Are you on the verge of deciding to become an investor or make the decision to diversify your existing investments? Perhaps you have also zeroed in on real estate investing – rental properties specifically as the best asset to put your money into.
As someone just starting in real estate investing, what are the things you should know? What are the definite benefits of owning rental properties versus other types of assets? Do the benefits of real estate investing have the potential to exceed the benefits from investing in other assets?
This post makes a case for real estate investing as the preferred method for securing and growing your capital. In this article you will see why investing in rental properties is not just a strategy for increasing your personal net worth but a proven method for building generational wealth.
Using the booming real estate market in Scottsdale, AZ as a reference point this post explains why there is no better time to invest in real estate than now. If by the end of reading the article you are disposed to speak to a Scottsdale real estate agent or realtor, you may contact us.
Why you should buy a rental property today
Since around 2004, the rate of home ownership across the United States has been falling steadily. This decline in the number of people who are becoming homeowners currently stands at 9%. This is true all across the nation including in the Scottsdale, AZ property market.
What is responsible for the drop? It is clearly not the result of negative population growth; the US population is still growing at a fairly decent rate. What has happened is that home values are rising faster than income is growing, so fewer people can afford their own homes.
Secondly, people’s attitude toward home ownership is changing. The younger generation of Americans, in particular, place greater value on the freedom that comes with renting versus the security that comes from ownership. Hence, they are waiting longer to buy their own homes.
What does this mean for real estate investors? With more renters than homeowners in most locations in the United States, landlords are seeing greater demand for their properties. That’s because people still have to live somewhere even if they don’t want to buy their own house.
For the Scottsdale real estate rental market, demand is especially outstripping supply. More people are looking for homes to buy or rent than there are Scottsdale homes to sell or lease. This is partly because of the influx of people from areas like California, Colorado, and Illinois.
The benefits of investing in rental property
Two things to be careful about when buying a rental property are location and cash flow. The success of an investment property mostly depends on these two factors. If a property is in a good location and has positive cash flow, here are the benefits you can expect from that investment.
1. High leverage
No other investment offers the kind of leverage that is available with real estate investing. While borrowing to invest in stocks is discouraged, it is the recommended practice when buying investment properties. Property investors have the advantage of only needing to provide between 20 - 35% of the cash value of a property to control 100% of the investment.
2. A source of passive income
You can earn passive income from stocks, but that income does not compare to the income from rental properties. As the owner of a rental property, you not only determine your income (by setting the rental rate for your property and controlling your expenses), but you can also expect the income to be stable and substantial.
Owners of rental property have complete control of the operations of their property. Unlike when you invest in stocks or mutual funds, where you must rely on the expertise of fund managers and the company’s management, as a landlord you make the day-to-day decisions that determine the performance of your asset.
4. Value appreciation
There are two ways to make money from a rental property: rental income and value appreciation. Your property can increase in value as the result of market forces. For instance, homes in Scottsdale AZ are more valuable today because the real estate market in Scottsdale is very hot right now. The other way you can improve the value of a rental property is through forced appreciation. This is when you enhance the aesthetics and function of the property. You can’t do this with stocks or other asset classes.
5. Hedge against inflation
Investing in rental properties is the perfect way to protect your capital from the effects of inflation. This is because a rental property is like any other goods or services. As inflation pushes the prices of goods and services higher, it also forces the rental rate for the rental upward. This keeps the asset’s value from eroding as a result of inflation.
6. Tax benefits
One of the best rewards of being a landlord is the tax benefits attached to rental properties. A few of the tax deductions landlords are allowed to make on their rental property include operating expenses, mortgage interest, and owner expenses. You can also defer capital gains tax on the property and depreciate the property to recover the cost of wear and tear.
7. Grow your wealth faster
Other than your initial investment in the property – the down payment – you don’t need to put any more money into the asset. That’s because the rent paid by your tenants covers the mortgage payment and other costs. Furthermore, after 5 or so years of owning the property, you can use the built-up equity in the property to buy another rental property.
8. You can retire on rental income
Because the income from a rental property is stable, sufficient, and does not deplete the asset, you can build your retirement plan on the foundation of a portfolio of rental properties. This is a safer way to prepare for retirement than investing in stock, bonds, mutual funds, or other competing asset classes.
Managing your rental property
The major challenge of owning rental property is that this investment is not passive. Managing a rental property requires you to be present and hands-on. But you can make your rental property into a source of passive income by getting a professional property manager to oversee the asset.
The property manager brings their years of experience, allowing you to avoid the costly and sometimes inevitable mistakes new landlords often make. The property manager will not only take over the management of your property, but they will also make the asset more profitable.
This kind of arrangement is perfect if you are looking to buy a Scottsdale property, but you don’t live in Arizona. It is also the way to go if you don’t want the hassle of maintaining a rental property, managing the tenants in it, or doing any of the work necessary for the success of the rental.
By hiring a competent property manager, you get the best of both worlds: the benefits of owning rental properties along with the time freedom to do the things that make you happy. But the first step to getting all those benefits is buying your rental property.
If you have been playing with the idea of buying a rental property in Scottsdale, this is the time to stop thinking and act. If you need a trustworthy and competent Scottsdale real estate agent or realtor to guide you through the hot Scottsdale real estate market, talk to us today.Posted by Judy Orr on