Residential real estate is one of the most rewarding and profitable long-term investments. It offers a variety of benefits, including capital appreciation, tax breaks, diversification, and a hedge against inflation.
However, investing in residential real estate requires a lot of patience and time to ensure it’s worth the investment.
Increased Cash Flow
Whether you’re a new investor or a seasoned veteran like Peter Hungerford founder of PH Realty Capital, cash flow is one of the most important things to remember when investing. A positive cash flow means you have an extra monthly income that can be reinvested to grow your portfolio and create more opportunities.
Real estate investors can increase their cash flow by implementing several strategies. These strategies include increasing rent, reducing operating expenses, and minimizing property taxes.
The most effective way to increase the cash flow is to focus on rental properties. Keeping quality tenants can help you maintain a steady income and reduce the costs of managing and maintaining a property.
Homeowners can build equity in various ways, including making larger down payments, paying off their mortgages faster, and improving their homes. This can be especially useful for investors, allowing them to increase their net worth when the property appreciates over time.
Alternatively, they can refinance their mortgages to secure lower interest rates and shorter loan terms, allowing more of their monthly payments to go toward the principal. This will enable homeowners to build more equity quickly and easily.
Regardless of how you invest your home equity, it is essential to keep an eye on the value of your home and where your equity stands at all times. This can help prevent financial loss when it comes time to sell your home.
Numerous tax benefits can be obtained through investing in residential real estate. These include income generation, price appreciation, a reduction in property taxes, and the ability to build a portfolio of properties.
The Tax Cuts and Jobs Act of 2017 established a pass-through tax deduction for rental property owners. This deduction, scheduled to expire in 2025, can reduce an investor’s income tax by 20% of the net rental income received from their property.
Another essential tax benefit is depreciation, which allows investors to recover a percentage of the costs of owning and improving their investment property over its determinable useful life. The IRS estimates that a single-family residential rental property can have a lifespan of 27.5 years so this noncash expense can save an investor thousands of dollars each year.
Increased property values can be a big draw for both sellers and buyers. The higher your home is valued, the more it will sell for and the less you must pay in taxes. It also incentivizes you to upgrade your abode or add an extra bedroom and bath.
When determining the value of your property, there are many ways to go about it. The most obvious is the sales comparison method, which uses what other properties have sold for recently in the area. Other methods include the reproduction method, which re-creates the same property using modern materials and construction techniques. The best way to determine the accurate market value of your property is to consult a qualified real estate broker or appraiser.
One of the most attractive aspects of investing in residential real estate is that many of its expenses are tax deductible. These include mortgage interest, property taxes, and even some maintenance costs.
Depreciation is another tax deduction a real estate investor can take advantage of. This allows investors to deduct a percentage of the building’s value each year for the life of the property.
Depreciation is a way of accounting for wear and tear on the property over time. It is based on a property’s lifespan, which is currently 27.5 years for residential properties and 39 years for commercial ones.