Being a landlord can be scary and stressful. Sometimes, it can be a negative experience. But overall, being a landlord can be very rewarding. There are actually many financial benefits that come with being a landlord. I’m sharing the benefits we have seen as we have taken on the journey of being landlords.
Financial Benefits for a Landlord
- Positive Cash Flow – While we only make between $200-$450 a month as landlords — that money covers all expenses and funds, as well as an “oh shoot account” (emergency fund).
- Place Holder – We are able to buy houses in awesome areas with great school districts and “lock” in the price and interest rates. That means we have a great house as an investment with a low monthly payment, and our renters are the one’s paying off the mortgage.
- Tax Deductions – Most houses, when they start out as a rental, do not show a huge profit. This is due to depreciation. Therefore, this is a great “tax-free savings account.” Depreciation can be claimed on taxes. Check with your tax professional to make sure you follow all of the IRS guidelines.
- 1031 Exchange – This is an amazing feature that allows you to exchange one real estate property for another. The exchange is a great way to avoid paying taxes on the profit gained from the sale of a house. This is very different than the sale of stock — if you want to sell Disney stock to buy Coke stock, you will have to pay taxes on any capital gains. With the 1031 Exchange, you can sell one house and use the proceeds for the purchase of another without paying capital gains (there is always fine print, though, so talk to a professional).
- Reclaim Appreciation and Depreciation – As I’m writing this, the tax rules regarding moving back into your rental home as your primary residence for more than two years allows you to reclaim all appreciation and depreciation. This means that when you sell it, as long as your capital gains are less than $250k single or $500k married, you can get all the appreciation tax-free.
- Principle Pay Down – Don’t forget about the extra money you are paying down on principle too! The extra money that is being paid off on the loan is also “money” in your pocket. It is just less liquid.
Real Estate is awesome because it is one of the few investments where you can “own” the house and rent it out without owning the whole thing. While you can borrow stock on a margin, you can’t own a margin and then “rent” it out to someone else and have them pay off your purchase while you gain value.
If you purchase your primary residence property with future rental income in mind you will be able to save money on the down payment. The down payment on a primary residence purchase is significantly less than a down payment on a home where you don’t intend to live in it yourself.
If you purchase an investment property, your down payment could be 20-25% of the purchase price. Primary residence down payments are much less. So if you turn your personal home into a rental, you have very low cost of entry.
Let’s Talk Low Cost Entry Point
- 0-5% Down – Depending on the type of mortgage, you can buy a house for very little down. Therefore, when you rent it out someone else is paying your mortgage. This allows you to still contribute to your retirement basket with your personal income while someone else pays the mortgage on your investment house. This is like saving for retirement twice.
- Lower Interest Rates – Personal property interest rates tend to be 0.5-1% less than investment interest rates.
Now all of that is only beneficial and possible if you are a successful landlord.
Keys to Being a Successful Landlord
- Detailed Lease – We find that having a VERY detailed lease and sticking to it prevents lots of unnecessary questions and stress.
- Tenant “Ownership”– It is important to make the tenant responsible for the house too. You want to empower them to take ownership and be responsible for your house. So treat them with respect and remember honey is better than vinegar in your communications with the tenant.
- Say No – This is a business. You are much better saying no, and sticking with it, than being wishy-washy, or resentful of your answer later.
- Market Rates – It is important to rent your house out at current market rates. By being “nice” and renting your house out with an under-market rental rate, you will not do anyone a favor, especially yourself.
- Watch your Expenses – Don’t add extra landscaping, alarm systems, or other expenses. I have found that these don’t add value and only take away from your profit.
If you are planning to move from your primary residence and are on the fence about whether to sell or rent your current house, check out some of my other posts. You might find more information to help you make that decision!0