By now, you’ve probably heard that buying income property is a great way to invest your money.. However, has anyone taken the time to break down exactly what those benefits are, and what kind of skills are needed to get started?
Well look no further because you’ve arrived at a guide to investing in an income property that’ll help answer all those questions you’ve been wondering.
What is an Income Property?
An income property is exactly what you might imagine it to be. By leasing it out to tenants and creating rental income, or by selling it after it appreciates in value, properties can generate income for owners, depending on what exit strategy is selected.
Income properties come in all shapes and forms. They can be commercial or residential, ranging from business buildings to single family homes to multifamily apartment buildings. Some buildings may even feature both types of properties (commercial and residential), which are called mixed-use developments and have increased in popularity in recent years. Most landlords will generate rental income off of these properties for some time, and then will sell them once they appreciate in value.
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
The Benefits of Income Property Investment
Income properties have become a popular investment vehicle, and for good reason. Many investors enjoy the sense of having control over a tangible asset, instead of being subject to the ups and downs of an intangible asset, such as stocks, bonds or gold. The following are some of the most frequently cited benefits of income property investment, followed by a detailed explanation of each:
- Be your own boss.
- Make rental income.
- Benefit from value appreciation.
- Take advantage of numerous tax benefits.
Be Your Own Boss
Aside from the monetary value, buying income property provides you with the opportunity to be your own boss. This is your acquisition, your business endeavor. If you’ve been dreaming about running your own business and not having to report to anyone anymore, becoming a rental property owner might be the answer. Although you may not make enough income off of your first property to completely replace your current salary, you can gradually expand your rental property business until you can. Being your own boss means that you get to make all of the important decisions, such as what property to purchase, what tenants to rent it out to, for how much, and when the property will be refinanced or resold. The ultimate decision-making is up to you.
Make Rental Income
The obvious benefit to owning an income property is the potential for earning rental income. By leasing out the property to tenants, not only will you earn monthly rent, your tenants are contributing to your monthly mortgage payments and costs of maintaining the property. Many landlords will make the decision to only make money with rental properties if and only if the income will be more than the mortgage and additional maintenance costs, to ensure that they will end up with a monthly profit that they can bank. If this is your main objective, then be sure to have this rental property calculator handy so that you’ll know how to value income property like a pro.
Benefit from Value Appreciation
Income properties are so great because you’re really gaining access to a combined benefit between rental income and then value appreciation — this means you have two ways that you’ll be making a profit instead of just one. When the value of an asset increases over time, it appreciates. One of the major benefits of investing in real estate is that you can leverage a relatively small sum of money to invest in a property, which will appreciate in value over time. For example, let us say that you invested $100K in a property that was worth $1 million at one point in time. Over time, this property appreciates in value to, let us say, $1.5 million. This means that your initial investment of $100K has grown by half a million dollars, and most likely, you were also earning rental income the entire time. If you haven’t realized it already, investing in real estate can be a powerful investment vehicle.
Take Advantage of Numerous Tax Benefits
If you’re thinking about buying an income property, then you’ll want to know about all of the income property tax deductions you’ll be benefitting from as well. Some write-offs include, but are not limited to: mortgage interest payments, business purchases made for the property, insurance payments, various business costs such as maintenance, repairs and travel, fees paid for legal and professional services, property tax payments. Earlier, it was mentioned that purchasing income property is your opportunity to become your own boss. This means that you must treat running and selling income property as a real business. The benefit here is that you then get to enjoy all the tax benefits that other business owners do.
Tips for Investing in an Income Property
Not all income properties, or income property owners for that matter, are created equal. In order to fully enjoy the benefits and maximize your capital gains on income property, be sure to review the following tips below.
