Investing in Rental Properties for Beginners

If you’ve got some money to invest, putting it into real estate might be a good idea for you. It has worked for many of the world’s most wealthy people. However, if you don’t know what you’re doing, you could also lose your investment. There are several advantages to investing in rental properties that you might want to consider.

Rental properties provide you with immediate income.  While you will have expenses every month like a mortgage payment, as long as you have a tenant, you can expect on some money coming in. For the part of the income that is offset by expenses, you can also deduct it from your taxes. This means that someone else is paying your mortgage for you and you don’t even have to pay taxes on it. The only part you have to pay taxes for is the income that comes in, over and above the expenses. At first, most if not all of what you make will be going back out in expenses. This is ok, because you are building equity.

Another positive of rental properties is the appreciation that you will realize on the property.  Over time, your rental property will probably appreciate in value. This is money that can get whenever you eventually sell the property or if you decide to refinance. Refinancing is an attractive option as the money you get is also tax-free. You could use the money to invest in more real estate or whatever you choose.

Perhaps the most attractive aspect of investing in rental property is leverage. This is when you use OPM or other people’s money.  Let’s think about how this could help you out significantly. If you have $10,000 in cash to invest, could you buy a house by yourself? Probably not. However, if you find a bank that will loan you $90,000 dollars, you can now buy a $100,000 house that you only paid $10,000 for. Now the tenant can make the payments for you. Let’s say that the house appreciates 2% in a year, which isn’t unrealistic. You just made $2000 profit on your $10,000 investment or a return of 20%. Not a bad investment by anyone’s standards.

There are also several tax advantages to owning rental property.  In addition to the previously mentioned ones, you can also use what is called a tax-free exchange. When you sell the property, if you reinvest the profits into another property, you don’t have to pay taxes on them. There is paperwork that has to be done and you have to buy the property within a certain time period. It is usually well worth the savings, though.

While there are many positive factors in real estate, there can be downsides too. You’ll have increased liability and unexpected expenses. Replacing the flooring or roof can become costly if you aren’t prepared. It’s a good idea to save a little bit of money for repairs before you get started. Once you’re ready, jump in and get started. Find a property that works for you and invest.

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