5 Reasons to Jumpstart Your Financial Future with a Rental Property

You may have just graduated or barely started out in the business world. Maybe you just got married and you’re trying to figure out how to get ahead in the world. Either way, you are probably looking for a way to supplement your income and give your financial future a boost.

Many of us dream of owning our own home, but purchasing an investment property as your first home could be an ideal option for you. Here are five reasons why you may want to consider a rental property as a way to jumpstart your financial future:

Create a Direct Income Stream

Just like an IRA or 401(k), investing in rental properties is a long-term strategy, but the perk is that it’s a strategy that brings in cash right away. The goal is to have those monthly rent checks be higher than the cost of the mortgage and any other expenses so that you not only build your equity, but also create a cash flow. This isn’t a get rich quick scheme, but if you look at the numbers, it makes sense.

Considering that the historic average rate of return for the stock market is 7%, an average 9% return on investment property is enticing. Of course, the return on investment (ROI) for real estate varies widely due to the unending list of factors involved, such as down payment variations, market ups and downs, interest rates, and maintenance costs. That being said, a smart investor has the potential to see returns even greater than the average.

While you do need a good chunk of cash to invest initially, you will be able to profit off your investment as soon as you can fill the space with tenants. Once the rent starts to come in, you can direct that money into other investments, savings for your own home, or debt repayment.

You should also consider purchasing a multi-family unit. Not only can you live in the space yourself, but you will profit off of the additional units. Early on, my wife and I purchased a fourplex and had a mortgage payment around $2,000. Although we had some additional bills on top of that amount, by living in the fourplex and renting the other three units, we had an income stream of $1950 a month. Our renters were essentially paying our mortgage, which allowed us to save 10-15% of our income each month. Eventually, we had enough to start building our own home.

Once we moved out of the fourplex, we were able to earn a profit of $750 a month. We also designed our new home with a separate basement apartment that we rented out, earning another $800 a month to put towards our new mortgage. You can realize a higher cash flow by investing in a multi-family unit, but single family homes typically increase in value at a faster rate, so you have options when jumpstarting your finances in this way.

Maximize Tax Benefits

Owning an investment property also offers income tax deductions that could benefit you when tax season rolls around. Here are some common deductions you can use if you are a rental property owner:

  • Mortgage interest
  • Property taxes
  • Cost of repairs
  • Travel for rental-related activities
  • Insurance premiums
  • Legal and professional services
  • Casualty and theft losses
  • Independent contractor fees
  • Depreciation

Keep in mind that you can deduct up to $25,000 as a passive investor, but that you cannot write-off deductions that are more than the rental income.

Outpace Inflation

A very real concern when it comes to saving for retirement is the risk that inflation will deplete your savings. Owning investment properties can help mitigate this risk, as rental rates and home prices generally rise with inflation, but your mortgage payment will not increase. Therefore, if you continue to rent or decide to sell, that extra amount will help offset the cost of inflation on your expenses.

Use Rental Income to Help Qualify

When you think of diversifying your investments and adding a rental property to the mix, you probably believe that it’s something to do down the road, after you’ve purchased your own home. But if your credit isn’t good enough to get a mortgage for your dream home, you still have the option to buy an investment property.

Federal Housing Administration (FHA) loans not only allow you to buy real estate without the 20% down payment the industry usually requires, but they also offer loans to those with a short credit history or a less-than-stellar credit rating. The caveat is that you must live in the property you purchase with this type of loan, so this is an ideal option for those who wish to buy a multifamily unit such as a duplex or a triplex.  Lenders will also allow you to use 70% of the anticipated rental income to help qualify for your loan.  The additional income may give you the ability to purchase & afford a more expensive property than originally anticipated.

Invest in your future

You may be scrimping and saving now to buy your dream home in the future, but how long will that take? If you can make the  necessary short-term sacrifices to come up with a down payment for a rental property, they may pay off in the end. If you need to live with family for some time, start a side business, or rework your budget, do whatever it takes to come up with that initial investment.

As you add rental properties to your portfolio and pay back those mortgages, the rent will turn into retirement income that will help you ease the worry that 59% of Americans have of outliving their retirement savings.

Becoming a landlord is not a decision to be made lightly. There are plenty of factors to think about, such as legal implications, time constraints, and real estate markets in your area. But if you are ready to jumpstart your financial future, investing in a rental property may be the key!

Navigate Private Wealth LLC is an SEC Registered Investment Advisor, 12012 S 700 E, Suite 100, Draper, UT 84020.

Securities offered through Allegis Investment Services, Member FINRA/SIPC. Supervisory office located at 10235 South Jordan Gateway, Suite 420, South Jordan, UT 84095.