Have you ever thought about investing in real estate?
I’m sure you’ve heard the horror stories. Friends, family members and colleagues tell you of the headaches and financial risks associated with owning and renting investment properties.
But when approached with a solid strategy, and with an abundance of caution, the financial benefits of owning investment properties are undeniable.
My wife and I noticed it the minute we signed our completed income tax return. The first residential rental property we bought completely changed the bottom line on what we owed the Internal Revenue Service – for the better. The effect was so dramatic we decided to buy two more units, and we now own three income-producing rental townhouses in the Piney Orchard community.
Rental investment properties can make money for you four ways:
1. Principal Reduction – In essence, owning an investment property means that after obtaining financing and providing a down payment, other people buy the house for you. Investment property owners use the rent collected from tenants to pay down the mortgage and pay other expenses associated with the property.
2. Income – Also called cash flow before taxes. Any amount of rent collected over and above the amount needed to cover the mortgage and other expenses is income for you. When the mortgage is paid off, you own the house free and clear, and the lion’s share of the monthly rent collections go directly to your bank account.
3. Income Tax Savings – In effect, federal and state governments subsidize your purchase of real estate by allowing you to write off property taxes, mortgage interest and certain other expenses. Owners of investment property also are allowed to “depreciate” the property. The end result is that investment properties can greatly reduce your tax liability, allowing you to put even more money in your pocket.
4. Price Appreciation – Granted, when measured over the last four to six years, there’s been little if any property price appreciation in most areas of the country. However, in most parts of west Anne Arundel County, properties have increased in value over the lows of the housing crisis.
The greatest financial benefits of owning residential rental property are realized when all four of these factors work in concert to boost a property owner’s bottom line. However, even when one or more of these factors is not adding to a property’s financial performance, the remaining factors may still combine to produce a positive net cash flow for the owner.
The key is buying the right property at the right price.
The greater Odenton area is an excellent market for investing in rental properties. The reason? There’s a large number of renters, there is frequent turnover of tenants, average rents per unit are high and there are plenty of properties available for purchase.
But it’s important that you do your homework. Not every rental property is a good investment, and many can lead you into financial hardship.
The key is finding the right property and consulting qualified professionals who have experience handling such investments. These experts include accountants, tax advisors, financial planners and realtors.
Jerry Kline is a Realtor with the Odenton, Md., office of Keller Williams Flagship Realty (1216 Annapolis Rd., Odenton.) For more information on the local real estate market, contact him at (443) 924-7418, or visit his blog (www.JerryKlineRealtor.wordpress.com) or website (www.JerryKline.kwrealty.com).