Owning a rental property can be a good investment vehicle, depending on the market in your area. Being a rental property owner allows you to invest in your community by providing good quality housing, and your rental property can also become an asset that will generate income for your and your family in the future. If you are considering buying a rental home, here are three main ways your investment can provide for you financially in the future.
When you buy a home to rent out to tenants, you can have a passive cash flow income from the property's rent it generates. A profitable rental property is one which bring in more rent than the property's expenses.
Be sure you find a property that is selling at a price where your loan on the property, its taxes, repairs, and property insurance are less than the monthly rent you collect from your tenant. Even if you end up with $20 excess from rent after you pay the expenses on the property, your property is providing cash flow. Over time, the rent rates in your area can increase and you can lower the payment when you refinance the mortgage, so your positive cash flow each month will increase.
Buying a home to have as a rental property also allows you to write off a great deal of your expenses on the property as tax deductions. Any tax deductible expenses related to owning a rental property will help to reduce the amount of your taxable income, so at the end of the year you pay less in taxes or likely get a great deal back in a tax return.
Expenses you can deduct includes items, such as the interest on your mortgage, the property taxes, home owner's insurance, any commissions paid to a rental property agent, expenses for maintenance and cleaning, mileage driving to and from the property, and advertising costs. Be sure to keep track of these itemized deductions with receipts so you can account for them during your tax filing.
You can also financially benefit from rental property ownership when you sell the property at a profit. At the closing of the sale, any money you make off the property's increase in value is considered a capital gain and you are normally required to pay capital gain's taxes on it.
However, if you reinvest the money in a new similar property you can defer paying the taxes on the gain. This process of rolling over of the profit is called a 1031, or like-kind exchange. By putting the profit from the property sale into a new rental property your mortgage costs on the new property are reduced and can potentially increase your profit from the rental income.