What Is an Investment Property Good For?
You may be wondering why people decide to buy an investment property. With tons of horror stories about financial pitfalls and flips gone wrong, it’s no wonder many people question what an investment property is good for.
There are several key reasons why buying an investment property is good for building your portfolio and increasing your wealth, despite the potential financial risks.
In this post, we cover the six main reasons why an investment property is a good financial move if you want to boost your monthly income, hedge against inflation, and get big financial returns.
Passive Income & Cash Flow
One of the best-known reasons why someone invests in real estate property is to generate passive income and cash flow. Investment properties can be an excellent way to receive additional monthly income that is relatively passive. While there are maintenance and management costs to consider, the reality is buying the right investment property can yield extra income for you every month.
Conducting thorough market research into average rents in the area is the best way to ensure a steady cash flow. While you have to account for occasional vacancies, you can confidently calculate average passive income and cash flow numbers with the right data.
Build Wealth and Equity
Many investors consider buying an investment property to build long-term wealth and equity. Because buying an investment property is a long-term investment – often with a 30-year mortgage – you can safely build equity.
Over time, you can leverage that built equity to buy other investment properties and increase your overall wealth. Buying more investment properties means a larger boost to your monthly passive income and cash flow.
While we recommend partnering with an expert real estate brokerage team, like Sovereign Realty Advisors, you can estimate the amount of rent you can collect with DIY formulas. For example, use the Gross Rent Multiplier (GRM) Approach to determine the rent you can make from an investment property each year. By doing this, you can get a rough estimate of how much equity you’ll build over time.
Diversity & Protect Your Portfolio
Another key reason you may consider buying an investment property is to diversify your portfolio. As an investor, you know how essential it is to include different investments in your portfolio to ensure you’re protected in difficult economic times.
A diversified portfolio, including stocks, bonds, and real estate investment properties, can help you through different economic loss scenarios. For example, your investment properties can protect you from devastating losses if the stock market takes a turn and you lose equity.
Buying an investment property comes with key tax benefits, including special deductions and credits. While we always encourage you to find a CPA well-versed in the topic of real estate taxes, there are a few tax-saving deductions you should know now, including:
- Property taxes, mortgage interest, and property insurance
- Property management fees
- Costs of maintenance and repairs
- Fees associated with marketing your property for rent
- Capital gains
It’s critical you speak with a certified accountant who can confirm you are eligible for such deductions. For example, ensure you confirm the tax advantages of claiming capital gains. Sometimes these figures can vary depending on your unique situation.
While appreciation isn’t guaranteed for any investment you make, buying an investment property does give you a leg up in this area. Most real estate markets appreciate over time, and you may find that your long-term investment brings you a great return.
One of the key ideas you should consider when researching an investment property is the potential passive income you expect to receive. As we said, you can’t expect appreciation in any of your investments, but passive income can go a long way in meeting your financial goals.
Hedge Against Rising Inflation
Finally, one of the biggest reasons you should buy an investment property is the hedge against inflation. With uncertain economic times always looming, it’s critical you invest in assets that can help you during difficult financial times. Buying an investment property is considered an excellent way to protect against rising inflation.
Because the real estate market value tends to increase over time, you can leverage higher rent for your investment properties and protect against the rising cost of living. Therefore, the hedge is twofold:
- You can raise rents on your investment rentals and increase your monthly passive income to account for your rising living costs;
- You can sell your investment property and use the appreciation to invest in other income-generating assets.
No matter your reasons for investing, buying an investment property is a surefire way to increase cash flow, save you tax dollars, and protect you from uncertain economic times.
Give us a call if you’re interested in getting started with investment properties. From running the numbers to researching the local market and closing on your property, we’ll help you through the entire process.