We often caution new investors that real estate investment won’t make them rich overnight. It’s a process that takes time, intention, and slow growth. We say this primarily so expectations are managed – the better your perception of the reality of this business, the better you’ll fare.
At the same time, we don’t want to give the impression that investing in buy-and-hold real estate is fruitless until some far-off point in time. Rest assured, every SFR investor actively benefits from their real estate assets.
The great thing about single-family rental properties is that you’re not limited to short-term or long-term benefits. You get BOTH.
Here are the biggest advantages real estate investors can expect from SFRs.
The Top 5 Benefits of Buy-and-Hold Real Estate Investing
1. Cash Flow
Investors earn passive income as soon as their residents sign a lease. Typically, that cash flow will cover ongoing maintenance and management costs, as well as mortgage payments. You’re able to utilize someone else’s money to pay off your debts. When those debts are paid, the amount of cash in hand increases.
When we look at cash flow, consistency is key. Investors benefit most when they retain their residents through lease renewals.
2. Equity
Over time, as your mortgage is paid down, your equity in the property will grow. That equity means that, should you sell, you will reap the maximum payout. Even if you don’t sell, increasing your equity increases your net worth and lowers your debt-to-income ratio. That, in turn, makes your financials look better to lenders when you’re looking to acquire more properties.
Equity isn’t a benefit that you see in a monthly check, but it is one of the most important benefits investors get. It must grow with time, though, making it a long-term commitment. The more time you have, the greater the property’s value and your full ownership of it.
3. Leverage
For the real estate investor, leverage appears in multiple contexts. We leverage bank lending to acquire properties. We leverage expertise from property managers and portfolio advisors. But you can also leverage the equity you’ve built in your rental properties. If you don’t have cash on hand, you can still borrow against your assets – something best done when you have ample equity built up – to expand your portfolio.
Real estate is one of the few asset classes that allows investors to use leverage. This means you can acquire properties with only a fraction of your own money. Lenders pay the rest, then the rent payments pay the lenders.
4. Tax Advantages
There are far too many tax advantages in real estate investing to detail here. Just know that there are unique deductions, strategies, and rules that can greatly reduce your tax liability. You can deduct expenses like mortgage interest, maintenance and repair costs, management fees, and more.
There’s also the benefit of depreciation, the tax structure for passive income, long-term capital gains versus short-term capital gains, the opportunity to invest tax-deferred through different strategies…the list goes on!
The best thing an investor can do is secure a relationship with a CPA or other tax professional with experience in your industry. It will guarantee that you get every advantage available to you.
5. Hedge Against Inflation
Inflation eats wealth. If your money is sitting in the bank or tied up in stocks, inflation will make it worth less. Real estate, however, has a very interesting and unique relationship with inflation. The value of properties and the cost of rent both tend to go up with inflation – meaning that your money retains its value and your passive income grows to compensate.
Real estate is an essential asset. It’s not going to totally crash as some other investments might. It’s also the only investment where inflation might make you wealthier than you were before! With the economy being volatile, unpredictable, and downright scary, you can rest better knowing that you hold a time-tested, inflation-resistant, and essential asset.
Some people like to point to one benefit or another as THE reason to invest in real estate. We don’t do that. We know that it’s the combination of benefits, not one advantage alone, that makes investing in SFRs worth your while. So when you’re weighing the pros and cons, be sure you’re looking at the full picture!
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