Why should I buy rental property? Find out the answer today as we explore the big reasons to own rental property.
Why buy rental property? The government offers generous tax advantages for rental property owners. They do this to encourage more people to purchase rental property so that the supply of rental homes will increase.
People who own rental property are considered as investors or business owners under tax laws. That is great news because it allows you to enjoy a lot more tax deductions and benefits when compared to the average home owner.
For example: You can deduct make use rental property depreciation and traveling expenses to lower your annual property taxes. To learn more, Click here for our complete list of rental property tax deductions.
One good reason to buy rental property is that you can use other people's money to pay for your rental property. This is called leverage and what makes leverage so powerful is that any gains in your property value will be multiplied.
For example: You bought a rental property for $100,000 with 20% of your own pocket and borrow the remaining 80% from a bank. If the property value rises to $110,000, then you would have reaped a return of 50%:
= (Increase in Property Value) / Out of Pocket Investment
However if you bought the same rental property with 100% of your own money,
the returns will be a much lower 10%.
Most lenders will finance 50 to 80% of the property price for you. In addition to banks, finance companies are also popular places to look for rental property loans. Sometimes the property developer or the previous rental property owner may also offer you a loan package so they become your lender instead.
Why does it matters that your rental property is consider an asset by financial institutions? It's important because once you have paid off part of your rental property mortgage, you can use it as a collateral.
What it means is that you can pledge your rental property as an asset to obtain another loan. This will come in handy if you need ever money for any reason such as starting a new business or buying a second rental property.
By paying your monthly mortgage on time also helps to build up your credit score. Benefits of having an excellent credit score - Higher chance of loan approval and lower interest rates the next time you buy a rental property or take a loan in general.