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7 Benefits of Buy and Hold Rental Properties
Today I want to talk about seven benefits of buy and hold rental properties. Now this video is for those of you that are considering buying rentals, maybe you own them and you want to be more informed of some of the benefits, or those of you that own them and are maybe looking to sell because you’re not feeling the love of the rentals. And I hope that this video shows you how over time, and in the long run, they pay off big time.
So number one is cash flow. Rental properties as an investment is one of the only cash producing investments where you can get consisted cash flow over time. And it’s something that continues to generate cash in the long run, forever if you choose, because you have someone that’s willing to pay you monthly for that asset.
Now I want to show you an example, so if we buy a rental and we have monthly rent of $1,500, which will grow because of inflation and other reasons, 3% on average per year, we grow that over 30 years now that’s $3,600 dollars a month. We more than doubled our rent over the course of time. We start out here, let’s assume a 15 year mortgage, we actually tend to do 30 year mortgages, but let’s just assume a 15 year mortgage so I can show the growth of this. Now after 15 years of course that mortgage gets paid off. Now our cash flow spikes, right? And it continues to grow over the course of time. At the end of 30 years about £2,600 a month that we have in cash flow.
So how that looks on the mortgage side, because you have a tenant in there that’s paying down the principle balance, that continues to decrease and get paid off over time. In this case it’s the thirty years. Cash flow is number one.
Number two is appreciation. Real estate appreciates. Now although it may not appreciate by 10, 15, 20% a year, it’s going to be slow appreciation, sometimes some spikes, sometimes some dips depending on the market. But if we look over the course of time, although it’s not a straight line, we can draw a straight line here and we’ll see consistent growth. And you can look back over the last 30, 40 years and you’ll see that. Even the last 10, 15 years. So appreciation is number two, and I’ll show you how that impacts things.
Depreciation is number three, so real estate as an investment is an interesting asset. Not only does it appreciate and grow, but on your taxes … Now I’m not an accountant, please talk to your accountant, your accounting professional about this, how it impacts you specifically, but it also depreciates in value on paper, and I’ll show you that. So this is our line of appreciation I showed you earlier where we’re appreciating this asset. Now, this is showing the value of the structure, because land never depreciates, land will always be there, but the asset on paper can depreciate. So let’s say we’ve got a structural value of 125, it’s going to be a flat line depreciation schedule over 27 and a half years as of today. So that will depreciate, giving you back that expense on your taxes.
Again, talk to your accountant about your specific situation as well as appreciation re capture if you chose to sell that asset. So depreciation can be a big part of that on the back end of your taxes.
Leverage is number four. Leverage is a huge part of why Warren Buffet even in 2012 said if he could, if it made sense to him, to have the manage with single family homes, he would take out mortgages. Now why is that? Well if we buy a property for $200,000 we have a $200,000 asset that we’re only putting down $50,000 for if we put down 25%, okay? So cash invested 25% down, there’s very little assets that the general public can get into where you can leverage like that and have a great return.
So 3% appreciation on the asset, that’s the $200,000 value, would be $6,000 in a year one. Now if we take that $6,000, apply it to the cash that we put into, the $50,000, that’s a 12% appreciation. 12% just on the cash that we invested in that asset. A lot of people look at appreciate on an asset and say you know it’s only 3% that’s not very much. Well how much did you put into it? How much cash are you getting back? So 12%, plus you add in the return from cash flow, from principle pay down, equity growth, depreciation and all those other things.
Number five is write offs. Because you have a rental property, technically it is considered a business, that’s how it would be classified on your taxes. Again, talk to your accountant about that. You can write off travel, if you have a real estate investment out of state you can go visit and that can be a write off. Management fees, repairs, utilities, accounting fees, insurance, HOA fees. I’m telling tell you to talk to your accountant, I hope you’re writing that off as you have your investment property. There’s other operational expenses too that you can write off because of you owning this rental property.
Number six is it’s a tangible asset. Unlike the stock market and other paper based asses that can sometimes feel like they’re blowing away in the wind, like we experience in 2008,9,10, which is more like dollars floating away, right? Some of you may have experienced that. A real estate investment, a rental property, is a tangible asset that will never go away. It’s there, it is brick and mortar, it’s something that will never decrease in value down to zero. It’s something that you have that continues to produce cash.
And number seven, related, is options. Rental investments and rental properties give you options. You can sell them, you can offer seller financing, you can exchange them for other properties. And if worse came to worse, you could live in it. And that’s an asset, a home that you could live in if you had to.
And that’s why we love rental properties. These seven reasons and these seven benefits aren’t all of the benefits, but I hope that this is helpful for you in your investment decision making. Feel free to contact us should you have any questions, or if you’re interested in buying rental properties.