Owning rental properties is a great way to build wealth. It requires work, and it comes with its share of headaches, but long-term, owning investment properties has proven to be a real winner!
First and foremost, when you own an investment property, the tenant is paying down your mortgage. OPM means other people’s money. You’re taking advantage of OPM when you have a tenant paying the bills.
In some cases, the monthly rental income exceeds the monthly expenses on the property. In that case you’re making money every month. In Southern California it is hard to find a property that cash flows on day one. That being said, for me, the real benefit comes when the property is paid off in the future.
The IRS allows you to deduct expenses for repairs and upkeep, which helps the bottom line. Property taxes and insurance are also deductible. However, a landlord cannot deduct improvements. A Landlord can deduct depreciation on the property, which is the loss in value of the structure. This depreciation comes over the span of 27.5 years.
As mentioned above, the biggest benefit of owning an investment property comes when the property is paid off. The rental income that the property produces will rise with inflation. The income the property produces will allow the property owner to produce inflation-adjusted income over time.
Down the road, if a landlord wishes to sell their investment property there will be tax consequences in the form of long-term capital gains taxes. In many cases, those taxes are less than regular income taxes. A landlord can trade into other investment properties and avoid these taxes by going through a 1031 exchange. Many people 1031 exchange into less hands-on investment properties as well.
Reach out to discuss your investment property plans. I’m happy to help.