Reasons To Consider Investing In Single-Family Rentals
As property values continue to climb and interest rates keep up their ever-increasing and reliably consistent upward trend, many people are choosing to rent rather than own, or are renting longer as they save up for their first home purchase.
According to a Joint Center for Housing Studies of Harvard University report, the number of families renting increased by roughly 30 percent between 2005 and 2015. As a share of the general population, the households who rent rose from 31 percent to 37 percent during that same 10-year period.
The reason for this is multi-faceted. For one, Millennials entering their 20s began to find their own way and started their adult lives as renters, as most of us do. But that’s not the full story. The largest increase actually came from renters in their 50s and 60s, who added 4.3 million to their numbers between 2005 to 2015 (this can in some ways be attributed to the housing crash of 2009). Households aged 40 and over now account for the majority of all renters, according to the Harvard data.
In other words, renting is the new trend. This means there are a lot of potential opportunities for investors to acquire an asset that will appreciate in value while generating cash flow in the meantime. Among real estate investors, a significant question for most is whether to buy and hold (rent) or fix and flip for a quick sale. Obviously, what works for one investor may not for another; it really all comes down to each individual business plan and preference. These days, though, there’s a strong case to be made for rentals.
Still, we’re not here to tell you why you should be investing in rental properties. Whether or not that’s the right move is going to be different for every investor. What we’d like to show is why renting can work for you if your plan allows for it, and what you should be looking for as you make that decision.
The first consideration here is cash flow. This would be less important if real estate values were going down, but they’re doing the exact opposite with extraordinary predictability and reliability. So a rental can be a good investment that generates cash flow while the investment appreciates. Before you leap, remember that appreciation isn’t a universal law across the country (even though it’s pretty close). Properties in dense urban areas, or areas with high growth potential, will probably appreciate more than those in rural or even suburban areas.
So upside potential is something that should factor in here as well, because while cash flow is nice, it doesn’t do you much good if the property doesn’t grow your initial investment, and while real estate values reliably trend upward, it’s often a question of extent. How much potential a property has to appreciate in value is dependent on several different things, but community growth and the local economy as well as its housing market are the main factors.
So your calculus should be the usual for any purchase consideration. What’s the area’s growth potential? What are property taxes like? Are there more rentals or homeowners in the neighborhood? How are the schools? Crime rate? Are new construction or permits being issued? Don’t sit there and think, “I’ll buy this property and start making cash right away as soon as it’s occupied,” without considering anything else, because that’s 100% not how this works. Stick to your business plan when making these decisions, and approach them like you would any other real estate investment.
Leverage is another huge advantage of holding onto a property and renting it out. If your plan hinges on the purchase of several properties, or if you’ve got an eye for a bargain and a skill for flipping homes, a property you’re renting can be a good way to finance other investments and projects. A rental can essentially become collateral that you can leverage into financing for another property.
There are also some tax write-offs that can be beneficial to you as well, but again, this is a question of math; how much they benefit they can offer you is a better way to think about it. The answer is going to be different for every business plan and every investor. More generally, if you’re renting a property, you’re able to deduct reasonable expenses including utilities, taxes, and of course necessary and reasonable repairs to the property. In IRS legalese, any expenses used in the conduct, maintenance and managing of rental properties are deductible, but it goes a bit further than that.
You can also deduct travel costs that you might incur while doing business related to the property (even driving there to oversee a job), and of course anything you pay a contractor is deductible. A common misconception is that any payments under $600 aren’t deductible, but that’s not the case; you don’t have to file a 1099-MISC if you paid a contractor less than that amount over the course of a year, but you can still deduct the expense.
Whether or not that will work in your favor at tax time is purely a matter of what your plan entails and what it allows. Be sure to check with your tax advisor as well.
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