"The 5 Most Important Benefits of Real Estate Investing"
Despite the benefits of real estate investing, you may be wondering if the concept is really for you. It's a tough question, no doubt. The strategy doesn't execute itself. Somebody must analyze and coordinate purchase deals, manage tenants, fix toilets, etc. And that somebody is YOU!
The best advice I can give you is to focus on the endgame. Just like you can't earn a salary without paying income tax, you can't execute a long term investment property strategy without doing your landlord responsibilities.
Would you quit your job because you don't want to pay income tax? I would hope not. Would you ignore the benefits of real estate investing because you'd never want to unclog a toilet? Again, I would hope not.
I realize that small multifamily rental property investing is not for everyone, and so my job is not to tell you what to do. My job is only to present the info you need to decide for yourself whether investing in rental properties makes sense for YOU.
So without further ado, here are the primary benefits of real estate investing:
1. ABILITY TO EARN FREE EQUITY
One of the ultimate benefits of real estate investing is that your tenants will pay your property mortgage every month - plus all other rental property expenses. The result is a gradual decline in your mortgage balance, and a gradual increase in the property's equity, over time.
When you sell property you essentially cash-out all of this built up equity. This is what I mean by "free" equity. It's like an investment account that somebody pays into every month on your behalf, yet asks for nothing in return.
2. ABILITY TO USE LEVERAGE TO MINIMIZE YOUR CASH OUTLAY
This is also one of the top benefits of real estate investing. Leverage gives you the ability to "own" 100% of an asset even though you may only "pay cash" for 20% of it, for example. This makes investing in rental properties unique compared to most other investment options. For example, if one share of stock in XYZ Corporation costs $100, you cannot pay $20 to acquire it...you must pay the full $100.
Leverage serves to minimize your out-of-pocket costs, thereby making rental properties a great entry-level type of investment for the masses (i.e., people like you and me with little discretionary income to spare). And the power of leverage, combined with your cumulative free equity, will always generate an excellent cash-on-cash ROI when you sell. This benefit is likely why many, many self-made millionaires earned their wealth through real estate.
3. ABILITY TO REDUCE YOUR TAX LIABILITY
One huge benefit is that you will be allowed a multitude of rental property deductions - even financed expenses that did not come out of your own pocket in the first place! As long as you own your rental properties in a 1-person real estate LLC, all deductions will be included as part of your regular federal tax return, which will usually increase the amount of your tax refund.
This tax deductibility is really the icing on the cake when it comes to investing in rental property. You see, when you are an employee, your income is taxed, and then whatever is left over is yours to spend. With investment properties (or any small business for that matter), you essentially spend first, and then you get taxed on the balance.
It's an overly simplistic explanation for sure, but you get the point. Reduced taxes = more money in your pocket!
4. ABILITY TO (EVENTUALLY) GENERATE MONTHLY CASH FLOW
I hesitate to include this as one of the top-5 benefits of real estate investing because income is not the primary goal (the goal is to cash out when you sell in 10+ years). The best thing to do is to keep any monthly
in a reserve account for future purposes. The reserve account will come in especially handy when a tenant moves out, or when the inevitable surprise expenses come up – for example, if a pipe bursts or a hot water heater unexpectedly fails.
Your cash flow position will be tightest in the beginning, but will improve a little each year as you execute your plan to regularly raise rents and subsequently increase your rental property income, pay extra toward the mortgage principal each month, and manage property costs.
Then in a few years, you will probably see a small profit – maybe a few hundred bucks per month. Depending on your position at that time, you could choose to pocket the monthly income or put it into the business (pay down more of your mortgage principal, etc.). Either way, it's nice to have the option...just do not expect to have this option right out of the gate.
5. GRATIFICATION OF PROVIDING A NICE HOME FOR SOMEONE
While not one of the "slam dunk" benefits of real estate investing, this is worth mentioning nonetheless.
It's good to give back, even in a non-monetary way. Investing in rental property provides an opportunity to give back to the local community.
By improving or even simply maintaining your properties, you will improve the neighborhoods within which they are located.
Additionally, you can help out a family in need by providing them with a nice place to live. Please, do not be a slumlord. View your tenants as customers and strive to exceed their expectations. This way, everybody wins.
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