Why Invest in Rental Property

The real estate investing infomercials of the housing boom suggest that real estate could make you rich - the benefit of real estate being exponential returns of your investment. While I only have a few small real estate investments there are a couple benefits to real estate compared to typical alternative investments like stocks or bonds:

Appreciation - Like stocks, real estate has the potential for exponential valuation growth during a bubble or other period that causing significant valuation increases.
Rental properties are a business - you can gain valuable business experience from maintaining a rental property if you don't have it already
Some Cash Flow Flexibility - while not a huge benefit, unlike stocks or bonds, being the owner of the rental property allows you to make decisions regarding managing cash flow to your benefit. Your household finances tight this year? Maybe you defer some expenses associated with your rental and maximize your cash flow during certain periods if needed or proactively invest in your rental when household finances wise your cash flush.
Consistent Cash Flow - certainly there are risks to the positive cash flow on a rental, but those risks are under your control. If managed well you could produce very stable cash flow.
Value Add - If your handy, real estate is one mechanism to turn your talents into a higher value investment with the goal to increase cash flow
Inflation Protection - Unlike a bond, rents typically rise on par with inflation rates so you have an added benefit of inflation protection.
Property Management - Translating time to $. Flexibility of turning your hours of time into cash by performing repairs and property management yourself.

Related in Rental Property:

2012 Passive Income: Rental Property (Feb 10, 2013) Its been several years since I did a thorough analysis of our rental property performance and investment return. Here is an analysis of our 3 rental properties for 2012 that should give a pretty reasonable view of how these investments...

Rental Property Investment Breakdown (Sep 27, 2011) Here is some overdue financial record keeping from our latest rental investment in August 2011. This breaks down all our out of pocket costs to purchase the property and get the 1st tenant in place. Out of Pocket Investment in...

Thoughts On Buying Another Property In This Environment (Aug 15, 2011) We recently put a contract on a property to serve as an expansion to our rental properties. We weren't looking to expand, but an opportunity popped up that was compelling enough for us to make an offer. As we have...

Comments (9)

What about taxes? I'd love to hear how it affected your tax return this year.

Posted by Jonathan | March 13, 2012 10:17 AM

You forgot two big ones - the ease of leveraging your investment, and the ability to write off interest, maintenance expense, mileage, etcetera! I love real estate.

Posted by Jonathan | March 13, 2012 1:10 PM

We once had a rental property, the most important thing is to get a good tenant, make sure to fully screen any potential renters.

Posted by PFM | March 14, 2012 8:36 AM

Rental property is a wise real estate investment as long as you have conscientious tenants who pay and don't ruin the place. In contrast, buying a primary home for personal use is a losing proposition and a liability, not an investment as maintenance costs, property taxes, broker fees/commissions, furnishing costs, energy costs, mobility costs and interest payments on the mortgage brutally eat into any return under normal circumstances.

One major correction. You said "Inflation Protection - Unlike a bond, rents typically rise on par with inflation rates so you have an added benefit of inflation protection." In fact, there are inflation-protected bonds, bond funds and Treasuries. These are called I-bonds, TIPS or VIPSX.

Posted by Steve | March 15, 2012 7:26 PM

Starting 2013 you will be taxed on rental income.

Good chance the mortgage interest and property tax write off is going away also.

If the foreclosures get turned into rentals present rents will drop like a rock.

Posted by Dave | March 19, 2012 2:59 AM

Dave, care to share your sources?

Rental income has always been taxable (hence its name "income") - it will continue to be in 2013 and I am sure after.

The ability to write off mortgage interest has been a discussion for years now. Whether and when it will be removed, can only be speculated. That said, mortgage interest on an investment mortgage is likely to stay since it is an expense tied to an investment. Your personal mortgage may be a different story.

Foreclosures have been consistently bought by investors and turned into rentals since the housing bubble burst. Yet many areas have recently seen rents start going up not down. There are many other factors to consider when trying to predict rental prices.

Investing in rental properties is not for everyone. It's a lot of work and could be very stressful. But hard work often pays off.

Posted by Mark | March 20, 2012 10:30 AM

"We once had a rental property, the most important thing is to get a good tenant, make sure to fully screen any potential renters."

Amen to this. If you have nightmare tenants, you are going to have nightmares.

Posted by Stevie | March 20, 2012 6:23 PM

Mark, part of the Affordable Health Care act - 3.25% tax on rental income starting Jan 1, 2013. The mortgage interest going away is part of Bowe-Simpson commission that will be part of the debt ceiling deal early in 2013 that was the reason the payroll tax was extended..

Posted by dave | March 22, 2012 3:58 AM

Dave, thanks for the clarifications, now I know what you were referring to.

You are right, part of the Affordable (not sure to whom) Health Care Act is an additional 3.8% medicare tax to rental income. That's in addition to the standard income tax one already pays. However, there are MAGI thresholds as well. It will only apply to individuals earning $200,000 or more and married couples earning greater than $250,000. That said, the entire healthcare package may still get thrown out, so who knows.

In regard to the mortgage interest deduction (MID), that's not finalized. There are several options that were proposed as far as I can tell:
- Limit MID to primary homes only
- Limit MID to primary and secondary homes and lower the limit to $500,000 mortgages (currently at $1M) and apply only to those making in excess of $200,000
- And completely eliminate MID

Those are just parts of the entire sets of tax reforms being proposed. Some other parts include income tax reduction, employment tax increase, a 12% credit, etc. Really hard to say what the government will do (especially since they can't agree on what to eat for lunch!).

Even with all of those proposed changes, I couldn't find anything that said mortgage interest changes would apply to rental property. I interpret mortgage interest on a rental as an expense that is directly tied to the rental income. Just like any other business, I would expect a direct expense can still be written off against the income it is used to generate.

But, hey, who knows. Many analysts predict no major changes to the mortgage interest deduction for the near future. And if MID is eliminated, we are likely to see housing prices take a pretty sizable haircut as home ownership will be significantly more expensive for an average person in after tax dollars.

There are many challenges ahead.

Posted by Mark | March 22, 2012 11:41 AM