What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

The Advantages of Buying a Rental Investment

Original post by Colleen Reinhart of Demand Media

While becoming a landlord involves responsibility, the potential payoffs are good.

Although the responsibility of repairing leaky ceilings and fixing blocked pipes might sound annoying, being a landlord has many financial benefits. Real estate can make a wise addition to your investment portfolio, as long as you do your research first. When buying a rental property, look for a broker with experience purchasing rental properties who can offer guidance along the way.

Someone Else Pays

Becoming a landlord allows you to use other people's money to make a profit for yourself, more than any other type of investment. A bank will grant you a mortgage as long as you're not a credit risk and you have a down payment ready. Once you have tenants, their rent payments will make the mortgage payments for you. As the value of your home appreciates, your tenants build your equity for you, leaving you with a large nest egg worth much more than your original cash outlay.

A Stable Investment

Although home prices fluctuate, they tend to appreciate over the long term. If you hang onto a home long enough, you're likely to realize a gain eventually, as long as you can weather short-term valuation drops. These blips on the radar don't matter much, as long as short-term gains aren't your goal. Although stocks and mutual funds tend to have higher growth rates, real estate is a less risky investment that you can use to diversify your retirement portfolio.

Low Interest Rates, Low Prices

Home prices are down right now, which means you stand to make more as the housing market rebounds from its slump. If you buy while prices are low, you'll make more when homes regain their value. Low interest rates make the cost of borrowing low, too. At a lower rate, your tenants can pay off your mortgage sooner so you can own your home faster. If you need to cover the mortgage in between tenants, a lower rate makes the monthly payments less of a financial burden.

Tax Benefits

Being a landlord has a number of tax benefits, as long as you take the time to claim them. Depreciation rules let you claim some cash flow from your property tax free. Property improvements and repairs are also depreciable. Many operational expenses that come from maintaining your property are tax deductible. Examples of operational expenses include interest on home repair loans, insurance, municipal property taxes, property management fees and more.



About the Author

Colleen Reinhart began her writing career in 2006. She has worked as a technical writer for numerous companies, including Autodesk, and she worked as a marketing writer for Open Text in Waterloo, Ontario. Reinhart has a Bachelor of Arts in rhetoric and professional writing from the University of Waterloo.

Photo Credits

  • Hemera Technologies/AbleStock.com/Getty Images