Sometimes it can seem like owning an investment property involves a lot of spending rather than saving. But a rental property investment can actually save you money in the long run, if you play your cards right. Since real estate is typically a long-term investment, it’s a good way to put your cash into something tangible that will gradually increase in value over time.
This article in the Huffington Post that summarizes some of the ways real estate investing can help you save money. The author emphasizes that when investing in property, it’s important to either buy with cash or be in a position to comfortably pay the mortgage each month. If you’re financially secure so that you’re able to purchase a rental property, Brad Hettich, President and CEO of Commercial Lending X, lists five primary financial benefits to doing so–lower taxes, positive cash flow, leverage, equity growth and inflation. Here’s a brief explanation of how these work:
Taxes and Cash Flow. There are several tax incentives for real estate investors including deductions for expenses like maintenance and repairs, and all the costs associated with managing and operating the property, including property management software. Other deductions include depreciation, mortgage payment interest and insurance premiums. As the article points out, you can achieve positive cash flow if your income is greater than your expenses, or if your expenses are greater but after tax deductions you come out net-positive.
Leverage and Equity. As a real estate investor, you can use leverage to gain equity without spending your own money. By borrowing money from the bank and letting tenants pay the mortgage, you can increase your assets without spending your own money. Building up your equity allows you to save on your mortgage and earn a profit.
Inflation. We often tend to think of inflation as a negative thing, but when you’re investing in real estate, you want to look for places with high inflation rates. As rental prices increase for the area, your mortgage costs stay the same, so your cash flow increases.
Despite these advantages, property investment comes with its own set of risks. Perhaps the biggest risk is that by converting your cash into an asset, you lose the ability to quickly convert it back to cash. However, that can also be considered a positive aspect of real estate investment. You’ve committed to a long-term investment strategy and you can’t just impulsively cash out. As long as you have some liquid assets and can leave your real estate investment alone for the long-term, ultimately that investment could save you a lot of money.