The Reasons Why Getting Started in Real Estate with buying Rental Property
The Best Way to Understand this site is subscribe the RSS or Email Updates.
There are a lot of ways to make money from real estate. But there are certain reasons that you must get started with rental property.
1. Leverage on Bankers Money
One of the advantages of buying a property that other investments do not have is you can borrow money from bank to buy it. You can always leverage on the money of bank to buy property that you want to. In most cases, all you have to do is just pay a small amount of money, usually 10%, and get a mortgage from a local bank to own the property. That is mean with a small amount of money, you can own a rental property that bring you money in several ways.
Another issue that you must pay attention here is the PMI charges. For your information, PMI, Private Mortgage Insurance, is an insurance that purposely protect the lender against the losses should the borrower default. You must buy this insurance if you put less than 20% of down payment in your property. The monthly payment for the PMI is depending on a number of factors and will generally fall into the $25-$100 range for median price property.
If you are trying to make money from rental property, then you must pay attention on this PMI expenses and do some calculation. $25 dollar monthly expenses might affect your profit or even make you getting a negative cashflow from your property. Collected Rent < Mortgage payment + insurance.
2. Real Estate Tax Advantages
You can have a lot of taxation benefits by owning a property. Below is some of the Standard Tax deduction/Tax Advantages that you can get from the rental property:
Home Mortgage Interest. Once you start making payment towards your mortgage, remember that you can the portion paid toward interest is deductible.
Depreciation. Depreciation is all about the overall wear and tear on your building. Only the portion of a property's value that is attribute to the buildings. Residential rental property must be depreciated over 27.5 years.
Operating Expenses. All the expenses that related to your rental property are deductible. For example Travel expenses that you drive around for the rental activities. So you are advised to keep track all the expenses on running your rental property business.
To fully benefit from the real estate tax deduction, you must help yourself to be Real Estate Professional. IRS defined that a real estate professional as someone who spends more than half of his or her working time in the rental business. A real estate professional also needs to spend more than 750 hours per year working in rental properties. Once you achieve the name of Real Estate professional, all your losses are fully deductible against all income. Otherwise, your losses are only deductible up to $25,000 against your rental income.
3. Side Income or more income
All the time, rental property is claimed to be the best way to build passive income. A tenant rent your property and pays some money to you every month. Then you use the money to pay your mortgage and also other expenses that involved, maybe some maintenance on the property. If the pays is high enough to cover all the mortgage payment and expenses, then you are considered having a positive cashflow from your property and this will be your passive income. You do not have to do anything but this positive income will go into your pocket each month. All you have to do is choose a right location with the right market, and then you can easily have the passive income you want to. The good news is the rent hike each year, while the mortgage of your rental property remains the same. That is mean…. YOU MAKE MORE MONEY!
4. House Equity, a better saving fund
When you are paying the mortgage payment every month, you are paying both the mortgage interest and also the propertys equity. The more you pay, the faster you can build the equity.
So what is this house equity for? You can use it on anything you want to. You can take it out for your house improvement, vacation or even as an education fund for your children. Some of the real estate investors are using this home equity fund to perform No-Money-Down purchase for their next investment properties.
There are a few points you must know:
1. By owning a rental property, your tenant will build the property equity for you as he/she will pay the mortgage for you.
2. You still own the property even you take out the equity.
3. You can take out the equity many times as long as you own the property. Of course you must know your credit and have a plan to manage it
Now you know why the home equity is called as a better saving fund where someone save the money for you and you can withdraw the money again and again in future.
5. Getting more information getting information for a market
Real estate is a business. For rental property, a property will be your income source. You rent it out to your tenant (customer) and collect a certain amount of payment every month (service income). So you must know the market and then you will only know what kind of strategy you can use to rent your property out or even increase your property value and rental and make more money.
By owning the first property in certain area, you will start learning the local culture, behavior and real estate market trend. In a nutshell, you are learning the local people behavior on housing. Then you will know
How much of rent you can charge. whether you can fully maximize the profit or away from it as you are losing money
What kind of facilities in your property can boost your profit. This is all about the taste of your tenant and how you provide the business value to them and make them happy with your service, maybe some improvement or add-on on your property.
What kind of property that you can buy that will make you money. By familiar with a real estate market, then your brain and your eye will be your analyzer on how to choose a property that will bring you money. This is all about experience and sometime this is hard to be learnt from a book.
Who can help you in that area. It is important to have a list of handyman or real estate agents that you can trust with especially you want somebody help you to run your rental property business. A trustworthy handyman can help you solve your tenants problem and give a silent night to you.
The more information you have on a particular market, the more strategies you can build to make money. To me, this kind of information is important if you are going to run a property flipping business in future.
Simple Formula of Making Money from Real Estate
You can consider rental property is the base, is the foundation of your real estate business. First, it let you leverage on bankers' money to own property. Second, with a property you can get some extra tax deduction on your income which helps you save some money. After that your rental property will generate income to you and also help you in capital appreciation in home equity. From here, you can generate the enough money to start owning more property. With your experience dealing with tenant, you start learning more about a market and you can use the generated money to buy your second, third or even more property. This is a simple formula on making money from real estate.
Good luck
Harrison
Some Related Posts
The Real Estate Bubble and Tips to Protect you from it6 Ideas to know how much rent your should charge for your rental propertyRentometer, another internet tools to check rental market of your propertyCan't Find What You are Looking for? Try Google Search
 |
   
|
Comments
9 Responses to “The Reasons Why Getting Started in Real Estate with buying Rental Property”
Leave a Reply
Real Estate investing is dangerous now with the subprime collapse. This will work if (and only if) you can get a good mortgage on your first property … and then pay it off. You need the rent from your tenant to fund the rest of the scheme, not pay off a 30 year mortgage.
Real estate is definitely a great place to earn passive income as well as a great investment tool.
Once one can start generate a positive income every month after substracting all the mortgage cost, he or she is definitely on the right track to financial freedom.
Regards,
Cheow Yu Yuan
Very informative article, I agreed that buying rentals is definitely the way to go
nice and interesting post. the comments were also good. they seem to also like your post as I really did… =)
Thank you, Marco. Don’t forget to come back here more often.
YOU SUCK! Learn how to speak English! Learn how to write if you are going to write a blog jackass. I don’t take financial advice from someone who can’t even write correctly.
HI dgdg, I’m trying my best to improve my writing. Please don’t be angry with me and my mistakes in writing. If you want, you can contact me directly and tell me what is wrong with my article. So that I improve and provide more value to you.
I think the most important step is to be realistic in what you can and cannot do. I’ve seen so many first time home buyers jump into something they cannot afford only because they have big dreams.
Do your homework done first if you are thinking about taking out a loan or mortgage. The time spent looking into your options can save you a good deal of money later on.
Thanks for the informative article Harrison. And you write just fine…I blog myself and mistakes are often frequent, though always correctable.