5 Reasons an Income Property Is a Great Investment

There are endless ways to invest your money. One investment option to consider is an income property. This can be a great option for a number of reasons. Here are five benefits to consider.

What Is an Income Property?

An income property is just what it sounds like. It is a property bought or developed with the intention of earning income on it.

Income properties can be residential properties, such as single family homes or multi-family properties, or they can be commercial properties, such as a strip mall. Money is generally made through holding the property and renting it out or selling the property after the value of the property has appreciated.

1. You Make the Decisions

When you decide to invest in an income property, you become your own boss. You choose what property to invest in, what tenant you will rent to, how much you will charge in rent and how you will manage and maintain the property.

In the average 9 to 5 job, you are subject to the wishes of your boss and the company infrastructure in general. While investing in a stock or mutual fund gives you some freedom, in that you are able to choose the stock or mutual fund to invest in, you are still allowing someone else to manage and control your money.

2. Property Appreciation

One of the most unique things about investing in real estate is that you can buy it using a small amount of your own money, while borrowing the rest, often four to twenty times more, from a lender. This is called leverage. If you purchase a property using significantly more debt than equity, the investment is said to be “highly leveraged.”

 An Example of the Benefit of Using Leverage:

You invest $10,000 of your own money to buy a property and borrow $90,000 from a bank. By combining your money with the bank loaned money, you are now able to buy a $100,000 asset.

  • We will assume that each year, for 10 years, your investment property will appreciate by 5%. Here is where the ability to leverage benefits you. The appreciation is on the entire $100,000 asset, not only the $10,000 of your own money.
  • Example:
    Year 0: $100,000
    *1.05 (appreciation)
    Year 1: $105,000
    *1.05
    Year 2: $110,250
    …Year 10: $162,889

So, after 10 years, your property value would have increased by almost $63,000 dollars. Thus, you would have turned your $10,000 investment into over a $60,000 appreciation profit simply by using leverage.

3. Rental Income Is Real Money

If you intend to place tenants in your investment property, you will be able to receive rental income. Any money left after paying your expenses will be money in your pocket.

Suppose you have one tenant whose rent $1,100 a month and your PITI mortgage payment is $700 a month. Thus, subtracting $700 from $1100 will leave you with $400 to go into your pocket each month, right? Not exactly.

From this $1,100, you will want to assume about 5% in monthly maintenance costs and 5% in vacancy costs. Therefore, you will put $110 into a designated bank account each month to deal with maintenance issues and potential vacancy costs. When all is said and done, you will have about $290 each month going directly into your pocket!

Example:

 $1,100 (monthly rent)
-$700 (monthly PITI mortgage payment)
=$400
-$110 (for maintenance and vacancy issues
=$290 (your monthly passive income from the rental property)

4. Tenants Will Pay Down Your Mortgage for You

The most popular type of loan is a 30-year fixed rate mortgage. It has an interest rate that will remain the same for the entire 30 year term of the loan. In the beginning of the loan, significantly more money is paid to interest than to principal, but by year 15, it is close to a 50/50 split. Therefore, the longer you hold the property, the more of the loan principal your tenants are paying down and the more wealth you are creating for yourself.

Say you have a $90,000 bank loan with a monthly mortgage payment of $500. In year one, approximately $385 of this payment will go towards paying the interest, while $115 will go towards paying down the principal on the loan.

Example:

$115 (monthly principal payment) * 12 (months) = $1,380 (principal reduction for the year)
$90,000 (original loan)
– $1,380 (principal payments after 1 year)
= $88,620 (loan balance after 1 year)

By year 15, approximately $270 of the monthly mortgage payment will go towards interest, while the remaining $230 towards the principal.

$230 (monthly principal payment) *12 (months) = $2,760 (principal reduction for the year)

Every year that you own this property, you are using the tenant’s money to pay off your debt. By reducing the amount of your loan, you will be building wealth as you will eventually be able to access this money either by refinancing your loan or by selling the property.

5. Numerous Tax Write-Offs

As a rental property owner, you are entitled to huge tax deductions. You can write-off:

  • Interest on your mortgage.
  • Interest on credit cards used to make purchases for the property
  • Insurance
  • Maintenance repairs
  • Travel expenses.
  • Legal and professional fees.
  • Property taxes.
  • Extensive list at Nolo.com

Depreciation

On top of all of these deductions, the government also allows you to depreciate the purchase price of your property based on a set depreciation schedule, even if your property is actually appreciating in value.

