Far and above any other type of investment, rental properties have the ability to generate a monthly cash flow. Even in an environment where housing prices are falling, and economic variables are making it hard to achieve a good return by investing in the stock market, the amount of rent that a person will have to pay for a property will likely stay the same.
In many cases, an economic downturn often corresponds with an increase in average monthly rents for a given area. When housing prices experience a sharp decline, potential buyers of real estate become insecure about the viability of a home as a long-term investment. People still need a place to live, however, and the result is more demand for rental properties. More demand leads to a shortage of inventory, and rents begin to increase.
This may be a bit of an oversimplification, but the point is that owning rental properties can be an effective hedge against many types of risk and an extremely stable investment, even in times of economic uncertainty.
What other form of investment can deliver a solid monthly cash flow? It’s true that many stocks pay dividends, and this can provide a tidy little income stream, but the amount of returns that can be realized by adhering to this strategy are minimal compared to what can be achieved by purchasing rental properties.
Consider that rental properties offer a variety of tax advantages, in addition to generating a positive monthly cash flow. With depreciation, an investor can write off a certain percentage of the property’s value each year to offset any profits, and this can result in decreased tax liabilities. Expenses for interest and property maintenance can also be deducted, which allows investors to potentially reduce their gross annual income by a substantial amount every year.
Of course, it is recommended that an investor consult with a tax adviser for guidance, although the advantages listed above pertaining to rental properties are widely known.
It’s often said that cash is king. Having a stable monthly income stream can provide investors with flexibility and a better quality of life. Extra cash can be used to pay off debt, go on vacation, supplement a monthly budget or even buy more rental properties. The stock market and government bonds don’t offer that same advantage.
Rather than use the monthly cash flow to pay down the mortgage on a property, some investors elect to use the additional funds to buy more rental properties. This can amount to a solid investment strategy, especially since many properties will appreciate over time and this can allow an investor to build up an equity position simply by paying the minimum each month.
What often happens to investors is that larger financial institutions become hesitant to loan more money to them if they already have many rental properties. To overcome this obstacle many investors choose to work with local mortgage brokers, since they are known for being more flexible in their guidelines.
For a consultation about your ability to invest in real estate, please contact me at the number below.
Patrick Stoy (NMLS# 39527; Market Consulting Mortgage NMLS# 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.