Some investors are going for straight monthly income. Others are looking at growing their equity over time. And taxes play a big part in your investment decision making, too.
To summarize the Reasons to Invest in Residential Income Properties:
- Cash Flow
- Principle Reduction
- Tax Write-Offs
- Easy to Get In To & Work With
- Easy to Grow & Leverage Your Capital
Here are the main reasons why SMART investors work with residential income properties, especially 1 to 4s:
First and foremost, if you are looking for a steady monthly income, residential income properties are one of the best investments out there. Residential real estate typically beats other types of investments, including savings accounts, certificates of deposit, the stock market, bonds, Treasuries, gold and currency trading.
The main factor to look at for maximizing your cash flow involves your total initial investment. This includes: down payment, closing costs and initial fixup costs. The more you put down, the less your monthly cost are going to be, mostly in terms of your monthly mortgage payments. This is great, but remember that putting down larger amounts, like 50% or all cash, will affect your Return on Investment. See our section on “Leveraging”, below.
And with condos, don’t forget the monthly HOA fees eating into your cash flow.
Bottom line: you need a complete & accurate calculator to determine the right mix of initial investment, purchase price, cash flow & ROI for your investment needs. We happen to have such a tool: our SMART Return on Investment Analyzer©. Check it out and see how well it works for you.
Over time, real estate investing is the best way to watch your money grow, and the rewards far outweigh the risks. Nothing is certain, of course, but here are some things to consider:
- As the economy improves, employment rates increase and housing demand follows suit
- Rental demand is showing unprecedented growth, and is expected to continue for the significant future
- Interest rates are still near historic lows, and will eventually rise, sparking a huge demand
- Waiting to get into the game will cost you in lost opportunity gains, in all of these price categories
All these factors point to rising residential income property prices in the near future. As the old saying goes: “Now is a great time to buy”. This applies to income property extremely well.
Several factors can help your financial situation relative to income properties. The major tax benefits include:
- Mortgage Interest Deduction
- Property Tax Deduction
- Expense Deductions
As with owning your own home, tax benefits can help turn an apparently unattractive situation into a positive one when managed appropriately.
*** We highly recommend that you consult your tax professional for complete and accurate tax and accounting information applicable to your situation.
Easy to Get Into & Work With
Start small: buy a single family residence or condo, or even a duplex. This should be a straightforward transaction for both the novice or experienced investor, very similar to buying your primary residence. The lending rules are virtually the same as for a primary residence, and the process is easy to understand.
Hands on or hands off: you can choose to manage the property yourself, or outsource to a professional Property Manager. Even though it impacts your cash flow, it’s probably best for the first-time investor to use a professional Property Manager. Once you get the hang of it, you can start taking some of the management responsibilities on yourself.
Larger apartment buildings, such as 5 units and up (know as “5+”) have different lending rules and property management requirements. These are a great way to leverage your investment, but they need quite a bit more experience, plus a higher tolerance for risk and problem solving ability.
Another great reason to get started with 1-4s:
If you live in one of your units, such as one side of a duplex, you can lower your investment mortgage significantly, and still leverage the full value of the property while it appreciates! With duplexes, you can usually reduce your mortgage by about 1/2.
Easy To Grow & Leverage Your Capital
Real estate investing is traditionally the best way to leverage your assets, time and involvement. Many smart investors start out with an investment single family residence, condo or duplex, then, after experiencing success with that type, continue to build on their success buying similar types of units. This creates a “money machine” effect, where you build on your strengths and experience by repeating past successes.
Other smart investors like to gain traction with smaller units, then work with larger properties, such as triplexes and fourplexes, utilizing the same techniques but leveraging their base investment even more with larger properties.
Here’s an example (*):
|Initial Investment (**)||$137,500||$178,750||$220,000||$275,000|
|(*) Assumes similar construction quality, condition & neighborhood|
|(**) Including 25% Down Payment, + 1.5% Closing Costs & 1% Rehab|
You can easily see that, in general, the more doors you invest in, the better the ROI, and the more you leverage your initial investment.
What better way to leave something to your heirs, or even just to get family members started in real estate investing? Share the investment, share the rewards, then let them build their own real estate empire.