If you’ve ever thought about investing in the lucrative Real Estate market, now is a great time to jump in! The economic challenges of the past few years have led to an influx of renters in Denver and many metropolitan areas as former owners have become renters. Rental rates continue to rise and attractive properties are snapped up by renters within hours of posting – all across town. Landlords have their pick of tenants in this market. There are pros and cons to owning a property for rent. Read on for more information on the potential benefits of Income Property.
Passive Income – This refers to the funds left over after the mortgage and related expenses (HOA, maintenance costs, etc) have been paid. “Passive” income is basically cash that you did not have to work for – your property produces it for you.
Appreciation – Real Estate generally experiences appreciation as time passes. Appreciation is not guaranteed. However, if you own a property in a stable area, the property will likely increase in value over the years.
Leverage – Much like purchasing the home you live in, rental properties can be purchased with borrowed funds. This means that you can purchase a rental property by putting down only a percentage of the total value. The property you purchase secures the debt, rather than your other assets. You may lose the rental property, but you shouldn’t lose your own home.
Tax Advantages – Your rental income may be tax free if you do not receive net cash flow after expenses are deducted. This means that your mortgage is being paid down and you own more of the total value of the property (rather than just controlling it), but you do not pay taxes on the money that is doing this for you. In addition to this, you can also pull out tax-free money by refinancing your loan if the property appreciates and the interest rates have fallen. Lastly, you may be able to avoid paying taxes on the sale of a rental property if you sell it and reinvest the money in another property (called switching or tax-free exchange).
Stay tuned for Part II of this article – Making Informed Decisions about Income Property.