Why You Should Consider Owning Rental Property
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With the Federal Reserve stamping its foot on a rising interest rate policy as if it were a cockroach crawling through the kitchen, mortgage rates should stay low for the immediate future.
That could make now a good time to buy rental real estate.
The real estate market, which was hot for years, has recently cooled. The number of properties receiving multiple offers plummeted to 13% from 53% a year ago, so buyers have more negotiating power than they did in 2018.
Last year, housing prices rose at the slowest pace since 2014, and they are expected to fall in 2019, according to real estate brokerage Redfin.
I’ve owned a few rental properties through the years. The first one we bought was an average-looking condo. We’ve had a variety of tenants. Some were great, others not so much.
Our current tenants always pay on time, but they are pigs. It’s surprising because they are two young women. One is a nurse. A photo that we saw of one of the bedrooms looked like something out of the TV show Hoarders. It’s a nightmare. We’ll have to replace the carpets and paint when they leave, but hopefully that’s all.
That being said, the smallish condo has almost always been cash flow-positive. We’re not getting rich on it, but it puts money in our bank account most months. The property has appreciated in value, and importantly, someone else is paying the mortgage for us each month.
How to Acquire Rental Property
If you’re interested in investing in rental real estate, one of the most important things you can do is find a realtor who understands the rental market. Be sure to work with someone reliable and look for recommendations from people you trust. That way, the agent is more likely to work in your best interest rather than simply try to land a large commission.
As far as calculating how much you should pay, Justin Ford, president of Pax Properties, uses a simple formula that called the GRM, or Gross Rent Multiplier. The GRM is the price of the property divided by the gross annual rent. He says the GRM should not exceed eight for houses if you want to be sure you’re not overpaying from a cash flow perspective.
For example, if you’re looking at a property that generates $20,000 in annual gross rent and the selling price is $200,000, the GRM would be 10, which Ford says is too high. You wouldn’t want to buy the property unless you could get it for $160,000.
There are also some great tax benefits that come with owning rental property.
- Mortgage interest – You can deduct the amount of interest that you pay on your mortgage. Keep in mind that the new tax law limits how much homeowners can deduct in mortgage interest, but this restriction does not apply to rental properties unless you live in the building.
- Depreciation expense – Depreciation is the theoretical value of the wear and tear on your property. You can write off the cost of the property (structure only, not land) and repairs over the “useful life” of the property, which the IRS usually considers 27 1/2 years. To calculate your deduction from depreciation, you would divide those costs by 27 1/2 and write off that amount each year.
- Travel expenses – If you need to travel for reasons related to your rental property (to attend a seminar, to visit the property or to look for new properties), you can deduct the cost of travel.
Be sure to talk with a tax professional about the benefits of owning rental property and any deductions you plan on taking.
Between the Fed keeping a lid on interest rates and tax breaks being offered for investment property owners, the government is basically encouraging you to buy rental real estate.
With mortgage rates still low and housing prices possibly slipping this year, it may be the perfect time to pick up a rental property – but be sure to buy smart, and don’t overpay just to own something. You want to be sure that it will generate cash flow.
I never buy a rental property on the speculation that the price will rise. If it does, that’s terrific, but the investment has to be cash flow-positive for me to consider it.
