Different Ways to Build Wealth
When you buy an income property and rent it, you now get to write off all improvements make to it, upkeep, gardening, repairs and the portion of utilities you pay. There are even opportunities to write off the property tax, even though it is not owner-occupied, as well as the interest on the loan. Wealth building can begin almost immediately. Many times you will not have positive cash flow from the very beginning. As an investment this should not weigh heavily on you as long as you have allowed for it in your finances.
Over time your property will increase in value. Additionally the rents will increase too. If you can afford that one extra payment a year, you'll have that much more equity in the property. If you had to borrow more than 80% of the property's price, then you'll want to build that equity as fast as possible in order to cancel the mortgage insurance on it.
The doom and gloom people claim is that if a recession hits (it did) then your value will go down and you will lose tenants. Here in Southern California my value did go down, by over 30%. My rents didn't go down. And my mortgage didn't go up, so I was in the same position I was in before the recession. I don't celebrate that so many homeowners lost their homes, but it did keep demand for rentals up. People have to live somewhere. In a worst-case scenario, I would have lowered the rent, but it never came to that. I also keep my rents in line with the area, even opting to charge a little bit less. Keeping a tenant long-term for a little less saves a lot more money than you will lose if you charge more and have a lot of turnover. And the bottom line: while stocks are on paper and can fall to the value of the piece of paper, with property, even if the value goes down, you still own the land and the structure. You still have something that you paid for. It cannot disappear to the banks that received our pension funds, 401Ks and the rest of it.
For many there is a downside to owning rental property. In eleven years this has not been the case for me here in Long Beach. Many do not like dealing with tenants and the issues that they bring up. This is a matter of perspective. If the toilet doesn't work in your home and you can't fix it, don't you call a plumber? Well, it's the same thing with a tenant. Toilets, garbage disposals, wear and tear, they all happen everywhere. It's not the tenant's fault (well, most of the time). That's why it is a good idea to have a team in place: your plumber, electrician, painter, etc. You should know them and they should know the policy on your rental properties. Many times you'll get a price break if you use them on your rentals and your private residence. Perhaps you have a limit: if it's under $100, do it and bill me. Your other choice is to use a property management company (or qualified realtor). What is important here is that the property manager be in synch with how you want things done. Some people want the cheapest possible anything, after delaying it as much as possible. Not my philosophy, but everyone is different. Maybe you want them to call for authorization on repairs at any price, regardless of how low. If you do decide to use a property management company, check them out thoroughly.
Lastly, the wealthiest people I know who started in the middle class are those who invested in income property. Every single year nowÂ they take a cruise. They also have a beach house they rent out in the summer and a house in the mountains that they rent out in the winter. With real estate you own something in the present and you are building a viable future.
It makes the most sense to consult with a financial advisor about how your money can work for you, and then a realtor can help you find what makes the most sense. Here is an article from the Economic Times on the subject. Click here.
I welcome your comments and personal experiences.