investors don’t carefully budget for rental property expenses — including maintenance costs, landlord insurance, property taxes, and others — it can be difficult to maintain profitability. 

How to maximize rental income

As with any source of income, savvy management maximizes returns. Here are three ways to make the most of buying a rental property.

Use rental income to pay down mortgage debt

Some investors can be put off by the seemingly high cost of rental properties and consider mortgages a prohibitive financial commitment. However, rent payments from tenants should cover the cost of mortgage payments and other expenses of buying a rental property. Investors can consider the projected rental income for a property when planning their mortgage payments. 

Make use of all available tax benefits

Investors must always consider their tax obligations on any given investment and real estate is no different. However, savvy rental property owners can limit the impact of taxes on profitability by maximizing landlord tax deductions — from mortgage interest and depreciation to repair and maintenance cost deductions. 

Retain the maximum amount of capital gains during sale

Real estate, like most other assets, is subject to capital gains tax if asset values are higher at the point of sale than they were at the time of purchase. There are two ways investors can retain the maximum amount of capital gains during a sale. The first method involves using the proceeds from the sale of a property to purchase another. This is done through a 1031 exchange, which allows property owners to defer their capital gains tax obligation until the sale of the newly purchased property. 

The second method is loss harvesting. This method allows property owners who have made losses in other investments that would otherwise have been subject to capital gains to offset the profit gained from selling a property. 

The pros of rental property investments outweigh the cons

Recent economic challenges have highlighted the importance of investments that can hold their value over the long term. While there are some challenges to buying a rental property, investors can generally earn a steady income while maintaining an asset that appreciates in value. 

If you would like to learn how Azibo’s free solution can help you manage your rental income more effectively, sign up today.