Using our above example, you receive $3,480 in rental income for the year ($290 each month * 12 months). If you made this money at a regular job or in the stock market, you would lose a significant portion of it to pay income taxes. However, by owning a rental property, you can offset the $3,480 income with the depreciationexpense for your property, thus being able to reduce or completely eliminate the amount of taxes you have to pay on this rental income.

10 Benefits of Owning Your Own Home

Homeownership is a rite of passage many of us dream of. Owning a home means putting down roots and having a space that is truly yours. It’s a significant moment of your life when you finally own a home.

But owning a home can be daunting because of the responsibilities and obligations that come with it, combined with the initial process it takes to get there. When done properly, though, buying and owning a home is a process that limits your financial risk, increases your investment power, and saves you tons of money over the long term—and it can even save you money immediately.

Renting has little to no ROI. Renters don’t have to worry about maintaining a residence or paying the mortgage. But if you’ve been renting long term, chances are you’re already performing home maintenance on some level and you’re at your landlord’s mercy when it comes to major repairs. And when it comes to paying the mortgage, there are many advantages over rental payments, which don’t provide any return on investment beyond securing a place to live through the end of the month or lease.

How much is rent actually costing you? Consider the amount one pays over a 10-year period. A $1000/month rental payment adds up quickly to a whopping $120,000 over 10 years, when the same amount of money could have gone toward reducing 1/3 of the debt on a 30-year home mortgage by essentially making the payments to yourself instead of a landlord. Wow!

Here are 9 more benefits to owning your own home:

1. Homeownership is an investment. Unlike a car and many other purchases that decrease in value, a home is a purchase that appreciates over time. While each local market has its own unique factors, the national median home price goes up each year, even in times of recession. As you pay your mortgage each month, your debt amount goes down, while the value of your home continues to rise. This creates the buying and reinvestment power better known as equity.

2. Gain equity. When it comes to homeownership, investment and equity are directly related. As you make mortgage payments each month, part of the payment goes toward the interest, while the rest pays down the principal balance. Equity can be better defined as the part of the principal balance you’ve already paid, or the percentage of your home you already own. Paying the principal is like depositing money in the bank, because that money becomes available for reinvestment in the home itself or a new home.

3. Take advantage of tax benefits. The federal government encourages homeownership (which in turn encourages economic growth) by offering tax incentives for homeowners. The biggest one is the option to deduct interest from mortgage payments on your income tax return, especially at the start of a mortgage when most of the payment is applied to the interest. Payments on private mortgage insurance (PMI) and certain home-related purchases also qualify for tax benefits.

4. Stabilize your housing costs. A fixed-rate mortgage means you’ll have the same mortgage payment for the term of the loan (usually 30 years), while monthly rental payments will continue to climb. And even adjustable-rate mortgages (ARM) have a fixed cap on them. Homeownership also stabilizes other home-related expenses like utilities and gives you more control over your ability to make investments in your property that keep those expenses down.

5. Gain control over your living space. Renting doesn’t usually come with a lot of options for modifying your living space to better suit your needs. Renters with changing needs must also deal with changing residences. Homeownership means you can make improvements to your home, and home improvements usually lead to increased home value, both financially and in daily home life. The power of equity can give homeowners the extra financing they need to reinvest in their homes when cash funds aren’t an option.

6. Increase your own sustainability. Homeownership can help you create a sustainable future in many different ways. Long-term renters lack sustainability because a high percentage of their income usually goes toward housing expenses that are constantly increasing. Locking yourself into a mortgage payment helps level out living expenses, so when income goes up it can be budgeted elsewhere. Paying off a mortgage allows homeowners a long-term plan to significantly reduce their living expenses as they move toward a retirement budget.

7. Stop moving. Homeownership increases sustainability and stability. Moving from rental to rental is a major inconvenience and a financial and emotional burden. Renting can mean that you never really know where you’ll be living next or what your expenses will be. Staying in the same home allows a financial and emotional investment in both your living space and your community.

8. Social benefits. Staying put for longer periods of time also creates social benefits that range from friendships with neighbors to community involvement and consistent educational opportunities for children.