Assess your time and skills
When you purchase an income property, you automatically become a landlord, whether you like it or not. Before you even get started, do a brutally honest self-assessment. Are you ready to become a landlord? Do you have a good eye for detail? Are you able to develop a good “landlord personality,” where you can be friendly and approachable, yet firm and direct? Do you have the discipline to do your due diligence every step of the way? (This includes collecting rental applications, running background checks, calling references, managing lease agreements and collecting rent to just name a few.) Do you have the savviness to manage routine maintenance and repairs? If you answered no to any of the questions, do not despair. There are always solutions, such as hiring a property manager to execute the daily affairs of your income property. However, keep in mind that doing so can eat into your cost. You should first and foremost be sure that you are ready to become a landlord before you dive in.
Know your laws
Tenant-landlord laws are complex, and because of that, breaking the law as a landlord is unfortunately easy. However, claiming ignorance is no excuse and can lead you to a painful legal battle if you’re not careful. Be sure to review rental property laws in your city and state so that you can be fully informed. Laws include regulations surrounding items such as security deposits, evictions and fair housing.
Create an emergency fund
If you think your investment property will generate all income with no expenses each month, you should know now that it will likely never happen. You can certainly minimize your expenses as much as possible by staying on top of your maintenance and selecting the best possible tenants, but you are still guaranteed to have monthly expenses. In addition, you’ll want to plan ahead for sudden, unexpected expenses (roof leaks, anyone?) that will drain your budget. Experts recommend tucking away roughly 10 percent of your monthly rental income away in an emergency fund to help cover these unexpected costs so that you don’t suddenly find yourself in a financial hole.
Mind your due diligence
Before buying income property at any time, be sure to analyze, analyze, analyze. This means analyzing the current conditions of the real estate market, analyzing the trends of your local or target market, and microscopically, analyzing the numbers of the property of interest. You’ll want to make sure that current market conditions are favorable for investment properties, and that your property is located in a market that favors rentals. Markets that are favorable for appreciation are not necessarily always correlated with good cash flow. Although you do want your asset to appreciate over time, you’ll mainly be focused on whether or not your property will provide you with good cash flow. That’s why you’ll want to run your numbers by using this rental property calculator to make sure your investment is sound.
Common Income Property Questions
Now that you’ve become familiar with some of the key benefits of income property investing, along with some tips to keep in mind, you probably have some other questions and concerns that come to mind. Here we will address how to find a good income property, how to finance one, and whether or not you’ll be eligible for tax benefits. If you have any other questions, be sure to explore our vast library of real estate investing guides for all levels of investors.
Where Do I Find a Profitable Income Property?
Unfortunately, there’s no master list where you can just choose a profitable income property from the get-go. You’ll have to perform market research and evaluate certain factors such as location, economy, number of available listings, vacancy rates, and future plans for development. For example, you might start off by identifying a growing market where an increasing number of companies are establishing offices. Perhaps that market offers good public transportation and local amenities, such as proximity to entertainment, shopping and recreation. You may find that there will be an increasing demand for rental units by employees of these companies that have begun to relocate and cluster as they form a hub. Chances are, you’ve just found yourself a great rental property market that will provide some strong cash flow.
How Do I Finance an Income Property?
Unless you have access to a large sum of cash where you can purchase your first property outright, you’ll need to identify how exactly you’ll be financing your purchase. The great news here is that there are ways to use other people’s money in order to make your first investment possible. Some of these methods include traditional loans, private money lenders, hard money lenders and seller financing. Be sure to read up on financing your first investment property for a detailed breakdown of each. In some cases, you won’t need to invest a single penny upfront.
Will I Be Eligible For Tax Breaks?
Investing in an income property means that you are in fact a bonife property owner, meaning that you are eligible for any and all tax breaks available to any homeowner. Furthermore, you become eligible for additional tax benefits associated with being a business owner. Any and all expenses you incur in order to properly run your investment property is considered a business expense, which can be written off on your taxes.
If you’re considering buying income property it’s necessary to first weigh the benefits against potential downsides. However, keep in mind that any type of investment includes some risk and potential drawbacks. Many will argue that when investing in income property, not only will the advantages outweigh any downsides, that the advantages beat out those of any other type of investment.
What are some other benefits to buying income property that you’ve discovered?