5 Reasons You Should (or Shouldn't) Buy a Rental Property
Last Modified on 8/21/2020
When you want to invest in a rental property, there are five reasons that will tell you why you should or shouldn’t buy a specific home. This is your Myndful Minute, where we’ll talk about why an acquisition will make sense or not make sense to a real estate investor.
The first reason to consider whether you should buy a property is its potential for cash flow. That’s the difference between debt servicing, which is your mortgage, tax payments, and insurance, minus the rent you collect. The difference between the two is your cash flow.
New investors will often make this the entire point of investing. It’s a good thing to consider, but it’s not always necessary to cash flow a property right away. But, cash flow should factor into your decision about whether to make an investment purchase or not.
Equity capture is another thing to consider when you’re evaluating a potential investment. There’s the market value of the property and what you ultimate buy that home for. If the property is worth $100,000, and you buy it for $80,000, you have an equity capture of $20,000. That’s not money in your pocket, but it is an unrealized capital gain, and it counts as money you have in the property.
Equity capture isn’t the only factor contributing to your decision, but it’s a piece of the puzzle that tells you if this deal matches your rental property investment strategy.
Debt pay down
When you have a rental property that’s occupied, your resident is paying rent. That rent goes towards your mortgage, which means your resident is paying off your home loan. We call this debt pay down. If you own a property for 30 years and you have a resident that whole time, your resident will essentially pay for the cost of your property.
Statistically, there will be vacancies throughout the course of your investment process. But in theory, you should definitely buy a rental property if you think you can enjoy a high debt pay down benefit.
Depreciation is another factor. The government allows you to depreciate your rental property, and the standard is currently 27.5 years. Talk to your CPA or professional bookkeeper about what this means for you, and make sure you can legally and effectively depreciate the property.
As investors, we call this a phantom loss, and it allows you to offset any rental income that you earn on your property. This helps you with your tax liability, and it should contribute to your decision about buying a rental property.
The biggest driver of your decision to invest in a property should be appreciation. This is a huge reason to think about owning rental real estate. Over time, your property will increase in value. Historically, on the East Coast and the West Coast, property values double every seven to nine years. In the Midwest, values double every 12 to 15 years.
So, even if you buy a property in the middle of the U.S., the value of your property should double twice in the 30 years you may own it. When it comes to deciding whether to invest, this beats out cash flow. A big reason investors are successful with rental properties is that their investments appreciate. If you’re planning to hold your real estate investment for the long term, this is an important factor.
Thanks for joining us for this Myndful Minute. If you have any questions about purchasing and renting out real estate, contact us at Mynd Property Management.
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In the meantime, learn more about ways to start with a smaller downpayment here.