The Rental Home Long-Term Investment Plan
Whatever your age, a rental home in Hagerstown can be an excellent investment. If you have 10 to 30 years to build a portfolio for retirement, rental property is an even better asset class. There are the normal ways in which investments return profits and grow, and there are some unique advantages for rental property that multiply your returns.
Appreciation in Value
The Rental Home Long-Term Investment Plan-Over time, real estate has always been a good investment. Growth in value over the years can provide a significant profit when you sell the investment. The saying that “real estate is local” is true, so appreciation rates vary by area. However, over time, various studies show that annual appreciation for homes has been between 5% and 7%. Using an online appreciation calculator, you can see that a $200,000 home appreciating at a 5% rate will grow in value by $125,779 over ten years to sell for $325,779.
Mortgage Pay-Down Leverage
As the home is appreciating in value, you’re also decreasing the amount owed as you make mortgage payments. Using the previous home example, if you financed 80% when purchased, that $160,000 mortgage if paying 5% interest would pay down to a balance of $129,831 over the same 10-year period. Using the appreciated value of $325,779, equity in the home would be approximately $196,000 ten years after purchase. If you hold the property longer, you can use this equity as leverage with an equity loan to buy one or more other rental homes. Or, you could sell it and roll the profits into more rental homes.
Excellent Deductions for Tax Purposes
The rental property owner can deduct the costs of doing business, such as management, advertising, repairs, maintenance and other expenses. There is one large benefit from allowed depreciation of the property. Consult an accountant, but most rental investors are allowed to depreciate the value of the structure (not the land) over 27.5 years. This means that you can take another deduction that isn’t out-of-pocket money you’re spending. Taking the land value out, if the example home structure is worth $170,000, annual depreciation would be $170,000 / 27.5 = $6,182. You wipe out tax liability for more than $500/month of cash flow.
Monthly Cash Flow
The cash left over from rent after you deduct for expenses is positive cash flow you take to the bank every month. Depending on the market and home value, this can vary a lot. Using the numbers above, you see that you may be able to put a nice little chunk in the bank each month and do so with little or no tax liability.
The I.R.S. Gift to Rental Home Investors
The 1031 Tax Deferred Exchange is a tool rental home investors can use to grow their portfolios over time while avoiding capital gains taxes along the way. Using the ongoing example, if the investor chooses to sell the home ten years after purchase, that $196,000 in equity is profit. You are allowed to reinvest that money into other rental or real estate property and postpone capital gains. The rules are complicated, and there is some recapture of depreciation, but the avoidance of capital gains taxes allows you to roll more of your profit into other rental property, either one higher-priced home or several lower-priced rental properties.
When you use these advantages, your long-term real estate investment plan can grow a huge portfolio that will cash flow a comfortable or even a lavish retirement lifestyle.