After all, each investor has different personal and investment business goals and different tax liability based on their total income and other factors. We don’t really care about that. We care about how the investment will perform, and we leave it to the investor to see if it meets their goals and personal tax situation needs. The rental property investor is very interested in cash flow. It’s the primary reason for most of them in getting into a deal. Sure, the property should increase in value over the ownership period, and they can make a profit when they sell it. But, it’s that monthly check in the bank that’s the big draw.
The Calculation
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Other Benefits of Rental Property Investing
Cash flow is the big draw, but it’s only one of several great benefits available to rental property investors. There are more people every year converting some of their other asset classes, like stocks and bonds, to real estate. Mostly they’re into the rental property, and mostly single-family homes. It’s natural, as they have experience in single-family homes; they live in one. The average new investor is comfortable with single-family rentals, and most have rented either an apartment or home in their lives. So, they can more easily make the investment leap in that market. In fact, some find it quite exciting to go from past tenant to landlord. There are some great tax breaks in rental property investment. Of course, you can normally deduct all expenses for management, advertising, maintenance, and normal repairs. You can also deduct the mortgage interest. But, one really nice deduction comes without having to spend a dime cash out of pocket. It’s the depreciation deduction. The IRS allows you to take depreciation of the rental structure over 27.5 years. The land value must be subtracted out. This results in a few thousand dollars in deduction every year, but you never actually spend that money. So, it’s like Uncle Sam is putting money into your pockets. Always consult an accountant though. If you sell the property later you may have to give back some of this as recaptured depreciation expense. The rental property also is generally less risky than stocks. Though bonds can be less risky, they also normally have far lower yields. The return on investment, ROI, is much better with a rental property. These are good things to know if you’re going to discuss rental property investing with a novice. Everybody has to start somewhere.
