From one of our favorite guest writers - Bruce Becker from SWBC - comes this well-written post about rental property and how it can fit your portfolio. Once you had a chance to peruse it, call us to Boost your plan forward.
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Let’s Buy Rental Property!
Happy Mid-Winter Everyone,
Believe it or not, last year 37% of all homes sold were acquired by buyers who didn’t live in them. U.S. home ownership has dropped to fifty-year lows. That’s a huge shift in American home buying demographics and surely an even bigger opportunity for us little guys to profit. Personally, I’ve owned rental property most of my adult life and for me it’s been as profitable as they say and really less headache than I thought. Maybe you too have rental property and are looking for more or just simply want to look into the possibilities of doing so…that’s what this month’s bullets is all about.
Why Buy Rental Property?
- Real estate is a key element in any financial diversification strategy, just ask your advisor. It’s the best inflation hedge out there, and inflation is coming.
- Leverage….$20,000 down buys you a $100,000 asset which, with a mere 3% annual appreciation, means your $20k grows to $36k after just five years. That’s a 80% return on your initial investment. Try that with stocks.
- Tax free cash flow….because of the depreciation and mortgage interest deductions, you should never pay taxes on cash flow and can wait for capital gains on the sale of the property in the future.
- Rising monthly income….over time, rents rise while your mortgage payments stay relatively constant. Give it twenty years and your retirement looks a lot rosier.
- Significant tax write-offs…mortgage interest AND principal, depreciation, repairs, improvements, even your mileage checking up on it are all deductible. Get creative for more ways to lower your tax bill!
- Many folks see it as an attractive way to save for retirement….steady monthly income plus future appreciation, all with a relatively minimal outlay.
- The demand for rentals is increasing dramatically. Millennials (now a larger group than Baby Boomers) still fear owning their own homes while rising prices deter those wanting to move up.
- Expanding your rental business by purchasing more properties or upgrading to duplexes and four-plexes can significantly increase your profits while keeping the hassle factor constant. More bang for your future buck.
The Downside:
- It takes effort to research, buy, and keep it rented. Record keeping is a must. Physically checking on it once a month, performing minor repairs, etc. will take time.
- You may get a bad renter (oh, the horror stories, right?). Personally, I have avoided that entirely by only purchasing nicer properties in nicer neighborhoods with rents only affordable by middle to high income renters. It works.
- Unexpected major repairs. This isn’t usual though if you stick to my suggestion above.
- It takes 20 – 25% down to get in the game. For most of us, that’s a significant amount of free cash needed. You could borrow from your 401k or take equity out of your current home but be sure and work the numbers to see if that additional debt load doesn’t wipe out your projected monthly income.
- Property is not liquid, it’s a long-term proposition. It may not be the best choice if your time-line is less than five years for the money you put down.
Getting Started:
- Do your OWN research. Forget those ads for investment clubs and seminars, they only want your money. Here are a couple of great links I’ve found to get you started:
o “Buy a Rental Property Before Year-End: Why and How” https://www.entrepreneur.com/article/283025
o “How To Start Investing In Rental Property” http://www.investmentzen.com/blog/how-to-start-investing-in-rental-property/
- Partner with a real estate agent, one that specializes in rentals or at least has a strong grasp of market conditions in the areas you’re looking.
- Get Pre-Approved for a mortgage. Right away. (That would be through me if you’re reading this.) Know up-front whether you have the FICO score, DTI and asset reserves to qualify beforehand. More importantly, your lender can objectively guide you each step of the way with affordability analyses, financing options, and buying tactics.
- Work the numbers…your spreadsheets, comps, etc. This is a business decision, not an emotional home buying one.
- Pull the trigger…buy it!
Next month we dig into buying a new home. Jess and I are consolidating homes this year so we have two to sell and one to buy. Join us as we navigate these tricky waters.