Image of a newly renovated kitchen in a rental property.

Benefits of Owning Rental Property

Updated February 5, 2022 . AmFam Team

Is getting in the real estate rental market worth it? Learn about the pros and cons of owning rental property and the tax benefits that can help you make big profits!

Investment properties can be an appealing source of income, even to those who’ve never considered the idea of being a landlord before. Take a look at the reasons why purchasing and managing rental units and rental homes can make good financial sense. Learn how the benefits of investing in rental property can help you advance towards your long-term financial goals. 

How to Buy a Rental Property

Although there are differences between purchasing single family-homes for private use and buying rental properties for business purposes, the process is very much the same. From making an offer to closing the deal, the two have a lot in common. Here are reasons why investing in a rental property may be more familiar than you think:

You’ll still be able to benefit from real estate professionals

Just because you’re interested in purchasing a rental property, you don't need to find one on your own. Many realtors specialize in finding great rental properties for their clients. Do a little looking around and source a seasoned investment property realtor. They’re a source of knowledge that can have many benefits.

Selecting the right property will be familiar

Although there are differences between financing for a rental unit compared to a personal home, you’ll still look at the property through a similar lens — seeking that perfect blend of affordability, financial opportunity and potential resale value.

Fixer-uppers always have great potential

As much as you looked for great deals when you were buying your own home, rental properties that require a bit of an up-front investment are worth your consideration.

The Benefits of Investing in a Rental Property

If you decide to take the plunge and begin investing in rental property, you’ll find there can be plenty of great opportunities and advantages. These benefits include:

You’ll be generating a monthly passive income stream

Any financial analyst will tell you to consider your investments carefully. Much like investing in the stock market, the opportunity to create monthly income from your venture exists also as a real estate investor. Here are some of the winning ways passive income streams can help you.

Making the right purchase can increase your resale price

Because a well-placed investment will appreciate over the years, you’ll be making money simply by owning property. In addition to the cash-in-hand benefits that renting affords landlords, you may also see the equity in your property increase over time as well because property values continue to climb.

Benefit from property management groups to do the heavy lifting

If you’re seeking to generate passive income without much actual involvement, this is the way to go with your rental property. However, you’ll have to be willing to place a certain amount of your monthly earnings into the hands of property managers to deal with the day-to-day operations. If socking away some of that rental income without doing much is appealing to you and you’re not up for fixing plumbing issues in your rental units, this option’s for you.

You’ll get to leverage tax deductions and write-offs

Boost your cash-positive flow at the end of the fiscal year by taking advantage of all the various tax benefits that are available to you as a landlord. As a real estate property investor, you should consult with a certified public accountant to be sure your taxes, insurance, and other expenses you cite as write-offs are legitimate.

Here are a few tax deduction options to consider:

Write off the interest

Mortgage interest payments on loans acquired for purchasing or upgrading the property are frequently considered legitimate write-offs. They’re usually one of the biggest tax deductions a landlord will make. Because it’s considered a business investment, you may also be able to write off the interest on credit card purchases made for these same purposes. With interest rates continuing to escalate, this big deduction can really help you stay in the black.

Take advantage of depreciating real property tax laws 

Because buildings and other structures on your rental property don’t last forever, they’re typically considered, and you may be able to write off a certain percentage of their net worth over several years. Swimming pools, parking lots, storage buildings, garages and even off-site rental property offices may be included as well.

Repairs you make to the rental property are deductible 

The painting, replacement, or repair of elements in the rental unit like floors, roofs, gutters, etc. may qualify for a tax deduction.

Rental unit furniture, appliances and other items may also qualify 

A percentage of the cost of personal property that you leave on-site in a rental property may qualify for a deduction.

Remember the Pass-Through Tax Deduction 

Active through 2025, this special income tax benefit affords business owners a deduction up to 20 percent of net rental income or 2.5 percent of the purchase price of the property and/or other expenses like salaries for rental property employees. Check with your tax attorney or CPA for details.

Write off your insurance

With the IRS considering your rental property a business, you’ll benefit from being able to write off your landlord insurance and supplemental business insurances like commercial flood and commercial umbrella premiums.

Your renters pay down your principal

Because most rental rates cover the entire cost of the mortgage and related annual fees, you may be able to build wealth by simply owning the right investment property. Due diligence is required when selecting the right tenant, and hopefully you’ll be on your way to quickly seeing positive cash flow as your tenants pay down the principal for you.

Potential Problems with Owning a Rental Property

Owning any property is a solid investment, but that doesn’t mean that it comes without it’s own headaches. It’s important to be aware of some of the issues with renting out your property. Unless you’re using a third-party property management service, you are responsible for the day-to-day responsibilities of being a landlord.

Troublesome tenants

Just like anything else, there are ideal tenants and those that can cause problems. Tenant screening is of the utmost importance here. A security deposit and a background check can help with this issue. Also, don’t hesitate to ask a prospective tenant for the contact information of their previous residence. This can help fill in gaps left out by a basic background check. For example, did they have any noise complaints? Was their rent paid on time consistently?

Lack of liquidity

Real estate is not a liquid asset, and it can take several months to complete a sale. If you need to sell fast, you may not get the best price. Plus, you’ll still have to take the tax and fee implications of selling into consideration too. If you’re looking to flip property for a quick turnaround, rental property might not be ideal for you.

Maintenance costs

There are local, state and federal laws that regulate the conditions landlords must maintain for their renters and be prepared to abide by them. Many landlords keep several thousand dollars earmarked for repairs. The silver lining here is that all of these repairs are tax deductible. But since every state varies, it’s important to be well versed in your state’s laws.

Insuring your investment

When you purchase a rental property, getting the right insurance plan is of the utmost importance. Because, unlike insuring your personal home, the rental property will house people with whom you don’t really know. Unknowns can be unpredictable. That’s why having your real estate investment protected properly is essential.

Insuring Carefully Can Protect Your Major Investments

The right real estate investment can compete head-to-head with most Wall Street investment opportunities — and if done correctly — sometimes those dividends pay out a higher-than-average rate of return.

Buying rental properties can be risky, but by closely paying attention to the factors that impact profitability, you can help to reduce the risks and invest more wisely. Because the unexpected happens, having a smart insurance plan in place is just as important as shopping around for the best interest rate.

Contact your American Family Insurance agent and verify that your finances and investments are well-insured. There’s real peace of mind knowing that all you’ve worked so hard for is protected.

This article is for informational purposes only and includes information widely available through different sources.

This information does not, and is not intended to, constitute legal advice.

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