9. Use your investment to make another investment. The equity that comes from paying a mortgage is what allows many individuals and families to make future investments in the same home, a higher-valued home, or second home. A home equity line of credit helps homeowners use the part of their home that’s already paid off to obtain financing for investments apart from the home itself, such as purchasing a boat or RV.

Advantages and Disadvantages of Owning a Home

For many people, owning a home is the fulfillment of the American dream. For others, it is their worst nightmare. Purchasing a home is one of the biggest financial decisions you will make in your life. So, before you decide to buy, carefully consider the pros and cons of homeownership.

When you think about buying a home, many questions will come to mind. Do I really need to buy a home? Is my income going to grow? Will I stay in a home long enough to benefit from the purchase? Have I got enough money saved? Am I ready for the responsibility? Buying a home is a major financial move, so you’re wise to look carefully at the positive and negative aspects. Information in this chapter will help you examine the pros and cons of owning a home, based on your personal desires, future plans, and general financial position.

Advantages and Disadvantages of Owning a Home

Before buying a home, it’s important to consider how such a purchase will affect your finances and your lifestyle. It makes sense to review all of the advantages and disadvantages of becoming a homeowner before making this big commitment.

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What Are The Advantages Of Owning A Home?

  • Greater privacy.
  • Homes typically increase in value, build equity and provide a nest egg for the future.
  • Your costs are predictable and more stable than renting because they’re ideally based on a fixed-rate mortgage.
  • The interest and property tax portion of your mortgage payment is a tax deduction.
  • There’s pride in homeownership, which also closely ties you to your community.
  • Affordable options exist, like purchasing a lower cost manufactured home.

What Are The Disadvantages of Owning a Home?

  • Homeownership is a long-term financial commitment.
  • You’re responsible for all maintenance on your home. This can include inexpensive repairs like fixing a broken toilet to complex and costly repairs like replacing a furnace.
  • Owning a home ties you to your community, making it more difficult to suddenly pick up and leave a location.
  • Although mortgage payments are usually fixed, they’re generally higher than rent payments.
  • Buying a home requires a down payment, closing costs and moving expenses.
  • The value of your house may not increase – especially during the first few years.
  • Borrowing against your home equity, to help you with a debt consolidation, for example, can leave you ‘house poor’

Advantages and Disadvantages of Renting a Home

Depending on your financial situation and preferred style of living, there are many advantages to renting:

  • Renting a home can be cheaper than buying a home. Your payments tend to be lower than a comparable house payment. Also, your rent may cover utility costs (additional savings).
  • You have more flexibility when you rent. Most leases are for 12 months. So, if your job requires you to move frequently, renting can be a desirable alternative to owning.
  • Your landlord, not you, is responsible for performing nearly all maintenance and repair work on the property.

Financial Disadvantages of Renting

  • There is no tax break for renting. You won’t be able to claim any deduction for mortgage interest and property taxes when you file your tax returns.
  • Your housing costs aren’t fixed like they are with a fixed-rate mortgage. Your rent will most likely grow from year to year.

Owning vs. Renting

Own Or Rent Advantages Disadvantages
Homeownership Privacy Usually a good investment More stable housing costs from year to year Pride in ownership and strong community ties Tax incentives Equity buildup (savings) Long-term commitment Maintenance and repair costs Lack of flexibility Usually more expensive than renting High up-front costs Foreclosure
Renting Lower housing costs Shorter-term commitment No/minimal maintenance and repair costs No tax incentives No fixed housing costs No building of equity

Here are the factors to consider when comparing buying to renting a home:

  • Homeownership is not for everyone.
  • Homeownership requires you to have a stable or growing income.
  • Financial benefits of homeownership are long term. You should have a budget and savings plan in place before buying a home. Owning a home is a big responsibility.
  • Your credit score will impact how much you can borrow and at what terms. If you have substantial credit card debt, you may want to seek the help of a credit counseling agency and debt management program and pay your debt down, before applying for mortgage.

Next Steps

If you are interested in becoming a homeowner, you should consider taking an online homebuyer education course to learn how to prepare for homeownership and get a better understanding of the home purchase process. Learn about the home purchase process, including how to finance and afford a home for the long term.